The opinion of the court was delivered by: Denise Cote, District Judge
This Opinion addresses a phenomenon known as a "book transfer chain" in the market for petroleum products, and the effort of one party to "break" the "book" on its effective date. In July 2008, plaintiff Morgan Stanley Capital Group, Inc. ("MSCG") agreed to purchase 25,000 barrels of M2 grade gasoline from defendant Trafigura AG ("Trafigura") to be delivered via the Colonial Pipeline either by physical delivery or "book transfer." MSCG contends that after the parties' agreed-upon book transfer was cancelled, Trafigura breached its contractual obligation to physically deliver the gasoline to MSCG. MSCG seeks recovery of $3,362,625 that it accidentally paid to Trafigura pursuant to the contract, as well as interest, attorneys' fees and costs.
A bench trial was held June 7-9, 2010. This Opinion presents the Court's findings of fact and concludes that Trafigura did not breach its contract with MSCG because the parties did not agree to cancel the book transfer and Trafigura had no contractual obligation to physically deliver the gasoline to MSCG.
On February 6, 2009, MSCG filed this action against Trafigura, asserting a single claim for breach of contract. The bench trial, held June 7-9, 2010, was conducted, without objection, in accordance with this Court's customary practices for the conduct of non-jury proceedings. On May 28, 2010, the parties submitted a Joint Pretrial Order and proposed findings of fact and conclusions of law. The parties also served affidavits containing the direct testimony of their witnesses and copies of all the exhibits and deposition testimony that they intended to offer as evidence in their case in chief at trial.*fn1
MSCG presented affidavits constituting the direct testimony of Kenneth Vincent ("Vincent"), a scheduler in the Denver, Colorado office of TransMontaigne, Inc. ("TransMontaigne"); Bryon Beckwith ("Beckwith"), the Director of Supply and Distribution in the Denver, Colorado office of TransMontaigne; David Hogan ("Hogan"), the New York Scheduling Manager in the Purchase, New York office of MSCG; Kevin Jandora ("Jandora"), the global head of Physical Oil Operations and the North American head of Power and Natural Gas Operations within Commodities Operations for MSCG; Chee Ooi ("Ooi"), the Executive Vice President for Supply and Trading at TransMontaigne; Christopher Arp ("Arp"), a manager in MSCG's Fixed Income Group; and Keith Grzeczka ("Grzeczka"), an Executive Director at JPMorgan Chase & Co., whom MSCG offered as an expert witness. Each of these witnesses appeared at trial and was available for cross examination.
Trafigura presented affidavits constituting the direct testimony of Danielle Neely ("Neely"), a scheduler in Trafigura's Houston, Texas office; Matthew Coté ("Coté")*fn2 , a scheduler in Trafigura's Houston, Texas office; Jason Liddell ("Liddell"), the Manager of Gasoline Trading for Trafigura; Mary Ellen Yacura ("Yacura"), the former head of finance in North America for Trafigura; and David Ownby ("Ownby"), a Director in the petroleum and chemical industry services practice of LECG, LLC, whom Trafigura offered as an expert witness. Each of these witnesses appeared at trial and was available for cross-examination.
Excerpts from the depositions of testifying witnesses, as well as the following individuals, were offered and received into evidence at trial. The parties offered excerpts from the depositions of Kellen Burdic ("Burdic"), a scheduler in the Denver, Colorado office of TransMontaigne; William Davidson ("Davidson"), a scheduler in the Stamford, Connecticut office of Glencore Ltd. ("Glencore"); Bruce Morgan ("Morgan"), the head of the petroleum trading and scheduling group at QuikTrip Corp. ("QuikTrip"); Dawn Tyler ("Tyler"), a former treasury analyst at Trafigura; and Cynthia Sawyer ("Sawyer"), a scheduler in the Houston, Texas office of SemFuel, L.P. ("SemFuel").
At the close of MSCG's case in chief, Trafigura moved for a directed verdict. Trafigura also moved for judgment as a matter of law after the close of its case in chief. Prior to summations, the court heard argument from the parties on Trafigura's motions and reserved decision.
This action arises from a contractual dispute between two sophisticated traders in the market for petroleum products. Plaintiff MSCG is the commodities division of Morgan Stanley, a global financial services company. Among other activities, MSCG trades in the spot, forward, and futures markets in several commodities, including metals, crude oil, oil products, natural gas and electrical power. TransMontaigne, an indirect, wholly-owned subsidiary of MSCG, is a distributor of unbranded refined petroleum products to independent wholesalers and industrial and commercial end users. Defendant Trafigura is a commodities trading company headquartered in Switzerland. In particular, Trafigura is involved in the trading of crude oil, petroleum products, renewable energies, metals, metal ores, and concentrates for industrial consumers. Trafigura is the world's third-largest independent oil trader and the second largest independent trader in the non-ferrous concentrates market.
1. Trading in Petroleum Products on the Colonial Pipeline
The Colonial Pipeline Company ("Colonial") is an interstate common carrier of petroleum products, delivering a daily average of 100 million gallons of gasoline and other fuels to shipper terminals in twelve states and the District of Columbia through a vast underground network of pipelines (the "Colonial Pipeline"). Colonial pumps petroleum products on the Colonial Pipeline in five-day periods, known as "cycles," which occur six times per month and approximately 72 times per year. Because a cycle lasts five calendar days, it is possible to arrange for petroleum products to be "lifted" into the pipeline for up to four calendar days after the first day of the cycle.
In order to ship petroleum products on the Colonial Pipeline, a company, through its "scheduler," must enter a "nomination" in Colonial's computer system.*fn3 A nomination is essentially a request for space to ship a petroleum product from an origin location to a destination location via the Colonial Pipeline. To set up a nomination in Colonial's computer system, a purchaser provides its seller with a "batch," which consists of a series of characters identifying the purchaser and the product to be shipped. The seller must then provide the purchaser with an "origin," which identifies the ultimate shipper of the product. The batch and origin are then "nominated," i.e., transmitted, to Colonial, which uses this information to credit the account of the purchaser with the petroleum product shipped on the Colonial Pipeline.
Colonial designates a "scheduling day" for each cycle, which represents the final date that a batch and origin can be nominated and confirmed to Colonial to arrange for physical delivery of petroleum products on the Colonial Pipeline. Colonial typically targets scheduling day to be four days prior to the lifting of the cycle out of Pasadena, Texas, the southernmost origin on the Colonial Pipeline. On or before scheduling day, schedulers from companies with contracts to buy or sell petroleum products on the Colonial Pipeline contact each other, typically via an instant messenger service, such as Yahoo! Messenger, in order to schedule the settlement of the contracts entered into by the companies' traders. Schedulers also attempt to determine if they are able to create what is known in the industry as a "book transfer chain."*fn4
A book transfer chain involves a series of buy and sell obligations between multiple companies, such that the buy and sell obligations form a circle whereby each company in the chain will be buying and selling the same amount of a particular petroleum product on the cycle. When only two parties are involved, they may "net out" their respective contracts through a book-out. The purpose of a book transfer chain is the efficient settlement of trades. Instead of transferring the physical product from each seller to each purchaser, and the purchaser paying for the product after the product is received (only to turn around and sell the product to its purchaser), schedulers endeavor to settle each contract through wire transfers of the purchase price on a chosen day, called the "effective date," from a party with an obligation to purchase gasoline to that party's respective seller of gasoline.
The effective date of a book transfer is typically the first day that product is lifted into the Colonial Pipeline for a particular cycle, but can be any day of the cycle if agreed upon by the parties. If the parties agree to settle their buy and sell obligations through a book transfer chain, Colonial is not provided a batch and origin on scheduling day. In fact, the parties do not even advise Colonial of the existence of the book transfer chain. Instead, title to the gasoline is simply deemed to transfer through the chain as of 12:01 AM on the effective date. Unless alternative arrangements are made, each party pays its counterparty via wire transfer at some point on the effective date. Thus, the book transfer chain ultimately has the same economic effect as the physical delivery of the petroleum product.
Contracts for the purchase and sale of gasoline on the Colonial Pipeline typically contain a provision that permits a seller to demand that the buyer post security for the payment it is obligated to make on the effective date. Security may, for example, take the form of prepayment of all or a portion of the purchase price or an irrevocable standby letter of credit. If such security is demanded by the seller on or after scheduling day, it is typically posted by the purchaser no later than two business days prior to the effective date of the book transfer. If no special arrangements for payment have been made, payment for physically-delivered gasoline is typically due two days after the purchaser's receipt of the seller's invoice and a pipeline meter ticket evidencing delivery of the gasoline.
Book transfers play an important role in the market for petroleum products because they increase liquidity in that market and provide additional hedging opportunities for market participants. Book transfers are particularly important for traders, like Trafigura, who do not own refineries or extensive facilities to store gasoline. For example, even though Trafigura enters into many contracts to purchase and sell gasoline on the Colonial Pipeline, it rarely intends to pump any barrels into, or remove any barrels from, the pipeline. In fact, approximately 90 percent of Trafigura's transactions involving Colonial Pipeline gasoline are scheduled to be performed by book transfer. Accordingly, on scheduling day, traders and schedulers at Trafigura coordinate to make sure that Trafigura is "flat," which means that Trafigura has contracted to purchase and sell the same quantity of gasoline during that cycle.
2. July 8, 2008: The Contract
On July 8, 2008, MSCG entered into a contract with Trafigura to purchase 25,000 barrels of M2 grade gasoline on cycle 41 of the Colonial Pipeline, at a price of $3.2025 per gallon, for a total contract price of $3,362,625 (the "Contract"). Pursuant to the Contract's "Delivery Terms and Conditions" clause, MSCG and Trafigura agreed that Trafigura would deliver the gasoline "FOB Pasadena, Texas into the Colonial Pipeline via mutually agreeable scheduling during July 2008, on cycle 41, or via mutually acceptable book, stock or inventory transfer against designated barrels of Seller or originator." (Emphasis added.)
The Contract provides that title to the gasoline "[w]ill pass from Seller [Trafigura] to Buyer [MSCG] at origin as the Products pass the delivery point on the [C]olonial [P]ipeline or at the time of book, stock or inventory transfer." (Emphasis added.) MSCG agreed to make payment either (1) within two New York banking days after receipt of Trafigura's invoice and a pipeline meter ticket evidencing the net quantity of gasoline delivered, or (2) if delivery was made by book transfer, "by wire transfer of federal funds on effective date of book transfer." (Emphasis added.)
In a paragraph entitled "Operational/Financial Contacts," the parties agreed that MSCG would make any operational notifications to Trafigura by contacting Neely, Trafigura's scheduler, at her office telephone, facsimile, or e-mail address. The contract also provides:
All notices and confirmations from Buyer to Seller arising out of or in connection with this contract must be received by Seller within office hours (0830 to 1730) in the relevant time zone and sent in accordance with the notice provisions herein. Any notice or communication addressed to someone other than the Seller(s) representatives named herein shall be deemed to have not been received and shall have no legal or contractual force or effect. Any notices received outside of office hours (as described above) shall be deemed to have been received on the next working day. (Emphasis added.)
The Contract contains an integration clause that states in pertinent part: "This confirmation constitutes the contract between the parties and supersedes all ...