United States District Court, S.D. New York
October 13, 2005.
SUNOCO, INC. (R&M), Plaintiff,
HONEYWELL INTERNATIONAL, INC. Defendant.
The opinion of the court was delivered by: DENISE COTE, District Judge
OPINION AND ORDER
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 that it is in manifest
disregard of the law.
There is no need for an extended discussion of Sunoco's
preliminary injunction motion.*fn1 Sunoco litigated within
the Damages Arbitration the issue of whether that arbitrator had
the power to award damages for the year 2005, or more
specifically, for any period until a new pricing mechanism has
been established through the Reopener Arbitration. Having chosen
to submit that issue to the arbitrator, the proper mechanism for
any attack on the arbitrator's decision on the issue is through
its cause of action to vacate a final award, and not through an application
for injunctive relief to prevent a final award from being
entered. The arbitrator is prepared to enter that final award,
and would have done so on September 21 at the latest but for the
existence of this preliminary injunction motion. Sunoco has not
shown that it will suffer any cognizable harm that cannot be
fully addressed through its action to vacate an award.
Honeywell points out that through its motion for a preliminary
injunction, Sunoco is seeking review of an interlocutory ruling
by an arbitrator. A court does not have the power to review
interlocutory rulings. See In re Michaels, 624 F.2d 411, 414
(2d Cir. 1980); Compania Panemena Maritima San Gerassimo, S.A.
v. J.E. Hurley Lumber Company, 244 F.2d 286, 288-89 (2d Cir.
Sunoco does not dispute that its sole recourse in attacking any
decision made in the Damages Arbitration is to move to vacate or
modify an award. Instead, it seeks to avoid this law through the
characterization of its motion.*fn2 It argues that it is
seeking to enforce its right to have the Reopener Arbitration set
the new mechanism for determining the price of cumene. But, it is
undisputed by both parties (as well as the arbitrator in the Damages Arbitration) that the Reopener Arbitration must proceed
and that the Reopener Arbitration is the sole forum for setting a
new mechanism to determine the price of cumene. Sunoco's right to
have the Reopener Arbitration proceed is thus fully protected.
The only thing that is truly at stake here is whether the new
mechanism determined in the Reopener Arbitration can apply
retroactively. Sunoco had previously taken the position that that
mechanism could only apply prospectively. Having lost in the
Damages Arbitration, Sunoco has switched gears and now argues
that the new mechanism should apply not just prospectively but
also retroactively to January 2005, and be the only measure used
to adjust the amounts paid by Honeywell (hoping perhaps that that
measure will be more favorable to it than the damages imposed by
the arbitrator in the Damages Arbitration or to preserve its
right to charge Honeywell at current prices for as long as
possible). Sunoco's rights in this regard are also fully
protected by denying its motion for a preliminary injunction and
by allowing the Damages Arbitrator to enter a final judgment on
the 2005 damages so that the scope of its jurisdiction and the
legality of its award can be promptly addressed on the merits.
In any event, two things are clear. Sunoco has not shown that
it will suffer irreparable harm if a final decision is entered in
the Damages Arbitration for 2005 damages. Honeywell has shown
that Sunoco's motion is an impermissible interlocutory attack on
an ongoing arbitration proceeding.
If it were necessary to reach the issue of Sunoco's likelihood of success, Sunoco has not shown that it is likely to
prevail. Sunoco having taken the position throughout the Damages
Arbitration (and in the Reopener Arbitration until very recently)
that any revised pricing mechanism established by the Reopener
Arbitration could not be applied retroactively, it would appear
as a preliminary matter that the arbitrator in the Damages
Arbitration was justified in finding that Honeywell would be
without recourse for arbitrary pricing in 2005 unless he awarded
damages to Honeywell for this period as well as earlier periods.
Alternatively, if it were necessary to weigh the balance of
hardships, Sunoco has not shown that the balance tips decidedly
in its favor, since the Agreement requires Honeywell to pay the
amount charged in Sunoco's monthly invoices, the Damages
Arbitration has determined that Honeywell has been overcharged at
a rate of approximately $4 million per month, and the hearing
(much less a decision) in the Reopener Arbitration is months
Sunoco's motion for a preliminary injunction is denied.
© 1992-2005 VersusLaw Inc.