Cities Service Co. v. Gardinier, Inc.

• Decision Date: 31 July 1975
• Parties: CITIES SERVICE COMPANY, Plaintiff, v. GARDINIER, INC., Defendant.
• Court: Delaware Superior Court

Page 254

344 A.2d 254

CITIES SERVICE COMPANY, Plaintiff, v. GARDINIER, INC., Defendant.

Superior Court of Delaware, New Castle County.

July 31, 1975.

E. N. Carpenter, of Richards, Layton & Finger, Wilmington, Cleary, Gottlieb, Steen & Hamilton, New York, of counsel, for plaintiff.

Richard F. Corroon, of Potter, Anderson & Corroon, Wilmington, Cravath, Swaine & Moore, New York City, of counsel, for defendant.

OPINION

WALSH, Judge.

This is an action instituted by plaintiff, Cities Service Company (Cities), seeking $730,160 in damages from defendant, Gardinier, Inc., (Gardinier) for breach of contract. The parties have filed cross-motions for summary judgment.

On January 19, 1973, Cities, Gardinier and Societe des Participations Gardinier, defendant's parent corporation, entered into an agreement providing for the sale to Gardinier of Cities' fertilizer manufacturing and mining operations, known as the 'Taco Facilities', for a price of fifty-five million dollars. The agreement also provided for the sale of Taco's supplies, inventories of raw material products, work in process products and finished products existing at the date of settlement, March 23, 1973. The purchase price for the supplies and inventories was additional to the fifty-five million dollars base purchase price and was to be paid in twelve monthly installments commencing 120 days after settlement. The purchase price for supplies and inventories would be determined by the application of two pricing formulae contained in the agreement, after ascertaining the physical quantities of the materials present at the closing date.

Subsequent to the settlement date, the parties, although having agreed on the quantities of the supplies and inventories physically present, as well as the price for the supplies, were unable to agree on the purchase price for the inventory items. According to Cities' application of the pricing formula a sum of $6,541,086 is due--a figure $730,160 more than the price calculated by defendant under its view of the formula.

Cities sought arbitration in accordance with a provision in the contract. ¹ Gardinier, believing that the dispute is not within the purview of the arbitration provision, refused to submit to arbitration and this litigation was commenced.

The parties differ sharply on the meaning of the pricing formula, contained in paragraph 6(e) of the agreement, which provides:

'The purchase price of raw materials products, work-in-process products and finished products shall be (1) the sum of the Direct Costs (as hereinafter defined) for all products (determined for each product by multiplying the Direct Cost per ton of a product by the number of tons of product on hand at the Closing Date) plus (2) a fraction of $10,149,000 (being a total of the aggregate overhead cost ($6,468,000) plus the aggregate depreciation ($3,681,000) attributable to the TACO Facilities for 1972), the numerator of which fraction is the amount determined in clause (1) above And the denominator of which is a figure determined by multiplying the Direct Cost per ton of each product by the number of tons of such product produced during the year 1972, and adding together the results for all products.' (Emphasis added).

The emphasized portion of the formula represents the method of forming the denominator of a fraction inserted in the pricing formula for the purpose of calculating the indirect costs, I.e. overhead and depreciation, of the purchased inventories and allocating a share thereof to each party. According to Cities' calculation, the figure in the denominator is $37,722,073. Gardinier computes the denominator as $119,093,753. Insofar as the parties agree to the figure in the numerator ($3,997,008) the larger the figure in the denominator, the smaller the portion of the indirect costs allocable to Gardinier. Similarly, the smaller the figure in the denominator, the greater the allocation of indirect costs to Gardinier. This difference in the denominator of the fraction fully accounts for the $730,160 in dispute.

Central to the dispute herein is the term 'Direct Cost' which is used throughout the formula, including the portion relative to the denomination of the fraction. A definition of 'Direct Cost' contained in the agreement itself provides in pertinent part:

'The term 'Direct Cost' as used in this paragraph (e) shall mean the Direct Cost per ton of product determined by taking the 'raw costs' per ton of products as of the end of the month preceding the Closing Date from the books and records of Cities Service in the same manner using the same procedure as the 'raw costs' per ton of such products at November 26, 1972, as shown on Exhibit Q hereto, were determined . . .'

Although no problem has arisen with respect to the application of the term 'Direct Cost' in other portions of the formula, the parties' calculations of the 'Direct Cost' of products produced in 1972, an element of the denominator of the fraction, differ significantly.

For each inventory item produced in 1972, as delineated in Exhibit Q, ² Gardinier has adopted, as the 'Direct Cost' per ton, the precise figure entered in Cities' books and records as the 'Raw Cost' of the item, as of the end of the month preceding the closing. Those figures constitute an update of the 'Raw Cost' figures listed for each item of inventory in Exhibit Q. ³

Cities, on the other hand, adopted, as the 'Direct Cost' of each item of inventory, the so-called 'Incremental Raw Cost' thereof, as of the end of the month preceding the closing. According to Cities, many of the products listed in Exhibit Q are further refined into other products contained on that list and the precise 'Raw Cost' figures found in Exhibit Q, as well as in Cities' books and records, include the cost of producing components as well. ⁴ Therefore, in Cities' view, the true 'Raw Cost' figures are not the cumulative 'Raw Cost' figures, such as are listed under the column entitled 'Raw Cost' in Exhibit Q, which, if used in the denominator of the fraction would, in some cases, duplicate, triplicate or quardruplicate costs, but rather the incremental 'Raw Cost' figures, which are readily ascertainable by deducting from the cumulative 'Raw Cost' figure the 'Raw Cost' of all components of a product. ⁵

In support of its motion for summary judgment Gardinier contends that the term 'Direct Cost' is unambiguously defined in the agreement and a strict application of the formula supports Gardinier's calculation of the denominator figure. It asserts that there is no justification for Cities' utilization of 'Incremental Raw Costs' since that term appears neither in the agreement nor in Exhibit Q. Gardinier argues that contract law requires that the agreement be enforced in accordance with the intention of the parties, as expressed in the language of the contract. It is immaterial, according to Gardinier, that the application of the formula it advances leads to an inequitable allocation of indirect costs, with little rational basis, because the formula was agreed to by Cities with full knowledge of its consequences, after considerable negotiations during which concessions were made by both parties. Furthermore, it argues, parol or extrinsic evidence offered by Cities in an attempt to demonstrate what the parties intended should not be allowed to modify the terms of a detailed integrated agreement.

Cities, in opposition to Gardinier's motion for summary judgment, argues that the formula provision relative to the denominator is sufficiently ambiguous, when read in context, to entitle it to demonstrate by extrinsic evidence that the parties intended to allocate indirect costs in a rational and equitable manner and, A fortiori, intended computation of the denominator in the manner expressed by Cities. In support of its cross-motion for summary...