Joc Oil USA, Inc. v. Consolidated Edison Co. of New York, Inc.

• Court: New York Supreme Court
• Writing for the Court: SHANLEY N. EGETH
• Citation: Joc Oil USA, Inc. v. Consolidated Edison Co. of New York, Inc., 434 N.Y.S.2d 623, 107 Misc.2d 376 (N.Y. Sup. Ct. 1980)
• Decision Date: 29 December 1980
• Parties: , 30 UCC Rep.Serv. 426 JOC OIL USA, INC., Plaintiff, v. CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., Defendant.

Page 623

434 N.Y.S.2d 623

107 Misc.2d 376, 30 UCC Rep.Serv. 426

JOC OIL USA, INC., Plaintiff, v. CONSOLIDATED EDISON COMPANY OF NEW YORK, INC., Defendant.

Supreme Court, Trial Term, New York County, Part XI.

Dec. 29, 1980.

Donovan, Maloof, Walsh & Kennedy, David L. Maloof, New York City, for plaintiff.

Ernest J. Williams, Barry S. Goldstein, New York City, for defendant.

SHANLEY N. EGETH, Judge:

TRIAL BACKGROUND & PROCEDURE

This action by a seller of oil for damages arising out of claimed breach of contract by a buyer was scheduled for jury trial before this court. After numerous conferences it was agreed that although complex legal and factual questions were involved, the parties were capable of effecting their own stipulation as to many relevant facts, and as to the admissibility of a number of evidentiary submissions. Attempts to procure an agreement for a jury waiver were unsuccessful, but after negotiation and conferences with the court the parties consummated an agreement which formulated four specific questions as the sole issues which they would submit for jury resolution via special verdict. They further stipulated that should any other factual finding be necessary in order to decide the issues between the parties, the court was authorized to make such determinations without a jury. The trial of this action was conducted in accordance with this procedure and the jury rendered special verdicts as to the four specific written questions submitted to it.

FACTS

Based upon the stipulations, submissions, testimony and jury determination, the following findings of fact are made.

Early in January of 1974, the plaintiff, Joc Oil USA, Inc. ("Joc Oil") purchased a cargo of No. 6 residual fuel oil described as "LSFO (Low sulfur fuel oil) 1 percent", at a price of.$133.10 per metric ton. On January 14, 1974, while the cargo was enroute to the U.S.A. aboard the M/T Khamsin, the plaintiff received a certificate of analysis from the Italian refinery where the oil had been processed, which indicated that the oil had a sulfur content of .52%. Plaintiff thereafter contracted in writing with defendant Consolidated Edison, Inc. ("Con Ed") to sell this cargo at a price of $17.875 per barrel, delivery to be during the period of January 24-30, 1974. The contract described the oil as .5% maximum sulfur content. The contract included a clause, (more fully set forth and discussed hereafter), which provided for price adjustment negotiations between the parties under certain circumstances. Payment under the contract was conditioned upon receipt of a Saybolt (an independent tester) certificate confirming both quality and quantity. The ship arrived at the Bayonne Terminal Warehouse oil storage facilities on January 25, and the oil was discharged into three of defendant's storage tanks, where it was mixed with other oil of varying sulfur content already in the tanks. When the Saybolt report was received, the sulfur content was described as .92%. Defendant Con Ed rejected the shipment.

Parenthetically, it is noted that at the time this agreement for a spot market purchase was consummated, the parties were aware of the existence of a shortage resulting from an existing Arab oil embargo. It was additionally known that Con Ed was then authorized to buy and burn oil within a variance of up to 1% sulfur content, and was in fact using and mixing oils with up to .6 to .8% average sulfur content, and some oils containing in excess of 1% which was acquired at a cheaper price. (Doyle deposition Tr. 276, 278, 280, 292).

A meeting was thereafter held on February 20, 1974 to consider a possible price adjustment. Joc Oil offered to reduce its $17.875 per barrel contract price by between 50 to 80 cents per barrel, based upon the market prices for oil of varying sulfur content prevailing at the time of the making of the contract. Con Ed expressed a willingness to accept the oil if it could pay about $13 per barrel, about the then prevailing market price for 1% sulfur content oil. The parties adamantly maintained their positions and no compromise agreement was reached.

The next day, February 21, 1974, plaintiff made an offer (UCC § 2-508) to cure the defect in delivery by substitution of a conforming shipment, already on a ship and due to arrive on February 28, 1974. Con Ed rejected this offer the next day indicating it would only pay based upon then prevailing market prices. The substitute shipment arrived on March 4, 1974 and it was sold to a different purchaser.

Plaintiff thereupon initiated an action seeking specific performance and a preliminary injunction. This was denied on the ground that plaintiff had an adequate remedy at law (decision, April 18, 1974). On May 20, 1974 plaintiff sold most of the oil involved to another purchaser and removed all but about 10,000 barrels from the storage tanks. Con Ed paid plaintiff $10.45 per barrel for the remaining 10,000 barrels; which had been mixed with other oil and then had less than .92% sulfur content.

At the close of testimony, pursuant to the agreement of the parties the jury was presented with the following four written questions, to which they responded as follows:

Q. 1) Did Con Edison negotiate in a reasonable manner and in good faith at the price adjustment meeting of February 20, 1974?

Jury "No"

Q. 2) Did Joc Oil USA negotiate in a reasonable manner and in good faith at the meeting of February 20, 1974?

Jury "No"

Q. 3) Did Joc Oil USA act reasonably in failing to make efforts to sell the rejected Khamsin oil until May of 1974 under all of the circumstances in evidence?

Jury "yes"

Q. 4) Did Con Edison act reasonably in rejecting the substitute shipment which was offered by Joc Oil USA on February 21, 1974, for a scheduled February 28, 1974 arrival?

Jury "Yes"

PRELIMINARY CONTENTIONS

Initially Con Ed argues that it received delivery of oil which failed to meet its contract requirements, that it transmitted a timely rejection of the shipment, and as a result, it incurred no further obligation to accept the oil at a lesser price or to accept a substitute shipment. It is clear that the shipment failed to meet the contract requirement, and this court determines, despite plaintiff's contrary protestations, that Con Ed made a timely and bona fide rejection of delivery pursuant to UCC § 2-601 and 602. It can not be validly posited that placing the oil into tanks where it was mixed with other oil, (with plaintiff's knowledge), was an "act inconsistent with the seller's ownership so as to constitute an acceptance" (UCC 2-606(1)(c)). While it may have been more prudent to await the inspection certificate before mixing the oil, the process is analogous to permissible treatment of fungible goods under the Code (see UCC 1-201(17); Cf UCC 7-207), which would not in and of itself bar a rejection of delivery.

Assuming the existence of a proper and timely rejection of delivery by the purchaser, the rights of the parties can not be adjudicated without resolving either or both of two other issues.

CONTROLLING ISSUES RAISED

1) Price Adjustment Negotiation was Con Ed obligated under the contract to negotiate a price adjustment, and did it breach its contract by a failure to so negotiate in good faith?

2) Conforming Shipment was Con Ed required to accept a proffered cure of defective delivery in the form of a substitute conforming shipment pursuant to UCC § 2-508, and did it breach its contract by its failure to so do?

PRICE ADJUSTMENT NEGOTIATIONS

Assuming a proper and timely rejection of the shipment by Con Ed, the next question raised is whether the parties were compelled by contract or statute to negotiate a price adjustment, and if so, whether they did so in good faith. Joc Oil argues that Con Ed was required to do so, and that the jury properly found that Con Ed did not negotiate in good faith, but the jury finding that it (Joc) did not do so was unsupported by the evidence. Con Ed contends that since the contract did not mandate a price adjustment as the buyer's exclusive remedy for a non-conforming delivery, it was not required to negotiate. It further asserts that even if this were not so, the jury finding that Joc Oil also did not negotiate in good faith, bars a recovery by Joc Oil based upon any Con Ed lack of good faith in the negotiations.

Under all of the surrounding circumstances the rights of the parties hereto can not be resolved based upon the extent and nature of the price adjustment negotiations, or the conduct of the parties therein. The jury findings of lack of good faith by both parties in the said negotiations are irrelevant in determining the ultimate rights of the parties hereto.

The contract provision dealing with withholding and price adjustment reads as follows "Withholding: It is further agreed by the parties hereto that the buyer shall not withhold all or any part of the purchase price due hereunder for oil delivered hereunder for the purpose of the buyer applying such withholding to any claim arising out of another transaction or transactions between the parties hereto or any of their related companies. Nor shall the buyer make such a withholding for the purpose of applying same to claims arising out of this transaction unless the claim is substantiated by the report of any independent inspector and then only in an amount mutually agreeable to both of the parties hereto." (Emphasis supplied).

This clause does not mandate negotiation of a price adjustment as the sole and exclusive remedy available to Con Ed upon rejection or an improper shipment. This court construes the contract provision to impose an additional limitation upon the buyer's withholding remedy authorized by UCC § 2-717, should the buyer seek to utilize such remedy, provided for in the Code, as follows:

"The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due...