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United States District Court, S.D. New York

May 3, 2004.

PCS SALES (USA), INC., Plaintiff, -against- NITROCHEM DISTRIBUTION LTD., Defendant

The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge


PCS Sales (USA), Inc. ("PCS") brings this diversity action against Nitrochem Distribution Ltd. ("Nitrochem"), seeking a declaratory judgment that PCS had no contractual obligation to purchase ammonia from Nitrochem in 2002.*fn1 Nitrochem counterclaims, arguing that there was a valid and binding contract, which PCS breached. A bench trial was held on March 31 and April 1, 2004. At the close of the trial, Nitrochem moved for judgment as a matter of law.*fn2 For the reasons set forth below, Nitrochem's motion and counterclaim are denied and PCS's application for declaratory judgment is granted. Pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, the Court makes the following findings of fact and conclusions of law.


  "The facts of this case sound like the delight of a contracts professor, if no one else."*fn3 PCS, a Delaware corporation headquartered in Northbrook, Illinois, is a subsidiary of Potash Corp. of Saskatchewan.*fn4 PCS's primary business is the sale of fertilizer and chemical products produced by affiliated companies for use in various agricultural and industrial applications. Additionally, PCS purchases various fertilizer and chemical products, including ammonia, for resale to its affiliates or to unaffiliated customers.*fn5

  Nitrochem, a Swiss corporation with its principal place of business in Binningen, Switzerland, is represented in the United States by its agent, Altus Corp. ("Altus"), a New Jersey company.*fn6 Nitrochem is engaged in the business of selling anhydrous ammonia and other chemical products produced by JSC Togliattiazot, a Russian corporation.*fn7

  A. The 1998-2000 Ammonia Supply Agreements

  In each of the first three years of their relationship, the parties negotiated and entered into one-year written agreements.*fn8 Specifically, the parties met and, by December of each year, signed an agreement for the sale and purchase of anhydrous ammonia in the following calendar year.*fn9 Among other common provisions, each of the contracts provided for the calculation of the sale price solely by reference to a published index, and the delivery of the ammonia in shiploads of 35,000 metric tons.*fn10 There were, however, slight differences between the contracts in terms of volume,*fn11 and the presence of an automatic renewal, or "evergreen clause." Specifically, the 1999 contract contained an evergreen clause,*fn12 but the 1998 and 2000 contracts did not.*fn13

  B. The 2000-01 Contract Negotiations

  In late September or early October 2000, PCS and Altus met at PCS's Illinois offices to discuss contract terms for the year 2001,*fn14 In particular, the parties addressed the possibility of adding an automatic renewal clause and implementing a pricing mechanism based on negotiation, rather than published indices.*fn15 The parties also agreed that it would be mutually beneficial for them to continue doing business while negotiating a contract for 2001.*fn16 Thus, Rock, speaking on behalf of PCS, notes that he and his associate, George Alleyne, stated that:

it was [PCS's] intention . . . to have 16 or 18 cargoes [in calendar year 2001] . . . and we developed a logistical program that [] could manage that amount and [Nitrochem] expressed that [it] felt it was important business for [it]. [Nitrochem] didn't want to change anything per se so between [the parties, so] we said let's continue to do business together while we negotiate a contract for 2001 and then in the event that we are able to conclude a contract for 2001, that those shipments would become part of that. . . .*fn17
  Following this meeting, Altus and PCS exchanged numerous drafts,*fn18 but by the end of December 2000, they had not reached an agreement that both parties were willing to sign.*fn19 Nonetheless, in January 2001 Nitrochem delivered, and PCS accepted, shipments of ammonia.*fn20 For each shipload of ammonia delivered to PCS in 2001, Altus prepared and transmitted to PCS a set of payment documents, including a price calculation, commercial invoice, ocean bills of lading, certificate of quantity, and certificate of quality. On each of these invoices, Nitrochem wrote the following: "Re: . . . Delivery in accordance with the contract for 2001."*fn21 The price for these shiploads was determined by the published index method, and the deliveries were made at regular intervals throughout the year. There were no demurrage charges applied to any of these shipments.*fn22

  The parties continued to trade drafts for the 2001 contract in January and February,*fn23 and on March 28, 2001, apparently growing impatient, PCS submitted to Nitrochem a signed contract.*fn24 Rather than countersign the agreement, Nitrochem sent an email to PCS on May 2, 2001, indicating that there were several provisions to which it would not agree.*fn25 In particular, Nitrochem objected to the "competitive provision" and the inspection, warranty, indemnification, termination, and remedies clauses, in their entirety, as well as some of the language in the "taxes" and "complete agreement" clauses.*fn26

  Thereafter, the parties continued their negotiations, exchanging drafts and comments over the next several months*fn27 with the objective of entering into a written, signed contract.*fn28 Although the parties had almost reached an agreement by the end of June 2001, ultimately PCS and Nitrochem could not agree on contract language acceptable to both parties.*fn29 In particular, they disputed the content of the force majeure and complete agreement clauses.*fn30 By the end of June, active negotiations between the parties for the 2001 contract had essentially ceased.*fn31 Consequently, when the parties met in Chicago on September 11, 2001, the focus of their discussions had shifted from the 2001 contract negotiations to PCS's 2002 requirements.*fn32 It was during this meeting that PCS's representatives, Rock and Dowdle, informed Nitrochem's agents that their needs for 2002 would be reduced from prior years — at most, PCS would require eight firm and eight optional cargoes of ammonia.*fn33 Rather than argue that such a reduction was prohibited under the "terms" of their agreement, Nitrochem's representatives looked for alternative purchasers for Nitrochem's ammonia.*fn34

  After the meeting, the relationship between the parties slowly deteriorated. In October 2001, Alleyne and Spirytus exchanged revised drafts of the 2001 contract, but Rock, objecting to the automatic renewal clause, would not sign the draft and negotiations stalled again.*fn35 On November, 19, 2001, Rock informed Spirytus that although PCS wanted to purchase ammonia from Nitrochem in 2002, it could not do so on a contractual basis.*fn36 Nitrochem did not inform PCS that its reduction to zero contract tons was barred by the notice provision in the 2001 contract drafts.*fn37 One week later, Nitrochem resurrected the March 28, 2001 contract from its files, countersigned it, and mailed it to PCS.*fn38

  In 2002, PCS purchased approximately two shiploads of ammonia from Nitrochem, as spot purchases.*fn39 On March 26, 2003, Nitrochem served PCS with a notice of intention to arbitrate. On April 15, 2003, PCS filed its Complaint for declaratory judgment and injunctive relief to stay arbitration, and Nitrochem counterclaimed for breach of contract on July 24, 2003.*fn40


  A. Applicable Legal Standards

  1. Choice of Law

  A federal court presiding over a diversity action applies the substantive law of the state in which it is located, including that state's choice of law rules.*fn41 In New York, "[t]he first step in any case presenting a potential choice of law issue is to determine whether there is an actual conflict between the laws of the jurisdictions involved."*fn42 A real conflict exists "`[w]here the applicable law from each jurisdiction provides different substantive rules.'"*fn43 If there is no substantive difference, a "New York court will dispense with choice of law analysis; and if New York law is among the relevant choices, New York courts are free to apply it."*fn44

  2. Principles of New York Contract Law

  Disputes arising from a contract for the sale of goods are governed by New York's Uniform Commercial Code ("U.C.C."),*fn45 "as interpreted in light of common law principles to the extent [those principles are] not inconsistent with the U.C.C."*fn46 As such, a court must consider whether the parties agreed to be contractually bound and if so, which terms govern the resulting contract.

  The touchstone of any valid contract is a meeting of the parties' minds.*fn47 Absent a "meeting of the minds on all essential terms," there is no contract.*fn48 The parties must manifest their assent to be bound by the contractual terms, either "by word, act, or conduct which evinces [their intent] to contract."*fn49

  Reflecting this principle, section 2-204 of New York's U.C.C. states, in relevant part, that "[a] contract . . . may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract."*fn50 Additionally, sections 2-206(1) and 2-207(3) "expressly allow for the formation of contracts partly or wholly on the basis of such conduct."*fn51 In other words, where the parties behave as though they have a contract, courts will recognize the existence of that contract, "whether or not the precise moment of agreement may be determined."*fn52 For instance, in Otis Elevator Co. v. George A. Fuller Co., the court found that an agreement existed between a general contractor and a subcontractor, even though they failed to agree as to when payment would be due to the subcontractor, because both fully performed and their "course of conduct in carrying out performance under those terms upon which they agreed [made] it absolutely clear that each party recognized that a valid and enforceable contract existed, the terms of which consisted of those terms on which the writings of the parties agreed" and U.C.C. gap fillers.*fn53

  "[C]onduct by both parties which recognizes that agreement is not yet consummated establishes the non-existence of a contract, . . ."*fn54 For example, where the parties have engaged in extensive negotiations, but "intended not to be bound until a written agreement was executed, `no amount of negotiation or oral agreement to specific terms will result in the formation of a binding contract.'"*fn55 In fact, as the court acknowledged in Durable, Inc. v. Twin County Grocers Corp., during the negotiation process, parties routinely conduct business with one another:

Parties can and do conduct business relationships . . . during discussion of whether . . . to enter into a more binding or longer-lasting relationship. If this is kept in mind, various subsequent events are as consistent with continuing negotiations, the hope of agreement, or the possibility that some business might be done without a binding umbrella relationship, as with entry into a large-scale long-term contract. . . .*fn56
  If a contract has been formed, courts must determine the terms of that contract.*fn57 To that end, section 2-207 addresses the paradigmatic "battle of the forms" situation, implicating "the all too common business practice of blithely drafting, sending, receiving, and filing unread numerous purchase orders, acknowledgments, and other diverse forms containing a myriad of discrepant terms."*fn58 Section 2-207 states, in relevant part:


(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.*fn59
Section 2-207 precludes application of common law principles, such as the so-called "mirror image" and "last shot" rules. Under section 2-207, neither party benefits from "the terms it attempted to impose unilaterally on the other. . . . Instead, all of the terms on which the parties' forms do not agree drop out, and the U.C.C. supplies the missing terms."*fn60

  B. Discussion

  1. Choice of Law

  PCS argues that Illinois law applies because the first negotiation between the parties for a 2001 contract took place in PCS's Illinois offices, the parties negotiated by phone between New Jersey and Illinois, the September 11, 2001 meeting took place in Illinois, and payment was to be made from Illinois.*fn61 Nitrochem counters that New York law applies because in their prior commercial dealings, i.e., the 1998, 1999, and 2000 written contracts, the parties agreed that New York substantive law would govern.*fn62

  As such, the first question is whether there is a real conflict between the laws of Illinois and New York. As the parties concede, the only difference between the two is that New York requires written notice of contract termination and Illinois does not.*fn63 But there is no need to decide whether written notice would be required to preclude the automatic renewal of the 2001 contract unless such a contract exists. There is no conflict in the laws of New York and Illinois as to that question. I shall therefore apply New York law in determining whether the parties entered into a valid contract for the sale of ammonia in 2001.

  2. Contract Formation

  Nitrochem argues that "the parties unquestionably engaged in conduct that recognized the existence of their contract, in that Nitrochem delivered ammonia and invoiced PCS in the manner set out in the various drafts of the contract exchanged, and PCS accepted the deliveries and duly made payment."*fn64 Specifically, the following conduct purportedly establishes the existence of a 2001 contract pursuant to the terms in the drafts: (1) Nitrochem's shipment and PCS's acceptance of approximately twenty shiploads of ammonia in deliveries made at regular intervals throughout the year; (2) the parties' calculation of price in accordance with the fallback pricing mechanism from the various drafts of the 2001 contract; (3) PCS's failure to object to the phrase "in accordance with the contract for 2001" printed on the invoices transmitted in connection with the shipments; (4) PCS's apparent adherence to the six-month notification rule contained in the drafts; (5) PCS's occasional references to "contract tons" and the demurrage rate in the "purchase contract"; and (6) the alleged cessation of active negotiations by June 2001,*fn65

  Nitrochem's argument lacks merit. Although a court may, under sections 2-204 and 2-207(3), recognize a contract based on conduct, this is only appropriate where the parties' undisputed actions "clearly manifest[] mutual recognition that a binding obligation was undertaken."*fn66 Where there is inconsistent behavior that suggests the absence of mutual assent, it is inappropriate to bind the parties to an agreement.*fn67 In other words, where, as here, the conduct of the parties acknowledges that an agreement has not yet been reached, that conduct is insufficient to establish a contract.*fn68

  The parties clearly did not consider themselves bound by the terms in the 2001 drafts, as evidenced by the fact that they continued actively to negotiate until at least June.*fn69 Rather than sign the drafts at the end of June, the parties continued to trade drafts, albeit sporadically, until the end of October 2001.*fn70 According to both Spirytus and Rock, the parties never abandoned the objective of obtaining a written agreement, as they had such an agreement in the three prior years of their business relationship.*fn71 Thus, the parties' decision to trade drafts throughout 2001 conflicts with Nitrochem's theory that the parties viewed themselves as contractually bound by the terms in the drafts.

  Additionally, Nitrochem's retrieval and countersignature of the March draft in November runs counter to its alleged understanding that the parties had a contract governed by the terms in the drafts. Had Nitrochem believed that it had such a contract based on conduct, it would have been unnecessary to locate and sign an old, long superseded draft. Thus, because the parties' actions unequivocally demonstrate that they did not think they had a binding contractual obligation, this case is distinguishable from those in which the courts recognized the existence of contracts by virtue of the parties' conduct.

  Moreover, to the extent that the parties' conduct is consistent with an agreement on certain terms contained in the drafts, this conduct is equally supportive of a finding that they had an interim arrangement.*fn72 First, Nltrochem's shipment and PCS's acceptance of deliveries of ammonia at regular intervals throughout 2001 reveals that the parties maintained a business relationship in anticipation of a written agreement. This behavior merely continued the parties' practice from prior years of shipping and receiving deliveries of approximately 35,000 metric tons (the amount of ammonia that typically equates to a shipload), evenly spaced throughout the calendar year. There is nothing in this arrangement to demonstrate an understanding that the parties' considered themselves "bound" by the terms in the draft agreements.

  Second, although the price charged for each shipment in 2001 corresponds with the "fallback price" of the drafts, these prices also reflect the pricing methodology from the parties' three prior contracts — i.e., reference to a published index. As such, the pricing mechanism used for the 2001 deliveries does not support a finding that the parties had a contract based on the terms in the drafts.

  Third, PCS's failure to object to the words "in accordance with the contract for 2001" on the various commercial invoices is understandable in light of Kirk's testimony that she never notified relevant PCS employees about this language as it had no bearing on the payment of the invoice.*fn73 As such, PCS's silence regarding this language does not demonstrate the existence of a contract in accordance with the terms in the drafts.

  Fourth, PCS's apparent adherence to the six-month notification rule in the drafts lacks persuasive force. Although PCS did notify Nitrochem in late June of its anticipated requirements for the year 2002, the parties failed to meet within thirty days to discuss quantities for 2002 as the various drafts required. Moreover, when PCS indicated that its fixed requirements for 2002 would be drastically reduced, Nitrochem did not assert that PCS was contractually obligated to accept a fixed number of deliveries in 2002. Fifth, PCS's references to "contract tons" and demurrage rates do not demonstrate the existence of a 2001 contract based on the drafts. Nitrochem first notes that "Mr. Rock was careful to phrase his statements to Mr. Spirytus regarding ammonia for 2002 in terms of `contract' tons," arguing that these statements would be "relevant and necessary only if the parties were acting in 2001 on a contract basis."*fn74 Specifically, Rock testified, "I also expressed to Alan that I was sure we were buying ammonia for 2002, we would be buying not on a contract basis from them, but we would consider them to be still one of our primary ammonia suppliers. . . . "*fn75 This statement, made in late November 2001, clearly demonstrates that PCS conveyed to Nitrochem that it was not bound by any contract in 2002.

  Nitrochem further emphasizes Rock's reference to "contract tonnes [] purchased in 2001," in conjunction with the statement "our requirements for 2001 were substantially less than we had agreed in Dec. 2000 to purchase during 2001. [N]evertheless we honored our commitment and worked hard at finding a home for that volume."*fn76 Nitrochem contends that by this statement, Rock acknowledged the existence of a 2001 contract on terms in the drafts. But, in light of the parties' history and fast-deteriorating relationship, this statement only demonstrates that PCS agreed to purchase approximately twenty shiploads of ammonia in 2001, pending the outcome of the negotiations.

  Sixth, the alleged cessation of active negotiations by late June 2001 is not an acknowledgment that the parties felt contractually bound by the terms in the draft. The parties did not sign the draft at this point and indeed continued to exchange drafts that fall. It was commercially reasonable for the parties to focus their efforts on negotiating quantities for 2002, as more than six months had passed without a written contract and without incident.*fn77

  For the foregoing reasons, the parties' conduct does not provide a sufficient basis for recognizing the existence of a contract based on the terms common to the drafts. The evidence suggests that, at most, the parties entered into an oral contract in late 2000 under which Nitrochem would sell to PCS approximately twenty shipments of ammonia, in accordance with the delivery schedule (evenly spaced throughout the year) and pricing mechanism traditionally used by the parties.*fn78 Because I conclude that there was no contract, I need not speculate as to the terms that such a contract might have contained. I note, however, that the purpose of an evergreen clause is to impart greater permanence to a contractual arrangement, allowing the contract to govern the relationship between the parties after its expiration without further negotiation. Given the failure of the parties to successfully negotiate and execute a formal contract for 2001, it would be particularly inappropriate for this Court to imply an evergreen term into what is, at best, an interim agreement between the parties to continue to do business in contemplation of reaching a final agreement. To do otherwise would transform an interim arrangement into a final agreement that the parties themselves failed to reach.


  For the foregoing reasons, Nitrochem's motion for judgment as a matter of law is denied, and PCS's application for declaratory judgment is granted. PCS had no contractual obligation to purchase ammonia from Nitrochem in 2002. PCS's application for an award of its costs incurred to bring this action is denied.*fn79 Nitrochem's counterclaim for breach of contract and request for relief including dismissal of PCS's complaint, damages, and an award of costs, are denied for the reasons set forth above. The Clerk of the Court is directed to close this case.


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