The opinion of the court was delivered by: DENISE COTE, District Judge
Sunoco Inc. ("Sunoco") has brought a motion for a preliminary
injunction to stop defendant Honeywell International Inc.
("Honeywell") from taking any further action in an ongoing
arbitration to obtain a determination of the price for the year 2005 of a key ingredient in a product Sunoco sells to Honeywell.
For the following reasons, the motion is denied.
There is very little dispute between the parties about the
facts that control the determination of this motion. Both parties
have agreed that the facts may be decided without a hearing on
the basis of the documentary record that they have submitted.
The parties executed a Purchase and Sale Agreement
("Agreement") for phenol, a petrochemical that Sunoco
manufactures and ships to Honeywell for use in Honeywell's
manufacture of nylon. The Agreement provides a methodology for
pricing a key raw ingredient of phenol, cumene, during the first
seven years of the Agreement, that is, until the end of 2004.
Thereafter, the methodology for determining the price can be
revised through the process spelled out in the Agreement. Until
the methodology is revised, however, "the then current
methodology will remain in effect." To obtain a revised pricing
methodology, either party may request on or after January 1,
2005, a "reopener" of the methodology "used to determine the
price of cumene then in effect", and if the parties are unable to
agree, a determination of a new methodology through an
arbitration process. The Agreement provides that the arbitrator
in any reopener proceeding will be an individual "reasonably skilled in determining prices and pricing methodologies for
cumene," and lists economic factors that the arbitrator will be
entitled to consider and assumptions that the arbitrator will be
required to adopt. Honeywell is bound under the Agreement to pay
each monthly invoice and to wait until the end of the year to
dispute an invoice.
In 2004, Honeywell began to suspect that Sunoco was
overcharging it for cumene, and when Sunoco refused to share
certain information with it, it filed a demand for arbitration to
determine damages from overpricing of cumene ("Damages
Arbitration") on November 1, 2004. Honeywell sought relief "as to
past periods," and "as to future periods", including a
declaration that Sunoco's breaches of contract and fraud excused
Honeywell's future performance under the Agreement.
During this time, the parties were also discussing whether a
new pricing mechanism could be put in place for 2005. After
Honeywell filed its demand for the Damages Arbitration, Sunoco
informed Honeywell that it would continue to invoice Honeywell at
the current price until a new price had been agreed to. As a
result, on December 6, 2004, Honeywell filed a second arbitration
demand for a determination of the methodology that "shall" be
used from January 1, 2005 to determine cumene prices ("Reopener
Arbitration"). In response, Sunoco wrote to Honeywell, taking the
position that the arbitrator in the Reopener Arbitration "cannot
declare" a price for cumene from January 1, 2005, since the
Agreement required that the price of cumene "continue under the methodology in the Agreement until a new methodology has been
decided. Therefore, Honeywell cannot demand, and an arbitrator
cannot declare, that the pricing methodology for the price of
cumene apply from January 1, 2005 forward." In its December 30
Answer, Sunoco objected that Honeywell's demand for arbitration
exceeded the scope of the Agreement in seeking that the
arbitrator "apply the pricing methodology retroactively to
January 1, 2005."
The hearing in the Damages Arbitration took place between May
18 and June 1, 2005. Honeywell had served an expert report on
March 28, 2005, claiming damages not only for 2003 and 2004, but
also for the year 2005 up to the date of the report. Sunoco
objected on May 6, arguing that the Reopener Arbitration was "the
appropriate place to resolve cumene pricing under the Agreement
for January 1, 2005 going forward." Honeywell responded on May
11, that it would have no remedy for Sunoco's breach of contract
from January 1, 2005 unless damages were awarded in the Damages
Arbitration given Sunoco's assertion that the Reopener
Arbitration could not establish a new pricing methodology
retroactively. Honeywell assured the arbitrator that it was not
seeking a new methodology through the Damages Arbitration, and
that the new methodology would be determined only in the Reopener
On May 10, Sunoco sought a ruling from the arbitrator in the
Damages Arbitration regarding the proper forum for Honeywell's
claim of overcharges in 2005, characterizing it as an issue as to the "scope" of the arbitration and of the arbitrator's
jurisdiction. As a result, the issue of the arbitrator's
jurisdiction to award damages for 2005 was the subject of
prehearing briefing, hearing testimony and post-hearing briefing.
Sunoco again took the position that the arbitrator could not
award damages for 2005 because Honeywell had already commenced a
separate Reopener Arbitration. A Sunoco executive testified in
effect that the reopener provisions in the Agreement precluded
Honeywell from obtaining any relief for cumen overcharges in 2005
until the pricing methodology was revised through the Reopener
Arbitration. According to the executive, "until such methodology
is revised, then current methodology will remain in effect."
In a preliminary decision of September 2, the arbitrator in the
Damages Arbitration awarded damages in favor of Honeywell for
June 2003 through April 2005, in the amount of almost $75 million
and ordered an additional hearing on continuing damages. The
arbitrator determined that Sunoco had purposefully created a sham
market for cumene, and that its manipulation of the price was a
breach of its duty of good faith and fair dealing under the
Agreement. The public market on which Sunoco had based its prices
in 2003 and 2004 ceased to exist as of January 1, 2005, because
of the filing of the Damages Arbitration. Nonetheless, Sunoco had
continued to charge Honeywell at the same price level in 2005
that it had used in earlier years. The arbitrator found that by
doing so, Sunoco had continued to breach the Agreement by
charging Honeywell an arbitrary price. He also concluded that the existence of the Reopener Arbitration did not preclude a
damages award for the period of time until the Reopener
Arbitration sets the future price: "I conclude that the existence
of a second arbitration regarding the pricing methodology on a
going forward basis does not preclude Honeywell from receiving
damages for Sunoco's past and continuing breaches of its
contractual duty of good faith and fair dealing for the time
until that second arbitration sets the future price."
On September 21, the arbitrator issued a final award for 2003
and 2004. As for the 2005 damages, which amounted to over $11
million, the arbitrator suspended entry of a final award in
deference to this preliminary injunction proceeding.
Following the September 2 ruling, Sunoco has continued to send
Honeywell invoices set at the same rate that the arbitrator found
to be a breach of its duty of good faith and fair dealing.
Specifically, on September 9, Sunoco sent an invoice to Honeywell
for August purchases that continued to charge Honewell at the
same rate it had used for its other 2005 invoices. Through this
invoice, Sunoco rejected Honeywell's offer to pay future invoices
at the rate approved by the arbitrator until the Reopener
Arbitration set a new methodology.
In the Reopener Arbitration, the parties agreed to waive the
requirement that an arbitrator reasonably skilled in determining
cumene prices preside over the arbitration. The hearing in this
second arbitration is set for April 10, 2006 in New York City.
The Reopener Arbitration has proceeded slowly because of a stay during settlement negotiations and delays associated with
locating a qualified arbitrator. On September 13, over a week
after the September 2 ruling in the Damages Arbitration, Sunoco
amended its answer in the Reopener Arbitration to take the
position for the first time that the new pricing methodology
which will be determined by the arbitrator in the Reopener
Arbitration may be applied retroactively to January 1, 2005.
In this lawsuit, Sunoco seeks a preliminary injunction. It also
has pleaded a count to vacate the September 21 award in the
Damages Arbitration on the ground ...