Simcala, Inc. v. American Coal Trade, Inc.

• Decision Date: 09 November 2001
• Citation: 821 So.2d 197
• Parties: SIMCALA, INC. v. AMERICAN COAL TRADE, INC.
• Court: Alabama Supreme Court

821 So.2d 197

SIMCALA, INC. v. AMERICAN COAL TRADE, INC.

1000739.

Supreme Court of Alabama.

November 9, 2001.

James M. Sizemore, Jr., Montgomery; and James C. Grant and Owen T. Hill of Alston & Bird, L.L.P., Atlanta, Georgia "of counsel," for appellant.

Michael D. Ermert and Bruce J. McKee of Hare, Wynn, Newell & Newton, Birmingham, for appellee.

LYONS, Justice.

American Coal Trade, Inc. ("ACT"), commenced an action against Simcala, Inc., alleging a breach of contract arising from Simcala's failure to perform its agreement to purchase its estimated coal requirements from ACT. Following a bench trial, the trial court entered a final judgment in favor of ACT and against Simcala in the amount of $101,850 in lost profits and $10,690 in interest, plus costs.

We affirm.

I. Facts and Background

Simcala, the buyer, issued a purchase order dated January 12, 1998, pursuant to which it estimated it would purchase, during 1998, from ACT 17,500 tons of "Black Creek" coal at $78.50 per ton. The purchase order stated that the order was a blanket order for 1998 and that "the above [i.e. 17,500 tons] is an approximate quantity and to be shipped as required." Simcala also included in the purchase order chemical and size specifications for the coal.

During 1998 Simcala actually purchased only 7,200 tons of coal from ACT, representing 41% of the estimated amount. Simcala ordered approximately 6,000 tons of coal from ACT between January and mid-May. Simcala suspended its orders in mid-May because of problems with its furnace and it purchased no coal from ACT from mid-May to the end of June. Simcala claims that the furnace problems were caused by the poor quality of the ACT coal, but it does not argue that the coal failed to meet the specifications in the purchase order. Simcala resumed orders for coal at the end of June and purchased approximately 1,200 tons during July and August.

The mine from which ACT obtained its coal to fulfill the Simcala purchase order closed in August 1998. However, throughout September, ACT's supplier had a surplus of coal from that mine and ACT had asked Simcala to purchase some of this surplus coal. Simcala, however, ordered no coal in September.

In early October Simcala ordered 600 tons of coal from ACT. However, ACT did not deliver the coal because by October its supplier had sold the surplus coal from the closed mine to another buyer. ACT offered uncontroverted evidence that by mid-October it would have had another source had Simcala ordered any additional coal, but Simcala did not order any additional coal from ACT.

The trial court found no evidence that Simcala's reduction in the amount of coal it ordered and the eventual cessation of its orders were in bad faith. However, the court found that Simcala's purchase of only 41% of its estimated needs for the year was "unreasonably disproportionate" under § 7-2-306(1), Ala.Code 1975, and it held, therefore, that Simcala had breached the contract. The trial court also found that ACT's profit would have been $10.50 for each ton of coal had Simcala purchased the full amount estimated. Thus, the court, as previously noted, awarded ACT lost profits of $101,850, and interest in the amount of $10,690, and taxed costs to Simcala.¹

Section 7-2-306(1), part of Alabama's version of the Uniform Commercial Code, states:

"A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of any stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded."

(Emphasis added).

Simcala argues that the "unreasonably disproportionate" language contained in § 7-2-306(1) applies only to amounts exceeding the estimates in requirements contracts, not to lesser amounts than the estimates. Thus, Simcala claims it was entitled to reduce its requirements—even to zero—so long as it did not do so in bad faith; it further claims that the trial court correctly found it was not acting in bad faith when it reduced its purchases below the estimate in the purchase order. In the alternative, Simcala argues that even if the "unreasonably disproportionate" language applies to decreases from estimates, its performance was excused because, it says, ACT breached the contract when it was unable to meet Simcala's order for 600 tons of coal in early October.

The question presented is one of first impression in Alabama: Whether § 7-2-306(1), Ala.Code 1975, permits a buyer purchasing pursuant to a requirements contract to reduce its requirements to a level unreasonably disproportionate to an agreed-upon estimate so long as it is acting in good faith. The trial court interpreted § 7-2-306(1) to mean that a requirements-contract buyer who has provided the seller an estimate of its requirements may not reduce its requirements to a level unreasonably disproportionate to that estimate, even when it does so in good faith. The trial court concluded that the reduction in this case was unreasonable. The trial court's interpretation of § 7-2-306(1) involves a question of law; it is reviewed de novo by an appellate court, without any presumption of correctness. Aetna Cas. & Sur. Co. v. Mitchell Bros., Inc., 814 So.2d 191, 195 (Ala.2001); Reed v. Board of Trustees for Alabama State Univ., 778 So.2d 791, 793 n. 2 (Ala.2000); Donnelly v. Doak, 346 So.2d 414, 416 (Ala.1977).

II. Application of § 7-2-306(1)

"Words used in a statute must be given their natural, plain, ordinary, and commonly understood meaning, and where plain language is used a court is bound to interpret that language to mean exactly what it says." IMED Corp. v. Systems Eng'g Assocs. Corp., 602 So.2d 344, 346 (Ala.1992), quoted in Ex parte Fann, 810 So.2d 631, 633 (Ala.2001). Our primary obligation is to "ascertain and give effect to the intent of the Legislature as that intent is expressed through the language of the statute." Ex parte Krothapalli, 762 So.2d 836, 838 (Ala.2000). Moreover, we must presume "`that every word, sentence, or provision was intended for some useful purpose, has some force and effect, and that some effect is to be given to each, and also that no superfluous words or provisions were used.'" Ex parte Children's Hosp. of Alabama, 721 So.2d 184 (Ala. 1998), quoting Sheffield v. State, 708 So.2d 899, 909 (Ala.Crim.App.1997). See also Elder v. State, 162 Ala. 41, 45, 50 So. 370, 371 (Ala.1909) (stating that it is unreasonable to presume that the Legislature intended the words it used to be meaningless).

Because this case presents a question of first impression concerning language used in the Uniform Commercial Code, "we look for guidance to the Uniform Commercial Code itself, the official Comments to the Code, the writings of commentators, and the case law of other jurisdictions." Massey Ferguson Credit Corp. v. Wells Motor Co., 374 So.2d 319, 321 (Ala.1979). Comment 3² of the official comments to § 7-2-306 states:

"If an estimate of output or requirements is included in the agreement, no quantity unreasonably disproportionate to it may be tendered or demanded. Any minimum or maximum set by the agreement shows a clear limit on the intended elasticity. In similar fashion, the agreed estimate is to be regarded as a center around which the parties intend the variation to occur."

(Emphasis added.) The use of the word "center" clearly indicates that the drafters intended to prohibit both unreasonably disproportionate increases and decreases from the estimates in a requirements contract. To interpret § 7-2-306(1) to prohibit only unreasonably disproportionate increases, but not decreases, would make the description in official comment 3 of an estimate as a "center around which the parties intend the variation to occur" mere surplus verbiage.

Simcala emphasizes official comment 2 in support of its argument that § 7-2-306(1) prohibits only unreasonably disproportionate increases. Comment 2 states:

"Reasonable elasticity in the requirements is expressly envisaged by this section and good faith variations from prior requirements are permitted even when the variation may be such as to result in discontinuance. A shut-down by a requirements buyer for lack of orders might be permissible when a shut-down merely to curtail losses would not. The essential test is whether the party is acting in good faith."

(Emphasis in Simcala's brief.) While comment 3 begins with the words, "If an estimate... is included ...," comment 2 does not mention estimates. Comment 2 addresses the general limitation of "good faith," which applies when there is no agreed-upon estimate. See Orange & Rockland Utils., Inc. v. Amerada Hess Corp., 59 A.D.2d 110, 115, 397 N.Y.S.2d 814, 818-19 (1977). The specificity of comment 3, however, dealing with estimates, displaces the generality of comment 2. Comment 3 therefore applies in the special case, like this one, where the parties have agreed on an estimate. Thus, the drafters' comments to § 7-2-306 support the conclusion that the statute applies both to unreasonably disproportionate increases and decreases from agreed-upon estimates.

Some federal courts and other state courts have previously addressed this question. Brewster of Lynchburg, Inc. v. Dial Corp., 33 F.3d 355, 365 (4th Cir.1994) (predicting direction of Arizona law); Atlantic Track & Turnout Co. v. Perini Corp., 989 F.2d 541, 544-45 (1st Cir.1993) (predicting direction of Massachusetts law on an output contract); Empire Gas Corp. v. American Bakeries Co., 840 F.2d 1333, 1335 (7th Cir.1988) (predicting direction of Illinois law); R.A. Weaver & Associates, Inc. v. Asphalt Constr., Inc., 587 F.2d 1315, 1321-22 (D.C.Cir.1978) (predicting direction of District of Columbia law); Canusa Corp. v. A & R Lobosco, Inc., 986 F.Supp. 723, 729 (E.D.N.Y.1997) (predicting direction of New York law as to an...