Man Indus. (India), Ltd. v. Midcontinent Express Pipeline, LLC

• Decision Date: 08 August 2013
• Docket Number: Nos. 14–11–00791–CV, 14–11–00892–CV.,s. 14–11–00791–CV, 14–11–00892–CV.
• Citation: 407 S.W.3d 342
• Parties: MAN INDUSTRIES (INDIA), LTD., Appellant v. MIDCONTINENT EXPRESS PIPELINE, LLC, Prime Pipe International, Inc., and The Bank of Tokyo–Mitsubishi UFJ, Ltd., Appellees. Midcontinent Express Pipeline, LLC, Cross–Appellant v. Man Industries (India), Ltd., Prime Pipe International, Inc., and the Bank Of Tokyo–Mitsubishi UFJ, Ltd., Cross–Appellees.
• Court: Texas Court of Appeals

407 S.W.3d 342

MAN INDUSTRIES (INDIA), LTD., Appellant

v.MIDCONTINENT EXPRESS PIPELINE, LLC, Prime Pipe International, Inc., and The Bank of Tokyo–Mitsubishi UFJ, Ltd., Appellees.

Midcontinent Express Pipeline, LLC, Cross–Appellant

v.Man Industries (India), Ltd., Prime Pipe International, Inc., and the Bank Of Tokyo–Mitsubishi UFJ, Ltd., Cross–Appellees.

Nos. 14–11–00791–CV, 14–11–00892–CV.

Court of Appeals of Texas, Houston (14th Dist.).

May 9, 2013. Appellant's Rehearing Application Overruled July 11, 2013. Appellee's Rehearing Application Overruled Aug. 8, 2013.

Roger D. Townsend, Houston, for Appellant.

J. Wiley George, David E. Harrell, Christopher Benjamin Dove, B. Edward Williamson, Kevin Hardman, Houston, for Appellees.

Panel consists of Justices FROST, CHRISTOPHER, and JAMISON.

OPINION

TRACY CHRISTOPHER, Justice.

This is an appeal from the judgment rendered after a nonjury trial in which the parties asserted claims for declaratory judgment, wrongful dishonor of a letter of credit, breach of contract, and breach of fiduciary duty. The claims at issue arose after a pipeline company contracted with a pipe manufacturer and the manufacturer's agent to buy steel pipe and secured the obligation with a standby letter of credit issued by a bank. After the manufacturer failed to timely produce the pipe, the purchase agreement was modified several times to reduce the size of the order and increase the price; the manufacturer nevertheless attempted to draw down the full amount secured by the standby letter of credit and collect amounts that were not due. We have consolidated the cross-appeals of the manufacturer and the purchaser.

In connection with the claims associated with the standby letter of credit, we hold that the trial court did not err in ordering the manufacturer to pay the bank's indemnitor for the attorneys' fees the bank incurred in its Texas declaratory-judgment action. Although an award of attorneys' fees is not authorized under New York's version of the Uniform Commercial Code that governs the construction of the standby letter of credit, such an award is authorized under Texas declaratory-judgment law. The trial court also did not err in ordering the manufacturer to pay the purchaser's expenses of litigation, because such an award is permissible under the Texas version of the UCC. Moreover, the evidence is legally sufficient to support an award to the purchaser of damages for the fees and finance charges the purchaser was required to pay as a result of the manufacturer's failure to timely return a duplicate letter of credit and its willful misconduct in making a materially fraudulent presentation of another letter of credit.

As for the remaining claims of breach of contract and breach of fiduciary duty, we hold that because the manufacturer and its agent agreed that the agent would be paid a sales commission on products shipped, the trial court erred in awarding the agent a commission on pipe that was not produced or sold, and thus, was not shipped. The trial court did not err in failing to find that the agent breached a fiduciary duty to the manufacturer or in ordering the manufacturer to pay the purchaser “cover” damages for its purchase of replacement goods when the manufacturer failed to meet its contractual obligations. Finally, we hold that the trial court did not err in enforcing a contract modification to which the purchaser agreed, or in concluding that the purchaser's obligation to pay for pipes that it accepted was not excused by the manufacturer's tardiness in delivering the goods. Thus, we affirm in part, affirm as modified in part, and remand the case for recalculation of interest ¹ and offsets and for rendition of judgment in accordance with this opinion.

I. Factual and Procedural Background

Midcontinent Express Pipeline, LLC (“Midcontinent”) was established to build and operate a 500–mile natural-gas pipeline from Oklahoma to Alabama. Man Industries (India), Ltd. (“Man”) is a pipe manufacturer based in Mumbai, India. Prime Pipe International, Inc. (“Prime Pipe”) is a broker of pipe for use in pipeline projects, and acted as Man's agent and sales representative in the United States.

A. Agency Agreement

Man and Prime Pipe entered into an Agency Agreement in which Prime Pipe agreed to negotiate and enter into contracts in the United States on Man's behalf for the sale of Man's products. In that capacity, Prime Pipe brokered a contract under which Man agreed to supply pipe for construction of Midcontinent's pipeline. The Agency Agreement served as the master agreement between Prime Pipe and Man, but they modified the commission schedule applicable to the sales to Midcontinent. We refer to the latter commission schedule as the “Midcontinent Commission Agreement.” In sending the signed payment schedule of the Midcontinent CommissionAgreement to Prime Pipe, Man wrote that it conditioned its approval on several considerations, one of which is as follows:

In the event of any changes in scope of supplies such as change in itemized quantities, el[i]mination of coating work etc. which shall have impact on the Contract Price, the commis[s]ions shall be subject to requisite adjustments arrived by logical re-calculations, which shall very [sic] much in line with the basic agreement.

B. Purchase Order Agreement

Midcontinent's contract with Man took the form of a Purchase Order. Under the agreement's terms, Man and Prime Pipe (defined collectively as “Supplier” in the agreement) were to supply Midcontinent with four kinds of coated pipe in a total quantity of more than 1.3 million feet. Man was to be paid a fixed price per foot of pipe, and the contract specified that the prices were “not subject to escalation.” Midcontinent had the right to decrease the order quantity by as much as ten percent. The parties agreed that Midcontinent would have a certain amount of time to finalize the quantities of pipe ordered.

Because Midcontinent had to complete the pipeline by a certain time, it repeatedly stressed that time was of the essence, and the parties agreed to a production schedule. They agreed that Man would dedicate two specific mills to producing pipe for Midcontinent and would begin production by September 30, 2007 and deliver the last of the pipe no later than August 31, 2008. Midcontinent advanced Man approximately $21.6 million to secure a portion of the raw materials. The parties agreed that Midcontinent could terminate the contract, in whole or in part, if Man and Prime Pipe failed to timely perform their obligations or failed to provide Midcontinent reasonable assurance of future performance on terms acceptable to Midcontinent.

In finalizing its order, Midcontinent decided that the pipes should be double-jointed before being coated; that is, pairs of 40–foot pipes would be welded together to make units 80 feet long. Man does not double-joint pipe and could not have transported such pipe from its plant to the port. Moreover, Midcontinent decided that the pipe should be coated in the United States, and Man has no facilities in this country. Man knew that Prime Pipe planned to bid on the contract and subcontract the work. Man had no objections to this; Man wanted Prime Pipe to win the contract, and one of Man's representatives even visited the coating facility. Midcontinent did award the contract to Prime Pipe.

C. First Cover

Man fell behind schedule almost immediately. In September 2007, one of the mills that was to have been dedicated to this contract was still being used to produce pipe to fill a prior order for a different customer; the other mill was not yet at full production. Midcontinent refused Man's request to extend the time for performance by one month. Because Midcontinent requested but failed to receive adequate assurance that Man would make up the production deficit in a timely manner, Midcontinent informed Man in November 2007 that it had contracted with a third party to produce ten percent of the quantity of one type of pipe called for under the Purchase Order. Midcontinent's net cost to cover this reduction was $3,720,800.66. This was the least expensive pipe that could be delivered by the deadline, and it is undisputed that the price was fair market.

D. Deficit in Man's Steel Supply

At a meeting between the parties on or about March 12, 2008, Man told Midcontinent that it would run out of steel before completing production. According to Man, various suppliers had agreed to allocate part of their schedules to producing steel to sell to Man at a stated price, but because the price of steel had increased, the suppliers were not honoring those agreements. Man asked Midcontinent to pay an additional $16 million as a result of the increased steel prices, and Midcontinent refused.

On April 1, 2008, Man informed Midcontinent that three mills had agreed to allocate slots in their respective production schedules to producing steel for Man to use in finishing the contract. Three-quarters of the steel would have to be shipped from China, and some of it could not be received in time for Man to complete production as scheduled. Man also told Midcontinent that securing this steel would have “commercial implications” that it wished to “resolve suitably so as to ensure the larger interest of successful completion of the project.” Man also asked for the production schedule to be extended by three weeks. On April 10, 2008, Man wrote to Midcontinent that obtaining the steel necessary to complete the order would have a “huge financial impact” on Man and stated that if Man and Midcontinent did not meet “to resolve this and other matters the forward movement will get adversely affected.”

E. Letter Agreement and Second Cover

The parties met on April 15, 2008 and negotiated a Letter Agreement modifying the Purchase Order. At the meeting, Man stated that it would run out of steel in a few days, but that it could obtain 28,000 metric tons of steel in time for it to produce a reduced...