Vitol Trading S.A., Inc. v. SGS Control Services, Inc.

• Decision Date: 21 April 1989
• Docket Number: Nos. 54,D,162,s. 54
• Parties: VITOL TRADING S.A., INC., Plaintiff-Appellee, Cross-Appellant, v. SGS CONTROL SERVICES, INC., Defendant-Appellant, Cross-Appellee. ocket 88-7384, 88-7386.
• Court: U.S. Court of Appeals — Second Circuit

Page 76

874 F.2d 76

1989 A.M.C. 1309

VITOL TRADING S.A., INC., Plaintiff-Appellee, Cross-Appellant, v. SGS CONTROL SERVICES, INC., Defendant-Appellant, Cross-Appellee.

Nos. 54, 162, Docket 88-7384, 88-7386.

United States Court of Appeals, Second Circuit.

Argued Aug. 31, 1988.

Decided April 21, 1989.

Michael E. Schoeman, New York City (Charles B. Updike, Thomas J. Dolan, Schoeman, Marsh, Updike & Welt, New York City, of counsel), for defendant-appellant-cross-appellee.

Patrick V. Martin, New York City (Dana K. Martin, Hill, Rivkins, Carey, Loesberg, O'Brien & Mulroy, New York City, of counsel), for plaintiff-appellee-cross-appellant.

Before FEINBERG, Chief Judge, and CARDAMONE and PRATT, Circuit Judges.

CARDAMONE, Circuit Judge:

SGS Control Services, Inc. (SGS) appeals from a judgment of the United States District Court for the Southern District of New York (Walker, J.) entered April 1, 1988, which awarded $547,688 in damages to Vitol Trading S.A., Inc. (Vitol) on the ground that SGS had breached its duty to render workmanlike performance while conducting chemical tests. Vitol cross-appeals seeking an increase in the amount of damages awarded it. Because, in awarding Vitol special damages, the district court applied an incorrect rule of damages, confusing plaintiff's failure to deliver a cargo that met contract specifications with defendant's test results that reported that failure, we must reverse. The cross-appeal is dismissed as moot.

I FACTS AND PRIOR PROCEEDINGS

We assume the reader's familiarity with the district court's thorough recitation of the facts, see 680 F.Supp. 559, 560-66 (S.D.N.Y.1987), and substantially adopt them, setting forth only those necessary to make our holding intelligible and to explain the relationship between the parties.

The plaintiff Vitol, the seller in this action, is the American branch of a Swiss Corporation that is an international trader in petroleum products. It had recently begun trading European "naphtha" to buyers in the United States, one of which is the Sun Oil Company located in Wayne, Pennsylvania. At issue in this litigation are two shipments of oil products that Sun Oil, which is not a party to this action, purchased from Vitol. Appellant SGS, a New York corporation which is a branch of a The cargo at the core of this appeal is naphtha, a substance resulting from the distillation of crude oil, which is used to make gasoline and petrochemicals. Its value varies with its chemical composition. The higher its content of the hydrocarbon molecules naphthene and aromatic (N & A), the more valuable it is because it is then refinable into gasoline. A method for testing naphtha's chemical composition is known as PONA analysis. SGS used two types of PONA analysis in this case: mass spectrometry (MS) and gas chromatography (GC). MS is generally considered to be the more accurate test because different laboratories employing the GC test often produce different results on the same naphtha sample.

French testing concern, was jointly retained by Vitol and Sun Oil to test the contents of the two shipments in order to ensure their conformity with the sale specifications.

Sun Oil entered into the subject contracts on April 4, 1984 to buy two parcels of naphtha from Vitol, as follows:

Parcel A: approximately 25,000 metric tons, minimum N & A content of 45 percent, contract price of $.7925 per gallon.

Parcel B: approximately 18,000 metric tons, minimum N & A content of 35 percent, contract price of $.7875 with a sliding scale of Naphtha content increased between 35 to 40 percent.

The seller and buyer orally selected GC as the test method that would be binding under both contracts, and designated SGS as the tester. Sun Oil confirmed by telex that SGS would test the naphtha by the GC method, and offered to split the cost of an MS test, if Vitol wanted an additional back-up test.

To fill the Sun Oil contracts, Vitol used a cargo of naphtha that had originated in Bilbao, Spain and that was, at the time of contracting, at Fawley, England aboard the M/T Randi Brovig. After testing the cargo in England, additional naphtha was added to increase the N & A content and to bring the shipment up to contract specifications before the Randi Brovig set sail for Houston, Texas. When the Randi Brovig docked on April 24, 1984, Vitol was still concerned that the cargo would not meet the percentage of N & A required by the contract, and therefore asked SGS to run both tests on both parcels. The MS test results were obtained first and showed that the naphtha in parcel A registered an N & A percentage content of 40.44 and that parcel B registered 34.92. Both were below the specifications of 45 and 35 percent respectively. SGS telephoned these results to Sun Oil and Vitol.

The contractually binding GC tests also showed the cargo was below specification, but by an even larger margin. It revealed an N & A content for Parcel A of 36.76 percent and Parcel B of 27.26 percent. From Vitol's perspective, the GC test results looked worse. Retests produced similar, but not identical, results. The binding GC retest for Parcel A was 36.83 percent, and Parcel B was 27.57 percent--again, below the contracts' minimums. The MS retest for Parcel A was 41.9, and Parcel B was 35.58. Thus, only the non-binding MS retest for Parcel B met contract specifications.

Sun Oil rejected the cargo on April 26 based on receipt of the telephone report of the GC test results. Unable to find another buyer quickly--and facing $9,500 demurrage charges and lost interest of $2,500 per day--Vitol was forced to renegotiate the contracts with Sun Oil at distress-sale prices. Two days later Sun Oil and Vitol agreed that Parcel A would be used to fulfill the lower priced Parcel B contract. Vitol agreed to discount the former Parcel B at slightly over five percent, thereby enabling it to sell all of the cargo, but at less profit than it had anticipated under the original contracts.

As a result of its loss of anticipated profit Vitol sued SGS alleging negligence and breach of contract arising from SGS's failure to conduct the GC tests in a workman-like manner. The district court found that even given the problems of GC tests generally, SGS's subcontractor had failed to perform them adequately, and that its methodology was seriously defective. "Vitol The trial court then calculated Vitol's gross damages to be $641,598: $595,808 for the price differential between the original and renegotiated contracts, and $45,790 for demurrage fees and interest. It then reduced Vitol's gross damages by $166,983, concluding that "Vitol did not establish that a properly conducted test would necessarily have found the cargo to be on specification and that Sun Oil would have paid the full contract price for the naphtha." Id. The district court bolstered its decision to decrease Vitol's award by stating as a finding of fact that "there is a reasonable probability that a properly conducted test would still have found the cargo to be slightly off specification...." Id. at 570. The phrase "reasonable probability" evidently reflects the non-binding MS retest result--which in contrast to all the other results in the "frenzy of re-sampling and retesting," id. at 565 n. 1--showed that there was enough N & A to meet the Parcel B contract requirements. The district court's finding that Vitol's cargo was "off specification" and therefore did not conform to the contract was not clearly erroneous.

                and Sun Oil may have bargained for an inconsistent test, but they did not bargain for an obsolete one."    680 F.Supp. at 568
                

II DISCUSSION

A.

New York law governs this diversity case. It classifies compensatory damages as either general (direct) damages--the fee SGS charged for the tests--or special (consequential) damages--the profit Vitol alleges it lost when it had to renegotiate the contracts with Sun Oil. General damages are those which are the natural result of the wrong and which the law presumes to have arisen from that wrong. These general damages must be traceable to and be the probable result of the injury. Special damages are not implied by law; they arise from the unique circumstances of the case. Such damages are awarded only when they are the natural result of the wrong and when they were within the contemplation of the parties at the time the contract was made. 36 N.Y.Jur.2d Damages Sec. 10 (1984). Regardless of whether Vitol's complaint is read as sounding in contract or in tort, the same rule of damages applies. See Kerr S.S. Co. v. Radio Corporation of America, 245 N.Y. 284, 295, 157 N.E. 140 (Cardozo, C.J.), cert. denied, 275 U.S. 557, 48 S.Ct. 118, 72 L.Ed. 424 (1927).

We agree that in the present case SGS breached its duty of workmanlike performance. In reaching this conclusion, the district court applied controlling precedent under New York law, see Lunn v. Silfies, 106 Misc.2d 41, 431 N.Y.S.2d 282 (1980), and its careful findings on the limitations of GC tests generally and the deficiencies of the instant tests are amply supported by the record. Yet, proof of this breach of duty is not enough for plaintiff to succeed in its suit. New York law requires that for a plaintiff to prevail it must prove causation. For example, in the leading New York case of Glanzer v. Shepard, 233 N.Y. 236, 135 N.E. 275 (1922) (Cardozo, J.), defendants were public weighers who the sellers hired to weigh bags of beans for the plaintiffs who were purchasing them. The weighers issued a certificate that inaccurately overstated the weight of the beans and, as a result, plaintiffs overpaid the sellers. The weighers were held liable to plaintiffs for the amount of overpayment. The damages flowed naturally from the inaccurate weighing and were therefore causally connected to it. See id. at 238-39, 135 N.E. 275.

Similarly, to meet the test of New York law, Vitol was required to demonstrate that if it had received an up-to-industry-standards test from SGS--one that...