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Cedar Petrochemicals, Inc. v. Dongbu Hannong Chemical Co., Ltd.

United States District Court, Second Circuit

October 21, 2013

CEDAR PETROCHEMICALS, INC., Plaintiff,
v.
DONGBU HANNONG CHEMICAL CO., LTD., Defendant.

OPINION

ALISON J. NATHAN, District Judge.

Plaintiff Cedar Petrochemicals, Inc. ("Cedar"), brought this breach of contract action against Defendant Dongbu Hannong Chemical Co., Ltd. ("Dongbu"), alleging that Dongbu had delivered non-conforming liquid phenol, in violation of the parties' written and oral contracts and in contravention of its obligations under the Convention on Contracts for the International Sale of Goods, Apr. 11, 1980, S, Treaty Doc. No. 98-9 (1983), 19 I.L.M. 671 (1980), reprinted at 15 U.S.C. App. (1998) ("CISG" or the "Convention"). A nonjury trial was held in this action on September 30, October 1, and October 2, 2013.

Pursuant to this Court's procedures for nonjury trials, the parties submitted the direct testimony of their witnesses by affidavit and their documentary evidence with the joint pretrial order. The Court received direct examination declarations from seven Plaintiff witnesses: Martin East ("East"), J.N.A. van de Giesen ("van de Giesen"), Fernando Irisarri Gonzalez ("Irisarri"), Salim Harfouche ("Harfouche"), John Minton ("Minton"), Charlene Silva ("Silva"), and Cho Yong ("Yong"). Of these declarant witnesses, Minton testified as an expert witness and East testified as both a fact and expert witness. The Court also received deposition designations for two Plaintiff witnesses: Gry Berg-Nilsen ("Berg-Nilsen") and Stig Egeland ("Egeland"). Finally, the Court received a direct examination declaration from the single Defense witness, Haolin Chu ("Chu"). Of these witnesses, only East, Irisarri, Harfouche, and Minton were cross-examined live at trial. This opinion represents the Court's findings of fact and conclusions of law for purposes of Rule 52 of the Federal Rules of Civil Procedure. See Fed.R.Civ.P. 52. The findings of fact appear principally in the "Findings of Fact" section, but also appear in the remaining sections of the opinion.

In short, the parties' dispute relates to a 2005 maritime shipment of the liquid petrochemical phenol. The phenol at issue ("the Phenol") was transported from its on-shore storage tank in Yuso, Korea, to Defendant's ship, the Green Pioneer, which carried it to Ulsan Anchorage, Korea. Once there, the Phenol was transferred from the Green Pioneer to Plaintiff's ship, the Bow Flora, which carried it to port at Rotterdam, The Netherlands. On arrival at Rotterdam, it was determined that the Phenol was damaged. The parties agree that, in order to demonstrate liability, Plaintiff must prove by a preponderance of the evidence that the Phenol was injured before it passed the rail of the Bow Flora. Plaintiff conceded that, for it to make the requisite showing under the facts of this case, the Court must be persuaded by its experts' theory regarding "seeding, " which they argue explains the delay between the alleged injury to the Phenol and the manifestation of the damage to the Phenol, i.e., its discoloration. On this factual point, the Court was unpersuaded. Accordingly, judgment will be entered in favor of Defendant.

I. FINDINGS OF FACT

After a protracted discovery period, all discovery in this matter closed on April 30, 2013. The parties' Joint Proposed Pretrial Order ("JPTO"), proposed findings of fact and conclusions of law, and other pretrial materials were submitted on July 17, 2013. The Court also received amended proposed findings of fact and conclusions of law and post-trial briefing on October 9, 2013. Based on the evidence presented at trial, the facts stipulated to in the JPTO and the Court's assessment of the credibility and demeanor of the witnesses and the inferences reasonably to be drawn there from, the Court makes the following findings of facts. Cites to the JPTO signify stipulated facts.

A. The Parties and Jurisdiction

Cedar is a corporation engaged in the business of buying and selling liquid petrochemical products, including phenol, and is organized and exists under and by virtue of the laws of the State of New York, with its principal place of business in New York, New York. JPTO ¶¶ 1, 2. Dongbu is a corporation engaged in the business of manufacturing and selling petrochemical products, and is organized and exists under and by virtue of the laws of Korea, with its principal place of business in Seoul, Korea. JPTO ¶¶ 3, 4. Based on the parties' diversity of citizenship, and with a statutorily sufficient amount in controversy, the Court has jurisdiction over this matter under 28 U.S.C. § 1332. See also Cedar Petrochemicals, Inc. v. Dongbu Hannong Chem. Co., Ltd., No. 06 Civ. 3972 (LTS), 2011 WL 4494602, at *1 (S.D.N.Y. Sept. 28, 2011).

B. Phenol

The liquid petrochemical at issue in this dispute is the polymer phenol (hydroxybenzene, C6H5OH). Pure phenol is a white, crystalline solid at room temperature, which liquefies at around 41°C. JPTO ¶ 11. In its liquid or "molten" form - which is the form in which it is generally transported - pure phenol is a clear, colorless liquid. Phenol is susceptible to discoloration in both its liquid and solid states. Phenol discoloration is measured using the Hazen units ("HU") on the Platinum-Cobalt Scale ("Pt/Co Scale"). Silva Decl. ¶ 12; Yong Decl. ¶ 10; Exhibits 2-3. Commercially, phenol discoloration is problematic because most of the applications for phenol, e.g., compact discs, airplane windows, and car optics, require the phenol to be colorless, or under 10 HU. PX 68 App'x 4.3; Minton Decl. ¶ 19.

The universe of causes of color change in phenol is not defined, but it is accepted that among such causes are manufacturing defects, contamination, and exposure to heat. JPTO ¶ 12, 13; Tr. 300; DX FF. Neither party contends that there was a manufacturing defect in this case. Phenol discoloration through contamination can occur as a result of the presence of impurities in the phenol; "discoloration is promoted by the action of water, light, air, and catalysts, e.g., traces of iron and copper." JPTO ¶¶ 12, 13; DX FF. Liquid phenol may also discolor as a result of exposure to heat, though there is some disagreement in the petrochemical industry and the scientific community as to the precise temperature at which heat exposure can or will result in such discoloration. Additionally, "[w]hen stored as a solid in the original drum or in nickel, glass-lined, or tanks lined with baked phenolic resin, phenol remains colorless for a number of weeks, " JPTO ¶ 14; DX FF, but "may acquire a yellow, pink, or brown discoloration." JPTO ¶ 15; DX FF.

To avoid discoloration, experts in the field recommend that phenol be transported and stored in its liquid form. The generally recommended temperature ranges vary from 50°C to 60°C, JPTO ¶¶ 16, 17, 18, and Minton testified that "[i]n the petrochemical industry, phenol is stored and shipped as a bulk liquid at temperatures ranging from 50°C C to 60°C." Minton Decl. ¶ 20. Here, however, the parties' agreement (discussed below) called for the Phenol to be shipped at a temperature between 50°C and 55°C. Tr. 57-58; DX TT. On cross examination, Minton claimed that storage at any point within this range would not generally cause discoloration and that storage anywhere within the 50°C to 55°C range was equally acceptable. Tr. 300-301. This testimony contradicted his prior testimony at his deposition, where he stated both that phenol could only be "heat[ed] to 60°C for a very short time without a problem, " Minton Decl. 84:19-21, and that "in general, the lower the temperature in the 50°C to 55°C range the better." Id. at 86:21-22. Overall, the testimony established that phenol discoloration is neither a well understood or fully established topic. Minton acknowledged that phenol color change is generally "a very poorly understood subject, " Tr. 299:5-8, both "by [himself] and others, " 299: 10-13, and that this is true "even with a great deal of research, " Tr. 299:5-8. And East acknowledged that "the cause of color degradation in Phenol has been a contentious issue for over 100 years." Tr. 60:13-17.

C. The Contract

Unless otherwise noted, the parties have stipulated to the following facts with regard to the contract. In May 2005, a representative from Kumho - a phenol manufacturer that arranges sales via export agents, including Dongbu - and a representative from Cedar's local agent in Korea, H.V. Co., Ltd., met at a restaurant in Seoul. JPTO ¶¶ 6, 7, 8. At that meeting, Kumho proposed that Dongbu and Cedar be principal parties to a proposed sale of 2, 000 metric tons ("mt") of phenol. JPTO ¶ 9. Dongbu agreed that it would enter into a contract with Cedar by which it would sell 2, 000 mt 5% of liquid phenol conforming to Kumho's Standard Guaranteed Sales Specifications ("Specs") delivered FOB Ulsan Anchorage, in exchange for $950/mt. Shortly thereafter, on May 17, 2005, Cedar faxed to Dongbu Contract No. T250-P1-0505NYC (the "Written Contract") which called for the purchase and sale of "2, 000 MTS 5% Seller's Option." This contract was drafted by Cedar, and signed and stamped by Dongbu. JPTO ¶¶ 20, 21.

Among other things, the Written Contract provided: (1) that the agreement would be governed by "Incoterms 2000 as amended to date, " ("Incoterms"); (2) that "[the] agreement [would be] subject to [Plaintiffs] standard terms and conditions, " which were attached and incorporated by reference; (3) that "[i]n the event of a conflict between the terms of th[e] agreement and [Plaintiff's] standard terms and conditions, the terms of th[e] agreement [would] control;" and (4) that the "[f]ollowing set[] forth the entire agreement of the parties." PX 5. In addition, the Written Contract called for the purchase of "Pure Phenol as per attached Kumho's Guaranteed Sales Specs, " to be delivered "FOB Ulsan Anchorage, Korea." JPTO ¶ 19; PX 5. As defined in "Incoterms, " FOB, or "Free on Board, " "means that the seller delivers when the goods pass the ship's rail at the named port of shipment, " which in turn "means that the buyer has to bear all costs and risks of loss or damage to the goods from that point." Cedar Petrochemicals, Inc., 2011 WL 4494602, at *3.

The standard terms and conditions referred to in the Written Contract refer to Kumho's standard "specification of phenol, " which call for color at max 5 HU. PX 2, 3; Yong Decl. ¶ 10. At some point, after May 17, 2005, the parties' contract was amended to substitute the phenol specifications from a third-party, Ertisa. Yong Decl. ¶ 16; PX 13. Ertisa's product specifications for phenol call for color at max 10 HU, PX 12; Yong Decl ¶ 16, and were incorporated into the letter of credit that Plaintiff procured on May 19, 2005. Yong Decl. ¶ 17, 18; PX 18. Accordingly, for the Phenol to be on specification at the time of delivery - FOB Ulsan Anchorage, Korea - the phenol had to be at or under 10 HU.

D. Transfer, Sampling, and Inspection

In addition to the terms discussed above, the Written Contract contained an inspection term, which stated that inspection was to be "[b]y mutually acceptable/independent surveyor whose findings as to quantity/quality as per shore tank figures at load port are final and binding on both parties." JPTO ¶ 22. The parties appointed internationally recognized independent inspection companies SGS Korea Co., Ltd. ("SGS") and Global Surveyors & Inspectors Ltd. ("GSI") to monitor the quality of the Phenol in Korea. Silva Decl. 27; JPTO ¶ 18. Although the individual who took the various samples for SGS cannot specifically recall any of the sampling he performed with regard to the Phenol at issue, it was his practice to use new, clean sampling bottles when sampling petrochemical cargos. JPTO ¶¶ 43, 44.

In summary form, the transportation of the Phenol was as follows. On or about May 20, 2005, the Phenol was loaded from the manufacturer's shoretanks onto a ship chartered by Defendant, the Green Pioneer, in the port of Yosu. From there, the Phenol was shipped to Ulsan, where it was transferred to Plaintiff's vessel, the Bow Flora, which carried the Phenol to its final destination, Rotterdam. JPTO ¶ 33. As agreed upon, at various key points during the course of the Phenol's transport, samples were pulled and tested or retained. JPTO ¶ 33.

In May 2005, prior to loading the phenol onto the Green Pioneer, GSI tested one sample from Yosu shoretanks FB-991 and FB-1993. JPTO ¶ 34. GSI determined that this sample was on-specification for all parameters, including color at less than 5 HU. JPTO ¶ 35. SGS confirmed these findings. JPTO ¶ 36. GSI retained a composite sample of the Phenol from both of the Yosu shoretanks. This sample, GSI 005946, was stored in GSI's Ulsan storage facility, in a solid state at room temperature, in a clear, glass bottle. JPTO ¶ 37.

After the shoretank testing, the Phenol was loaded into five tanks aboard the Green Pioneer at Yosu. JPTO ¶ 38. Once the Phenol was transferred, SGS pulled and tested a composite sample from the five tanks on the Green Pioneer. JPTO ¶ 39. That sample was also on-specification for all parameters, including color at 3 HU. In addition to this sample, SGS and GSI each pulled, but did not contemporaneously test, additional composite samples, GSI 0002387 and SGI 859048, which were transferred to and retained aboard the Bow Flora during the voyage to Rotterdam. The samples aboard the Bow Flora were stored in a solid state, at ambient temperature, in clear, glass bottles located in the ship's storage locker. JPTO ¶¶ 40, 41. SGS also pulled and retained an additional sample, SGS 534093, at its storage facility in Ulsan. JPTO ¶ 42.

On May 21, 2005, the Green Pioneer sailed from Yosu for Ulsan, where it arrived on May 24, 2005. JPTO ¶¶ 45, 46. That same day, the Phenol was transferred from Defendant's ship, the Green Pioneer, to Tank 13 Center ("Tank 13C") aboard Plaintiffs vessel, the Bow Flora. Transfer commenced at 11:05 AM, but was stopped from 11:08 AM until 11:28 AM "due to frozen of cargo line of coaster [sic]." JPTO ¶ 47; PX 29. Transfer resumed at 11:28 AM, but was stopped again at 11:37 AM, after one foot of Phenol had been loaded into Tank 13C, JPTO ¶ 48, in order permit surveyors to obtain samples of the portion of the Phenol that had been transferred (hereinafter, "first-foot" samples). JPTO ¶ 48. SGS tested one of these first-foot samples and determined that it was on specification for all parameters, including color at 4 HU. JPTO ¶ 49. SGS pulled an additional first-foot sample, SGS 534095, which it retained at its storage facility in Ulsan under the ...


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