Oil Country Specialists, Ltd. v. Philipp Bros., Inc.

• Decision Date: 29 September 1988
• Docket Number: No. 01-87-00109-CV,01-87-00109-CV
• Citation: 762 S.W.2d 170
• Parties: OIL COUNTRY SPECIALISTS, LTD., Appellant, v. PHILIPP BROTHERS, INC., Appellee. (1st Dist.)
• Court: Texas Court of Appeals

Page 170

762 S.W.2d 170

OIL COUNTRY SPECIALISTS, LTD., Appellant, v. PHILIPP BROTHERS, INC., Appellee.

No. 01-87-00109-CV.

Court of Appeals of Texas Houston (1st Dist.).

Sept. 29, 1988.

Rehearing Denied Dec. 8, 1988.

William E. Junell, Kay J. Hazelwood, Andrews & Kurth, Houston, for appellant.

Stephen D. Susman, Parker C. Folse, III, Susman, Godfrey & McGowan, Houston, for appellee.

Before EVANS, C.J., and COLEMAN, ^* C.J. (Retired), and PEDEN,* J. (Retired).

OPINION

PEDEN, Justice (Retired).

Philipp Bros., Inc. (Phibro) consigned most of its oil well pipe inventory to Oil Country Specialists, Ltd. (OCS), by written contract, giving OCS the exclusive right to sell it.

OCS sued Phibro for breach of the contractual warranties as to quality, for fraudulent inducement, and for negligent misrepresentations.

Phibro counter-claimed for breach of contract and for bad faith termination, and alleged that OCS had failed to perform its contractual obligations to pay consignment and restocking fees.

After receiving jury findings, the trial court signed a judgment for Phibro on its counter-claim. Those findings included a) that Phibro induced OCS to enter the contract by negligently representing the quality of the pipe but that OCS was estopped from complaining about such misrepresentations and b) that OCS had acted in bad faith when it rejected the entire Phibro inventory.

In this appeal OCS has divided its 51 points of error into eight groups that attack, among other things, the jury findings just listed; OCS also complains about the trial court's award to Phibro of damages, attorneys' fees and pre-judgment interest, failure to award damages to OCS, and the court's rulings on certain evidentiary matters and on the charge.

The parties' contract, dated May 29, 1985, covered both threaded and unthreaded pipe. Phibro warranted that the inventory would meet API (American Petroleum Institute) specifications, would be of merchantable quality, and would pass without objection in the trade. For its part, OCS agreed to pay Phibro (1) a set price for any goods sold out of Phibro's inventory at the time of sale, (2) a monthly consignment fee (to be paid regardless of actual sales) equal to a percentage of the contract sales price of all unsold goods remaining in inventory at the end of each month, and (3) an inventory restocking fee equal to 10% of the aggregate purchase price of all items remaining in inventory at the "termination" of the agreement by OCS or upon termination by Phibro in the event of a default by OCS.

The May 29 contract also gave OCS the right to reject any material which failed to comply with API specifications as determined by third-party inspections but gave OCS no right to reject material whose non-conforming status was due to deterioration from atmospheric conditions unless the rejection was made within 90 days from May 29 for material stored on third-party yards, or within 15 days from May 29 for material stored at the OCS yard.

Three weeks later, in a June 19, 1985 letter agreement, OCS stated that it had examined a substantial part of the inventory and had determined that part of the inventory of threaded pipe "may not" meet API specifications so it "may not" pass without objection in the trade as warranted under the agreement of May 29. This letter agreement included several renegotiations of threaded-pipe provisions in the earlier contract:

1. the calculation of the consignment fee was changed to require OCS to pay such fee only on merchantable threaded inventory 2. the restocking fee was changed by reducing the purchase price of pipe in threaded inventory,

3. OCS agreed to allow Phibro to sell the threaded pipe without prior consent from OCS,

4. OCS agreed to sell merchantable threaded pipe before selling plain-end pipe, and

5. the 90-day limit for rejecting threaded pipe was withdrawn.

Phibro's obligations under the consignment agreement were expressly conditioned upon the funding by OCS of a letter of credit equal to 10% of the aggregate purchase price of the inventory under consignment. At the time of the agreement, the aggregate purchase price of the consigned inventory equaled approximately $15 million. On June 20, 1985, a Texas Commerce Bank issued a letter of credit in the amount of $1,516,000 in favor of Phibro at the request of, and for the account of, OCS. The terms of the letter of credit required the bank to honor the letter for payment if Phibro presented it with a signed statement that OCS had failed to pay the restocking fee and an invoice for the amount of the restocking fee marked "unpaid."

In its pleadings OCS alleged that it had inspected the goods in the inventory and determined that Phibro had breached warranties regarding their condition. Claiming that the condition of the inventory substantially impaired the value of the contract as a whole, OCS "rejected" the entire inventory on August 15, 1985, and "cancelled" the contract. OCS further asserted that it had been induced to enter into the agreement by Phibro's fraudulent or negligent misrepresentations, and sought to avoid the presentment of the letter of credit.

Phibro claimed that OCS had terminated the contract wrongfully and in bad faith, alleging that the real motivation for the termination by OCS was that after the effective date of the contract, market prices for pipe fell sharply and OCS no longer viewed the consignment agreement as a favorable business venture. Further, Phibro asserted that the consignment agreement allowed OCS the right to reject nonconforming items within the inventory but not to unilaterally "cancel" the agreement. Phibro alleged that the unambiguous meaning of the contract was that any purported cancellation could only amount to a "termination" by OCS, requiring the payment of the restocking fee. In the alternative, Phibro said that OCS's bad faith rejection of the entire inventory precluded "cancellation" under Sec. 2.711 Tex.Bus. & Comm.Code and amounted to a default by OCS, enabling Phibro to terminate the agreement and require the payment of the restocking fee.

When Phibro attempted to draw down the $1.5 million letter of credit in collection of the contractual restocking fee, OCS sought injunctive relief.

After a preliminary hearing, the trial court temporarily enjoined the presentment of the letter of credit and this court affirmed. Philipp Bros., Inc. v. Oil Country Specialists, Ltd., 709 S.W.2d 262 (Tex.App.--Houston [1st Division] 1986, writ dism'd w.o.j.).

When the instant case was tried on its merits, the jury made the following findings in answer to special issues:

1. the jury did not find that Phibro had fraudulently induced OCS to enter into the contract (by making any of six named alleged misrepresentations).

2. Phibro induced OCS to enter into the contract by negligently representing that the Phibro inventory would meet API specifications, that it would pass without objections in the trade, and that the threaded portion of it could be sold on a "load and go" basis.

3. (a predicated issue) OCS is estopped from complaining about Phibro's representations about the condition of the inventory by OCS's having represented in the June 19 letter that OCS had examined a substantial part of the Phibro inventory and had determined that the threaded inventory might not meet API specifications and might not pass without objections in the trade.

4. (an issue predicated on an affirmative answer to any part of Issue 1 or 2)

OCS waived any right to complain that it was fraudulently induced to enter into the contract.

5. Phibro failed to perform its obligations under the contract by failing to provide inventory which met API specifications.

6. (a predicated issue) Phibro's failure to perform its contractual obligations substantially impaired the value of the contract as a whole to OCS.

6a. (a predicated issue) the jury did not find that Phibro's failure to perform its contractual obligations was a proximate cause of any damages to OCS.

7. (a predicated issue) OCS acted in bad faith when it rejected the entire Phibro inventory on August 15, 1985.

8. (a predicated issue) OCS is estopped from complaining about Phibro's failure to perform its obligations under the contract by OCS's representing in the June 19 letter amendment that OCS had examined a substantial part of the inventory and had determined that the threaded inventory might not meet API specifications and might not pass without objection in the trade.

9. (a predicated issue) the jury did not find that OCS waived any right to complain about Phibro's failure, if any, to perform its obligations under the contract.

10. the amount of the restocking fee as of August 15, 1985 was $114,932.73.

11. the compensation due Phibro for OCS's failure to pay the consignment fee from August 1 to August 15, 1985 was $43,659.71.

The trial court disregarded the jury's answer to Issue No. 10 and entered judgment in favor of Phibro for $1,369,993.00 (court's determination of the amount of the restocking fee), also for $43,649.71 ($10.00 less than jury's determination of the amount of the consignment fee), and $450,000.00 in attorneys' fees. In addition, the trial court lifted the injunction against the presentment of the letter of credit and later amended the judgment against OCS to include $95,876.18 in pre-judgment interest.

OCS first argues that as a matter of law the statements in the letter agreement could not estop it from complaining about the breach of warranty (Issue 8).

Phibro asserts that it was led to believe that because OCS had inspected a substantial portion of the entire inventory but was complaining only about the threaded pipe, it had found the plain end pipe acceptable. Also, Phibro alleges that it was led to believe that OCS's complaints about the threaded inventory would be solved by amending the contract according to the terms of the June 19 letter agreement.

We note, however, that the letter agreement contained no...