Plaintiff contracted with defendant to deliver liquid nitrogen, primarily from its Michoud, Louisiana plant, to defendants oil


Plaintiff contracted with defendant to deliver liquid nitrogen, primarily from its Michoud, Louisiana plant, to defendant’s oil refinery production facility located in Belle Chase, Louisiana. Defendant uses liquid nitrogen to ensure the safe operation of its plant. Defendant claims that plaintiff repeatedly failed to timely deliver the liquid nitrogen, dropping the liquid nitrogen to dangerously low levels, compromising the safety of plant personnel. Although the contract provided that if plaintiff failed to deliver the liquid nitrogen as required defendant’s sole remedy would be to purchase the product from another supplier and charge plaintiff for the additional expenses incurred, defendant did not do so, but instead terminated plaintiff’s services.

   Plaintiff sued defendant for breach of contract, and defendant counterclaimed. * * * The Law Division granted plaintiff’s motion for partial summary judgment on liability, * * *. After a damages trial before a jury, plaintiff was awarded a judgment in the amount of $1,200,000.

   Defendant appealed, * * *. We conclude that defendant’s arguments are without merit. Accordingly, we affirm.


   On October 1, 1991, the parties entered into a procurement contract, whereby plaintiff would supply defendant with ‘‘all [of defendant’s] requirements’’ for bulk nitrogen. * * * The contract, * * *, was originally effective from October 1, 1991, to September 30, 1994, and was extended until August 31, 2000.

   Defendant uses liquid nitrogen to ‘‘prevent fires and explosions within process equipment and systems and to assure instrumentation and control system reliability in critical process units.’’ The nitrogen ‘‘protects plant personnel and the public from accidental toxic material discharges and prevents product contamination [from] oxygen * * * which would reduce product quality and performance.’’ * * *

   The contract was a ‘‘requirement’’ contract—deliveries were based on how much liquid nitrogen defendant had in its tanks. As a result, plaintiff typically made deliveries seven days a week, and sometimes several times a day.

   Under the contract’s terms, defendant’s exclusive remedy if plaintiff failed to timely deliver the nitrogen was ‘‘cover damages.’’ 


When the nitrogen level fell below fifty percent of the total storage capacity, the operator of defendant’s plant would inform plaintiff that the levels were depleting and check on the time for the next delivery. At a twenty-five-percent level of nitrogen, defendant considered the situation ‘‘critical,’’ and at a ten-percent level defendant could no longer maintain normal operation of the plant.

   Defendant claims that from August 1997 through June 1998 plaintiff made twenty-one late deliveries. A representative of defendant stated that on ‘‘many more than two times,’’ because of its dissipating nitrogen levels, defendant’s personnel would have to call plaintiff to find out when the next delivery would arrive. Plaintiff would usually promise delivery within four hours; however, the delivery would typically not arrive for as long as twelve hours. On May 19, 1998, defendant’s nitrogen supply became so low that it had to connect its own nitrogen cylinders to the hot oil surge tank to maintain operation.

   That same month, Steven Earle, defendant’s operations supervisor, decided to terminate the contract with plaintiff and find another liquid nitrogen supplier. He testified that he opted to terminate the contract rather than seek cover damages because he could not find alternate suppliers to deliver the required nitrogen. He claimed other suppliers were hesitant ‘‘to come in and infringe on an existing contract. * * *’’ He did not know, however, which suppliers interpreted the contract that way. Although he believed that Air Products, a company that delivered nitrogen to defendant’s other plants, as well as other chemicals to defendant’s Belle Chase plant [the plant in question], ‘‘would have been one of them,’’ Dennis H. Boushie, an Air Products Chapter 25 Sales Remedies 489 representative, testified otherwise. He said that in early 1998, when a representative of defendant told him of defendant’s problems with low nitrogen inventory levels, he represented that Air Products ‘‘had the product’’ and could supply the product to defendant. Allen Jackson, defendant’s purchasing manager, confirmed this conversation. Although no agreement materialized from the discussion, Air Products did cover defendant’s liquid nitrogen supply on one occasion, in September 1998 during a hurricane.

   Earle also acknowledged, however, that when he made his decision to terminate the contract in May 1998 he was not aware of the exclusive remedy provision in the contract. In fact, he had not read the contract. * * *

   In July 1998, defendant advised plaintiff that because of its supply problems it intended to change suppliers. On July 15, 1998, plaintiff and defendant met to discuss plaintiff’s performance under the contract. At the meeting, Earle asked plaintiff for a letter confirming that defendant could obtain nitrogen from a secondary supplier. Plaintiff agreed to do so, but never followed through.

   On August 25, 1998, defendant wrote to plaintiff explaining that plaintiff’s late deliveries jeopardized defendant’s plant’s operations. Enclosed with the letter was a proposed amendment to the contract, which essentially allowed defendant to obtain nitrogen from any supplier, not just plaintiff. The effect of the amendment would have been to terminate the contract.

   Plaintiff agreed to maintain defendant’s supply of liquid nitrogen at a forty-percent level, and plaintiff also offered to ‘‘provide and install [at defendant’s plant] an additional 11,000 gallon vessel at no cost, to increase the present nitrogen storage from 22,000 to 33,000 gallons.’’ Defendant declined the offer. Rather, in a September 1, 1998, letter, defendant said, ‘‘Effective October 1, 1998, Chevron’s demand for liquid nitrogen from BOC will be terminated.’’


   We * * * turn to the Law Division’s entry of summary judgment on liability. The judge relied on the exclusive remedy language of the contract, limiting defendant’s rights in the event plaintiff failed to deliver nitrogen at the times and in the quantities defendant required. The court found that defendant’s sole remedy in the event of plaintiff’s noncompliance with the contract was to purchase nitrogen from another supplier, and charge plaintiff for any additional expense defendant incurred by reason of plaintiff’s untimely deliveries. The court concluded that defendant did not have the right to terminate the contract. We agree.

   Under the Uniform Commercial Code (UCC) as adopted in New Jersey, parties to a contract may establish an exclusive remedy, which, if so labeled, ‘‘is the sole remedy’’ available to them under the terms of the contract. [UCC §] 2–719(1)(b). Yet, despite this exclusive remedy provision, ‘‘where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in [the UCC].’’ [UCC §] 2–719(2). The exclusive remedy provision is ‘‘‘not concerned with arrangements which were oppressive at their inception, but rather with the application of an agreement to novel circumstances not contemplated by the parties.’’’ [Citations.] Although an arm’s length contract between sophisticated commercial parties, such as in this case, should not be readily upset by a court, [citation], where a party is deprived of the substantial value of its bargain by reason of the exclusive remedy, the contract remedy will give way to the general remedy provisions of the UCC. [Citation.]

   Issues concerning a contract’s exclusive remedy often arise in the context of a breach of warranty. For example, when a product becomes defective, the breach of warranty provision may limit the seller’s obligation to repair or replace defective equipment. [Citations.] In these types of cases— where the seller has limited the warranty to the repair or replacement of a defective part or product—before the exclusive remedy is considered to have failed in its essential purpose, the seller must be given an opportunity to repair or replace the product. [Citations.]

   A remedy may also fail of its essential purpose if, ‘‘after numerous attempts to repair,’’ the product does not operate free of defects. [Citations.]

   Failure of an exclusive remedy may also come about if the buyer is required to perform an act that cannot be done, such as where a warranty calls for defective parts to be delivered to its plant, but the parts were destroyed, [citation]; or repair or replacement take an unreasonable time to complete, [citations]; or circumstances ‘‘prevent the agreed remedy from yielding its purported and expected relief.’’ [Citation.]

   When deciding whether an exclusive remedy has failed of its essential purpose, a court must examine ‘‘the facts and circumstances surrounding the contract, the nature of the basic obligations of the party, the nature of the goods involved, the uniqueness or experimental nature of the items, the general availability of the items, and the good faith and reasonableness of the provision.’’ [Citation.] Whether an exclusive remedy fails in its essential purpose is a question of fact. [Citations.]

   Here, the exclusive remedy provision of the contract limited defendant’s rights in the event of plaintiff’s breach. Defendant’s ‘‘exclusive remedy’’ for the ‘‘unexcused failure on the part of [plaintiff] to deliver product to [defendant],’’ was defendant’s right to recover from plaintiff the difference between defendant’s cost to purchase nitrogen from another supplier and the price defendant would have paid plaintiff for the nitrogen under the terms of the contract. Defendant did not exercise this right because it claims it was unable to purchase nitrogen from other suppliers; therefore, defendant argues, the remedy failed in its essential purpose and may not be enforced. The proofs do not, however, support defendant’s argument.

   Earle testified that he believed other suppliers would not sell defendant liquid nitrogen because they did not want to ‘‘infringe’’ on defendant’s contract with plaintiff. However, Earle was unable to point to any occasion when defendant made such a request, or to any supplier who ever turned down defendant’s request. Although Earle believed Air Products may have been one of the suppliers who would not sell product to defendant, that testimony was contradicted by the testimony of Jackson and Boushie, each of whom indicated that Air Products was prepared to supply liquid nitrogen to Chevron; and, in fact, did supply liquid nitrogen to Chevron in September 1998.

   Defendant’s position, that the exclusive remedy failed, is further belied by Earle’s testimony that at the time he decided to terminate the contract with plaintiff—May 1998—he was not even aware of the exclusive remedy provision of the contract. The clear inference being that if he did not know what the contract required if plaintiff breached, there was no reason for him to invoke the contract’s exclusive remedy.

   We agree with the motion judge that a rational factfinder could not find that the exclusive remedy failed in its essential purpose. On the only occasion defendant actually tried to purchase nitrogen from another supplier, it was successful. The facts paint a clear picture—defendant did not give the exclusive remedy an opportunity to work before terminating the contract. It made no attempt to purchase liquid nitrogen from other suppliers when plaintiff was delinquent in its deliveries. Instead, Earle canceled the contract despite the contract’s exclusive remedy, which did not include termination.

   Both plaintiff and defendant are sophisticated business entities, freely entering into a contract which limited defendant’s remedies. We find no reason why the parties should not be held to the terms of their bargain. * * *

   Defendant argues that the trial court did not entertain its claim that plaintiff’s repeated lateness in delivering the nitrogen was tantamount to a breach of installments, impairing the value of the contract as a whole, giving defendant the right to cancel the contract. Under [UCC §] 2–612(1), an ‘‘installment contract’’ is a contract in which the goods are delivered in ‘‘separate lots to be separately accepted.’’ Whenever a nonconformity or a default with respect to one or more of the installments ‘‘substantially impairs the value of the whole contract[,] there is a breach of the whole,’’ [UCC §] 2–612(3), and the nondefaulting party may cancel the contract. [UCC §] 2–711(1). However, an ‘‘aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.’’ [UCC §] 2–612(3).

   Defendant points to twenty-one occasions where plaintiff was late delivering the nitrogen. Yet, defendant continued to accept delivery, without ‘‘seasonably’’ notifying plaintiff of its decision to cancel the contract. In fact, it was not until well after the twenty-one allegedly late deliveries that defendant told plaintiff of its intention to cancel the contract. Even after notifying plaintiff of the problems, and meeting with plaintiff in July 1998, defendant continued to accept nitrogen from plaintiff. In other words, even if plaintiff’s late deliveries were deemed to substantially impair the contract, by continuing to accept the deliveries, defendant reinstated the contract. Its argument that plaintiff’s repeated late deliveries permitted cancellation is therefore without merit.



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Smith and Roberson Business Law

ISBN: 978-0538473637

15th Edition

Authors: Richard A. Mann, Barry S. Roberts

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