The federal Fifth Circuit Court of Appeals recently issued an opinion addressing questions common to complex commercial litigation: was there a binding contract and what is the proper measure of damages? The dispute in Westlake Petrochemicals, L.L.C. v. United Polychem, Inc. centered on an agreement to sell/buy ethylene, a petroleum product. United Polychem is a distributor of petrochemicals and plastics.
In 2008, it sought to enter the market for ethylene, a petroleum product used in making plastics, with the intention of buying and reselling the compound. To do so, United Polychem authorized a bilateral broker to bid for five million pounds of ethylene per month during calendar year 2009 at a fixed price of $0.54 per pound. On July 2, 2008, the broker matched the bid with an offer from Westlake, and Westlake agreed to the transaction “subject to credit approval.”
Under industry custom, after a bilateral broker matches a bid with an offer, the broker “lifts the veil,” revealing the buyer’s and seller’s respective identities to one another. It is at this point that a deal is considered to be “done,” i.e., the parties have reached an agreement. The broker typically sends a written confirmation to each party notifying them that the deal is done, meaning that there is a contract. Following the lifting of the veil, the parties have a brief window of time during which either may cancel the transaction with or without any grounds. In the Westlake case, neither party cancelled the transaction and instead began negotiating credit terms and planning for performing the transaction.
After reviewing United Polychem’s financial information, Westlake rejected “open credit” for United Polychem, whereby it would simply deliver the ethylene and await payment. In response, United Polychem proposed that its president would execute a personal guaranty as security. Westlake rejected extending credit to UPC based on the Guaranty alone. United Polychem then sent an email to Westlake proposing to secure the credit with a $2 million letter of credit in addition to the president’s personal guaranty. Westlake left a voicemail message for United Polychem’s CFO requesting that it pen the letter of credit before the first shipment and inquiring about the bank that would issue the letter of credit. The CFO testified he never received that message.
Meanwhile, the market price for ethylene dropped sometime in the fall of 2008, thus turning against United Polychem’s ethylene position. When Westlake announced it was setting up billing in its system for the sale, United Polychem’s president replied, “We never closed the deal. We were not approved for credit.”
Westlake filed suit for breach of contract. The jury found that (1) the parties had formed a binding contract, (2) United Polychem breached that contract, and, as a result, (3) United Polychem was liable to Westlake for $6.3 million in actual damages and $633,199.67 in attorneys’ fees. The district court entered a final judgment in which it awarded Westlake damages and attorney’s fees against UPC under the jury’s verdict and also held United Polychem’s president jointly and severally liable under the terms of the personal guaranty agreement. United Polychem appealed.
The Fifth Circuit affirmed the jury finding as to breach. The court of appeals agreed there was a binding agreement. Relying heavily on the evidence of industry custom, the court held that a binding agreement was formed when United Polychem did not pull out in the few days immediately after its bid was matched and accepted by Westlake. The court ruled that “credit approval” was, if anything, only a condition of performance and was not a condition precedent to formation of a binding contract.
However, as to the measure of damages, the court reversed. Seeking to capitalize on the fall in price, Westlake argued it was entitled to damages in the amount of the difference between the contract and the market price at the time and place of tender under the Texas version of the UCC, Tex. Bus. & Com.Code § 2.708(a). The Fifth Circuit disagreed because the difference between the fallen market price and the contract price was not necessary to compensate the plaintiffs for the breach: had the transaction been completed, their “benefit of the bargain” would not have been affected by the fall in market price. The court remanded for a new trial to determine damages as per § 2.708(b): the amount that the non-breaching party would have realized under the contract had the breaching party fully performed.
The Fifth Circuit also held it was error to hold United Polychem’s president jointly and severally liable under the personal guaranty agreement. [The full opinion in Westlake Petrochemicals, L.L.C. v. United Polychem, Inc., — F.3d —- (5th Cir. July 24, 2012) is available online here: http://www.ca5.uscourts.gov/opinions/pub/10/10-20634-CV0.wpd.pdf.]
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