Orange & Rockland Utilities, Inc. v. Amerada Hess Corp.
| Decision Date | 15 August 1977 |
| Citation | 59 A.D.2d 110,397 N.Y.S.2d 814 |
| Parties | , 96 A.L.R.3d 1263, 22 UCC Rep.Serv. 310 ORANGE AND ROCKLAND UTILITIES, INC., Appellant, v. AMERADA HESS CORPORATION, Respondent. |
| Court | New York Supreme Court — Appellate Division |
LeBoeuf, Lamb, Leiby & MacRae, New York City (Taylor R. Briggs and Christopher C. Herman, New York City, of counsel), for appellant.
Milbank, Tweed, Hadley & McCloy, New York City (Adlai S. Hardin, Jr., and Norman R. Nelson, New York City, of counsel), for respondent.
Before HOPKINS, J. P., and MARTUSCELLO, MARGETT and O'CONNOR, JJ.
This action, for damages as a result of an alleged breach of a requirements contract, raises related but distinctly separate issues as to whether the plaintiff buyer's requirements occurred in good faith and whether those requirements were unreasonably disproportionate to the estimates stated in the contract.
In a fuel oil supply contract executed in early December, 1969, defendant Amerada Hess Corporation (Hess) agreed to supply the requirements of plaintiff Orange and Rockland Utilities, Inc. (O & R) at plaintiff's Lovett generating plant in Tompkins Cove, New York. A fixed price of $2.14 per barrel for No. 6 fuel oil, with a sulphur content of 1% or less, was to continue at least through September 30, 1974, with the price subject to renegotiation at that time. Estimates of the amounts required by plaintiff were included in the contract clause entitled "Quantity". Insofar as those estimates are relevant to the instant controversy, they were as follows:
1970 1,750,000 barrels
1971 1,380,000 barrels
1972 1,500,000 barrels
1973 1,500,000 barrels
The estimates had been prepared by plaintiff on December 30, 1968, as part of a five-year budget projection. The estimates anticipated that gas would be the primary fuel used for generation during the period in question. 1 This was a result of the lower cost of gas and of the fact that gas became readily available for power generation during the warmer months of the year as a result of decreased use by gas customers. Plaintiff expressly reserved its right to burn as much gas as it chose by the inclusion, in the "Quantity" provision of the requirements contract, of a clause to the effect that "(n)othing herein shall preclude the use by Buyer of * * * natural gas in such quantities as may be or become available".
Within five months of the execution of the requirements contract, the price of fuel oil began to ascend rapidly. On April 24, 1970 the market price of the oil supplied to plaintiff stood at between $2.65 and $2.73 per barrel. On May 1, 1970 the price was in excess of $3 per barrel. The rise continued and was in excess of $3.50 per barrel by mid-August, and more than $4 per barrel by the end of October, 1970. By March, 1971 the lowest market price was $4.30 per barrel more than double the price set forth in the subject contract.
Coincident with the earliest of these increases in the cost of oil, O & R proceeded to notify Hess, on four separate dates, of increases in the fuel oil requirements estimates for the year. By letter dated April 16, 1970, O & R notified Hess that it was expected that over 1,460,000 barrels of oil would be consumed over the period April December, 1970. Since well over 600,000 barrels of oil had been consumed during the first three months of the year, the total increase anticipated at that time was well in excess of 300,000 barrels over the estimate given in the contract.
Eight days later, by letter dated April 24, 1970, O & R furnished Hess with a revised estimate for the period May through December, 1970. The figure given was nearly 1,580,000 barrels which, when combined with quantities which had already been delivered or were in the process of delivery during the month of April, exceeded the contract estimate by over 700,000 barrels a 40% increase.
The following month the estimates were again increased this time to nearly one million barrels above the contract estimate. Hess was so notified by letter dated May 22, 1970. Finally, a letter dated June 19, 1970 indicates a revised estimate of more than one million barrels in excess of the 1,750,000 barrels mentioned in the contract; an increase of about 63%.
On May 22, 1970, the date of the third of the revised estimates, representatives of the two companies met to discuss the increased demands. At that meeting O & R's president allegedly attributed the increased need for oil to the fact that O & R could make more money selling gas than burning it for power generation. Hess refused to meet the revised requirements, but offered to supply the amount of the contract estimate for the year 1970, plus an additional 10 percent.
The June 19, 1970 letter referred to above recited that the Hess position was "wholly unacceptable" to O & R. It attributed the vastly increased estimates to (a) an inability to burn as much natural gas as had been planned and (b) the fact that O & R had been "required" to meet higher electrical demands on its "own system" and to furnish "more electricity to interconnected systems" than had been anticipated.
Thereafter, for the remainder of 1970, Hess continued to supply the amount of the contract estimates plus 10 percent. A proposal by Hess, in October, 1970, to modify the existing contract by setting minimum and maximum quantities, and by setting a price keyed to market prices, was ignored by O & R. Although the proposed modification set a price 65 cents lower than the market price, it was more advantageous for O & R to insist on delivery of the estimated amounts in the December, 1969 contract (at $2.14 per barrel) and to purchase additional amounts required at the full market price.
During the remainder of the contract period Hess continued to deliver quantities approximately equal to the estimates stated in the subject contract. O & R purchased additional oil for its Lovett plant from other suppliers. The contract between Hess and O & R terminated one year prematurely by reason of an environmental regulation which took effect on October 1, 1973 and which necessarily curtailed the use of No. 6 fuel oil with a sulphur content as high as 1%. During the period 1971 through September, 1973 O & R consistently used more than double its contract estimates of oil at Lovett. 2
This action was commenced in mid-1972. O & R's complaint seeks damages consisting of the difference between its costs for fuel oil during the period in question and the cost it would have incurred had Hess delivered the total amount used by O & R at the fixed contract rice of $2.14 per barrel. The trial was conducted in September, 1975 before Mr. Justice Donohoe, sitting without a jury. In an opinion dated March 8, 1976, Trial Term held that plaintiff should be denied any recovery on the ground that its requirements were not incurred in good faith. Specifically, Trial Term found that plaintiff's greatly increased oil consumption was due primarily to (a) increases in sales of electricity to other utilities and (b) a net shift from other fuels, primarily gas, to oil. The former factor was condemned on the premise that . The latter factor was not elaborated on to any great degree. Trial Term did, however, infer that O & R seized "the opportunity to release its reserve commitment of gas" and thereby reaped very substantial profits.
Although Trial Term stated in its opinion that one of the questions before it was whether plaintiff's demands were unreasonably disproportionate to the estimates set forth in the contract, it failed to reach this question in the light of its conclusion that plaintiff had failed to act in good faith. Plaintiff contends on this appeal (1) that Trial Term's finding of an absence of good faith is unsupported by the record and (2) that since its requirements for the entire term of the contract were less than twice total contract estimates, its demands were not "unreasonably disproportionate" as a matter of law. We reject both contentions upon the facts of this case and affirm Trial Term's dismissal of the complaint.
It is noted at the outset that the parties agreed, pursuant to their contract, that New Jersey law should apply. The governing statute is section 2-306 (subd. (1)) of the Uniform Commercial Code (UCC), which provides, in relevant part:
"A term which measures the quantity (to be supplied by a seller to a purchaser of goods) by the * * * requirements of the buyer means such actual * * * requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior * * * requirements may be * * * demanded" (N.J.Stat.Ann., 12A:2-306, subd. (1), (matter in brackets added)).
There is, as Trial Term observed, a good deal of pre-Code case law on the requirement of "good faith". It is well settled that a buyer in a rising market cannot use a fixed price in a requirements contract for speculation (New York Cent. Iron Works Co. v. United States Radiator Co., 174 N.Y. 331, 335-336, 66 N.E. 967, 968; Asahel Wheeler Co. v. Mendleson, 180 App.Div. 9, 12, 167 N.Y.S. 435, 437; see Moore v. American Molasses Co., 106 Misc. 263, 174 N.Y.S. 440). Nor can a buyer arbitrarily and unilaterally change certain conditions prevailing at the time of the contract so as to take advantage of market conditions at the seller's expense (C. A. Andrews Coal Co. v. Board of Directors of Public Schools, Parish of Orleans, 151 La. 695, 92 So. 303).
There is no judicial precedent with respect to the meaning of the term "unreasonably disproportionate" which appears in subdivision (1) of section 2-306 of the UCC. Obviously this language is not the equivalent of " lack of good faith" it is...
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