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CHEMETRON CORPORATION v. MCLOUTH STEEL CORPORATION

June 28, 1974

CHEMETRON CORPORATION, PLAINTIFF,
v.
MCLOUTH STEEL CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Julius J. Hoffman, Senior District Judge.

    MEMORANDUM OF DECISION

This is an action for breach of contract. Although properly within this Court's jurisdiction,*fn1 the action, where appropriate, is governed by the applicable law of Michigan.*fn2

Under the contract in issue, the plaintiff, Chemetron Corporation, obligated itself to purchase from the defendant, McLouth Steel Corporation, a minimum quantity of 975 tons of liquid oxygen and/or liquid nitrogen, combined (collectively, "liquid product"), each calendar month of the contract term. McLouth, on its part, obligated itself to make available for purchase by Chemetron, as requested, a guaranteed maximum quantity of 1,950 tons of liquid product each calendar month of the contract term. This arrangement provided Chemetron with an assured supply of liquid product so that it could meet its needs,*fn3 whatever they might be, from 975 tons to 1,950 tons per month. McLouth agreed to deliver the product ". . . on a twenty-four hour daily call basis . . . in approximately equal quantities each day except . . . Saturdays, Sundays, and holidays. . . ."*fn4

The written agreement, executed on April 17, 1964, became effective for a five-year term on April 21, 1965, and, pursuant to contract proviso, was automatically renewed for an additional five-year term effective April 21, 1970.

In its suit, commenced January 26, 1973, Chemetron charged that, because of McLouth's repeated failures to meet its requests during the renewal term of the contract, it has been forced to purchase liquid product from other sources at prices considerably higher than those payable to McLouth under the agreement; that therefore it has sustained, and is continuing to sustain, substantial money damages.

At trial, certain evidence was introduced which revealed the nature of contract performance during the original term of the contract. In the early years of the original term, performance was according to contract specification: in the 27 months from May, 1965 through July, 1967, in averaging 1,348 tons per month, McLouth regularly made available and Chemetron purchased a quantity of product well in excess of the minimum monthly quantity; there was no credible evidence that McLouth's performance for this period was in any sense inadequate to meet Chemetron's needs for liquid product. In the next year, however, McLouth's performance declined: from August, 1967 through July, 1968, McLouth made available and Chemetron purchased more than the minimum monthly quantity in only six of those months, with the monthly average slipping to 856 tons; about this inadequate performance, Chemetron complained, and in response, McLouth offered assurances that its performance would improve and that its plans to change its steel manufacturing processes would not impair its ability to supply Chemetron's needs for liquid product. The possibility of immediate improvement was forestalled by a strike that began in August, but by December, after a period of recovery, McLouth's performance returned to approximately the level of the first two years of the original term: from December, 1968 through April, 1969, McLouth made available and Chemetron purchased, each and every month of this period, a quantity of product well in excess of the minimum monthly quantity, the average rising to 1,283 tons per month; once again, there was no evidence that McLouth's performance for this period was in any sense inadequate to meet Chemetron's needs for liquid product.

It was against this background, then, that the contract was renewed; the deadline for notification of intent not to renew passed on April 21, 1969.

I.

Cancellation Provision

McLouth maintains that in order to sue for damages Chemetron had first to cancel the contract in its entirety. This contention finds support in the following language of paragraph XII of the contract:

  "[I]n the event of failure of either party to
  perform any provision of this Agreement, the only
  rights of the other party shall be to cancel the
  Agreement as provided in this paragraph to
  recover damages for breach of this Agreement."

Under the facts of this case, however, the harshness of this provision seems obvious.

From the outset of the 1964 contract, McLouth knew that Chemetron was purchasing liquid product from it for resale to Chemetron's customers. In April, 1964 McLouth gave Chemetron a letter addressed "to whom it may concern." In that letter McLouth stated that it had entered into an agreement to supply Chemetron "with a minimum of 65 tons per day" of liquid product. McLouth must have known that the letter would be used by Chemetron to solicit new sales agreements, and, in fact, a copy of the letter was given to the Jones & Laughlin Steel Corporation. Chemetron also advised McLouth that it had committed itself to supply large quantities of liquid oxygen to Jones & Laughlin. Within a few weeks of the execution of its contract with McLouth, Chemetron signed a sales contract to supply Jones & Laughlin with its liquid oxygen requirements. Relying on its guarantee of product availability from McLouth, Chemetron made other such commitments.

During the renewal term of the contract, when the quantities of liquid product supplied by McLouth fell far below Chemetron's needs for serving its Detroit customers, Chemetron endeavored to obtain substitute product from other sources. By late 1972, Chemetron could not obtain enough substitute product from these other sources, and, in the spring of 1973, was forced to institute an allocation program under which its customers received only 50 to 80 percent of their needs.

Under these circumstances it would have been commercially unfeasible for Chemetron to cancel its contract with McLouth notwithstanding McLouth's breaches, for Chemetron would obviously have been in an even worse position and less able to serve its customers if it had received no product at all from McLouth instead of the quantities, however insufficient, that McLouth made available.

While parties may agree to limit the remedies for breach of their contract,*fn5 the policy of the Uniform Commercial Code disfavors limitations and specifically provides for their deletion if they would act to deprive a contracting party of reasonable protection against breach. Subsection (2) of Section 2719, Uniform Commercial Code of Michigan, provides:

  "Where circumstances cause an exclusive or
  limited remedy to fail of its essential purpose,
  remedy may be had as provided in this act." 440
  M.C.L. § 2719(2).
  "If the parties intend to conclude a contract for
  sale within this Article they must accept the
  legal consequence that there be at least a fair
  quantum of remedy for breach of the obligations
  or duties outlined in the contract. Thus any
  clause purporting to modify or limit the remedial
  provisions of this Article in an unconscionable
  manner is subject to deletion and in that event
  the remedies made available by this Article are
  applicable as if the stricken clause had never
  existed. Similarly, under subsection (2), where
  an apparently fair and reasonable clause because
  of circumstances fails in its purpose or operates
  ...

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