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Sunoco, Inc. v. Honeywell

March 21, 2006

SUNOCO, INC. (R&M), PLAINTIFF,
v.
HONEYWELL INTERNATIONAL, INC. DEFENDANT.



The opinion of the court was delivered by: Denise Cote, District Judge

OPINION & ORDER

On January 13, 2006, Honeywell International Inc. ("Honeywell") moved to confirm arbitration awards entered in its favor on September 2 and 21, 2005 and January 11, 2006, against Sunoco, Inc. ("Sunoco"). Sunoco has responded with a motion to vacate. For the following reasons, the arbitration awards are confirmed.

Background

The background of this dispute was summarized in an Opinion of October 13, 2005, denying Sunoco's motion for a preliminary injunction. Briefly, Sunoco sells the petrochemical phenol to Honeywell, which uses the product in its manufacture of nylon. The key ingredient of phenol is cumene, and an agreement between the two companies ("Agreement") provides a methodology for pricing cumene through the end of 2004, and thereafter until a revised pricing methodology is established either through agreement or arbitration. Honeywell came to believe that Sunoco was overcharging it for cumene and demanded arbitration to determine damages for that overpricing. Through its motion for an injunction, Sunoco sought to stop the arbitrator in the Damages Arbitration from setting the price for cumene during the year 2005. For the reasons explained in the October 13 Opinion, familiarity with which is assumed, Sunoco's motion was denied. See Sunoco, Inc. v. Honeywell Int', Inc., 2005 WL 2259673 (S.D.N.Y. Oct. 13, 2005). A hearing in a second arbitration between the parties, referred to as the Reopener Arbitration since it will set a new methodology for the pricing of cumene, is scheduled to begin in April 2006.

The arbitrator in the Damages Arbitration ("Arbitrator") found by clear and convincing evidence that Sunoco engaged in a "dishonest breach of its duty of good faith and fair dealing under the Agreement" by manipulating the published benchmark for setting the price of cumene, producing an "artificial, inflated, manipulated" marker. The Arbitrator awarded Honeywell damages from June 2003 through 2004 in the amount of $63,698,798 for cumene overcharges and $1,832,996 for electricity overcharges. He awarded damages from January 2005 through April 2005 of $11,203,778, and from May 2005 through September 2005 of $12,824,014, for cumene overcharges. He awarded prejudgment interest through December 2005 of $3,581,245 on the cumene overcharges, and $77,174 on the electricity overcharges. He awarded attorneys' fees in the amount of $2,041,691, and costs of $30,847. The Arbitrator also set the price of cumene from October 1, 2005 until a new price is set and takes effect by agreement of the parties or as a result of the Reopener Arbitration.

As found by the Arbitrator, Sunoco's price manipulation can be summarized as follows. Sunoco and Honeywell agreed, for reasons described by the Arbitrator, that the largest component of the price of the phenol that Sunoco would sell to Honeywell would be Sunoco's cost of obtaining cumene. They agreed to use what was called the "freely-negotiated" contract posting or marker price for cumene that was published by Chemical Market Associates, Inc. ("CMAI") as an objective measure of the price a billion pound purchaser of cumene would pay in arm's-length transactions. Under the Agreement, Honeywell was required to pay Sunoco the invoiced amount within three days, and wait until the end of the year to resolve any disputes.

In 2003, Sunoco created an opportunity to manipulate the marker price. Sunoco negotiated an inflated price for one barge of cumene that it bought from a single third party and reported that price to CMAI as the freely-negotiated contract marker price. As of that time, CMAI had no other source for a marker price, and published the information that Sunoco gave to it. While Sunoco paid the third party more than it had to, it netted scores of millions of dollars through overcharging Honeywell based on the sham marker it had created. This manipulated marker was consistently several cents higher than the actual prices paid by Sunoco under its contracts with its cumene suppliers. After CMAI received complaints that the freely-negotiated contract price that CMAI published did not reflect contemporary prices, it began in 2003 also to publish a formula based contract posting for cumene. This formula based price was always several cents lower than the "freely-negotiated" marker price it also posted. CMAI stopped publishing the marker price as of January 1, 2005, because the third party who had participated in the single barge transactions with Sunoco refused to continue those negotiations after it learned of Honeywell's concerns about the validity of the marker price. Since that date, CMAI has only published a formula contract price for cumene. The Arbitrator chose this price as the reasonable price for cumene until the Reopener Arbitration sets a new price.

Before addressing Sunoco's arguments, one other component of the background to this litigation must be described. A tactical decision that Sunoco made at the outset of this dispute is the source of many of the issues that Sunoco has identified in its attack on the Arbitrator's decisions. Until quite recently, Sunoco took the position that the Reopener Arbitration could only set a new price for cumene prospectively, and therefore that Honeywell could not demand that the Reopener Arbitration set the price of cumene from January 1, 2005 forward. As a result, Honeywell sought damages within the Damages Arbitration for not just Sunoco's overcharging scheme in 2003 and 2004, but also the overcharging that continued in 2005 as the Damages Arbitration proceeded. Sunoco objected and sought a ruling from the Arbitrator on whether the Damages Arbitration was the proper forum for a claim of overcharges in 2005, characterizing the question as one concerning the "scope" of the arbitration. The Arbitrator concluded that the existence of the Reopener Arbitration does not preclude Honeywell from receiving damages for Sunoco's ongoing breaches until the Reopen Arbitration sets the future price of cumene. With this background, Sunoco's specific challenges to the arbitration awards are addressed in turn.

Discussion

Sunoco contends that the Arbitrator did not have the authority to award relief for breaches occurring in 2005, applied the wrong legal standard in deciding that Sunoco had breached its duty of good faith and fair dealing, and committed misconduct. A court's review of an arbitration award is "severely limited" so as to not unduly frustrate the goals of arbitration, namely to settle disputes efficiently and avoid long and expensive litigation. Willemijn Houdstermaatschappij, BV v. Standard Microsystems Corp., 103 F.3d 9, 12 (2d Cir. 1997) (citation omitted). "The showing required to avoid summary confirmation of an arbitration award is high," id., and a party moving to vacate an award bears "the heavy burden of showing that the award falls within a very narrow set of circumstances delineated by statute and case law." Duferco Int'l Steel Trading v. T. Klaveness Shipping A/S, 333 F.3d 383, 388 (2d Cir. 2003).

1. Authority to Award Damages for 2005 The Federal Arbitration Act (FAA), 9 U.S.C. § 1, et seq.,

permits vacatur of an arbitration award "where the arbitrators exceeded their powers." Id. § 10(a)(4). Courts should "accord[] the narrowest of readings" to this provision if the disputed issue is properly subject to arbitration under the parties' agreement. Westerbeke Corp. v. Daihatsu Motor Co. Ltd., 304 F.3d 200, 220 (2d Cir. 2002). Sunoco makes several arguments concerning the authority of the Arbitrator to award damages for Sunoco's pricing of cumene in 2005. None of these arguments is persuasive.

First, Sunoco contends that the structure of the Agreement's arbitration provisions precluded the Arbitrator from awarding damages for its 2005 pricing of cumene. Section 6.02 of the Agreement provides that "[o]n or after January 1, 2005, and from time to time thereafter, but no more frequently than once every three years, either party may request a reopener of this methodology used to determine the price of cumene then in effect." Sunoco argues that this represents a specific agreement on how to proceed with disputes over pricing after January 1, 2005, and that this provision supersedes the general arbitration clause in Section 20. Section 20 states that "any dispute, controversy or claim" arising under the Agreement that cannot be settled amicably within ninety days "shall be settled . . . by an arbitrator . . . using the Commercial Arbitration Rules of the American Arbitration Association [("AAA")]."

Sunoco asked the Arbitrator to determine whether Section 6.02 limited the scope of the Damages Arbitration to the award of damages for the period before 2005. After full briefing, the Arbitrator determined that accepting Sunoco's positions (1) that the Reopener Arbitration could only adjust the pricing methodology prospectively, and (2) that the Damages Arbitration could not award damages for 2005, "would leave Honeywell without any ...


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