Opinion
A3-00-145
March 27, 2002
MEMORANDUM AND ORDER
I. Introduction
Before the Court is a motion by plaintiff Burlington Northern Santa Fe Railway (BNSF) for summary judgment (doc. # 22). Defendant Dakota Valley Mills (DVM) resists the motion. As set forth below, the motion for summary judgment is DENIED.
II. Background
The factual details of the case are much in dispute, and the Court has no need to resolve these disputes for purposes of this motion. Therefore, the Court will merely sketch briefly the main factual framework. This case arises from a contract between the parties; it had an effective date of November 9, 1998 and was to be effective for three years. In general terms, the contract, which contains a choice of law provision favoring Texas law, provided for shipment of flour from DVM's Fairmount, North Dakota plant to various destinations on the BNSF. Several key terms of the contract are at issue here.
First, the contract contained a "Minimum Volume Requirement." Under this clause, DVM agreed "to ship 100% of all outbound rail flour movements from Fairmount, N.D. as a BNSF linehaul regardless of the junction to all destinations excluding Lowell, MA." (Shipments to Lowell were on the Canadian Pacific.) The costs were $2000 per car, offset by an allowance of $500 in the first year and $400 in the second and third years, resulting in a net cost of either $1500 or $1600 per car.
The contract also contained a liquidated damages clause: "If customer fails to meet the 100% of outbound volume of flour movements routed BNSF linehaul excluding shipments destined to Lowell, MA, the customer is responsible for the Tariff rate minus the Allowance payment for liquidated damages payable to the BNSF of $1500 per car." The contract also required DVM to "make available . . . records relating to this Contract." The rest of the document is, apparently, BNSF's standard flour contract.
DVM's business was predicated on a large contract with Pillsbury, which had committed to purchase a large amount of DVM flour each year. As DVM puts it, "Without Pillsbury, there would have been no mill." Unfortunately, for DVM, however, Pillsbury in early 1999 sold its flour processing facilities to Archer Daniels Midland (ADM), presenting DVM with a major problem.
DVM was apparently unwilling to allow Pillsbury merely to assign the contract to ADM. DVM did agree to sell its flour to ADM instead of Pillsbury. ADM required, however, that the sales terms were to be "FOB Fairmount." Thus, ADM took possession of the flour in Fairmount and handled its own shipping, rather than having DVM ship the flour. DVM ultimately disclosed to BNSF that ADM would be replacing Pillsbury as its buyer. DVM apparently also disclosed that ADM would be arranging its own shipping. At some point thereafter, DVM sold out to Cenex Harvest States and ceased operation as a going concern.
BNSF now asserts that DVM breached the contract by not shipping flour pursuant to the contract. BNSF thus seeks to recover under the liquidated damages clause for each carload of flour shipped adverse to it. The parties dispute how many carloads this would be, but their calculations are relatively close. As explained below, the motion for summary judgment is DENIED; additionally, the Court makes several other legal rulings which will affect trial.
III. Discussion A. Choice of law
The contract contains a choice of law provision in favor of Texas law: "This Transportation Contract ("Contract"), governed and construed in accordance with the laws of the State of Texas, is entered into 11-09-98 by and between [the parties]." DVM argues the use of Texas law is impermissible, as enforcing the liquidated damages clause would be contrary to North Dakota law.
The Court agrees with the general proposition that a choice of law provision is not binding if it requires application of law "contrary to the public policy of the forum." See Forney Indus. Andre, 246 F. Supp. 333, 334 (D.N.D. 1965); see also 16 AmJur 2d Conflict of Laws § 92 (stating general rule and collecting cases). However, the Court finds this situation not present here.
This holding is based on the similarities between North Dakota and Texas law on enforcement of liquidated damages provisions. In each state, a liquidated damages clause is valid to the extent it attempts to fix damages in cases where it would be difficult to do so but invalid if it is simply a penalty. Compare N.D. Cent. Code § 9-08-04 with Tex. Bus. Com. Code § 2.718(a). The only apparent difference is the burden of proof: North Dakota law places the burden on the party seeking to enforce the clause, while Texas law puts the burden on the party seeking to avoid it. Compare Fisher v. Schmeling, 520 N.W.2d 820 (N.D. 1994) with Baker v. Int' Record Syndicate, Inc., 812 S.W.2d 53 (Tex.Ct.App. 1991).
This difference — allocation of the burden of proof — is insufficient to support the conclusion that Texas law is `contrary to the fundamental public policy of North Dakota.' Accepting this argument would mean, essentially, that courts could apply other states' law only when it mirrored North Dakota's; the Court is unwilling to go this far. The parties have selected Texas law. Texas law does not run contrary to North Dakota's public policy, so the Court will apply it here.
DVM has not argued that any issue other than liquidated damages would require application of Texas law that is contrary to North Dakota public policy; nor has the Court encountered any such issues.
B. Ambiguity and breach of contract
DVM asserts that the contract is ambiguous, a conclusion which would prevent the entry of summary judgment. Under Texas law, it is for the court to determine if a contract is ambiguous; if so, the jury decides as a question of fact what the ambiguous language means. Appleton v. Appleton, `S.W.3d', 2002 WL 369964, at *3 (Tex Ct. App. March 7, 2002) (internal citations and quotations omitted). Texas courts apply the following rules when considering if a contract is ambiguous:
Ambiguity arises only if the application of established rules of construction leaves the agreement susceptible of more than one reasonable meaning. Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole in light of the circumstances present when the contract was made. Just because the parties disagree about the proper construction of a contract does not mean that the contract is ambiguous. Conflicting interpretations of a contract, and even unclear or uncertain language, do not necessarily mean a contract is ambiguous. Courts should not strain to find an ambiguity in a contract if, in doing so, they defeat the probable intentions of the parties. When a contract contains an ambiguity, the granting of a motion for summary judgment is improper because the interpretation of the instrument is an issue for the trier of fact to decide.
Id. Here, as set forth below, the Court finds the contract is capable of more than one interpretation and is thus ambiguous.
The clause alleged to be ambiguous provides: "[DVM] agrees to ship 100% of all outbound rail flour movements from Fairmount, N.D. as a BNSF linehaul regardless of the junction to all destinations excluding Lowell, MA." DVM interprets this to mean that any flour it was responsible for shipping had to be shipped under the contract. Thus, it could not itself arrange to ship flour, except to Lowell, other than as provided in the contract. As the BNSF puts it, this argument focuses on the ownership of the flour; it thus would allow DVM to avoid the contract by transferring ownership prior to shipping, as it did when it sold flour to ADM FOB Fairmount.
BNSF, for its part, asserts that this clause absolutely prevents DVM flour from being shipped — regardless of ownership and except to Lowell — other than pursuant to the contract. It points out that the contract does not speak of ownership, as DVM's argument does; rather, it focuses on shipment. Under BNSF's theory, any contract DVM made that did not require shipment on the BNSF would put it in breach, regardless of who owned the flour or arranged for its shipment.
Upon a careful review of the contract as a whole, the Court concludes that it is ambiguous on this point. Each interpretation outlined above is plausible, making the contract susceptible of more than one reasonable interpretation. DVM could, if it chose, contract away the right to make any non-BNSF shipped contracts, as the BNSF argues it did. However, it is not so evidently clear from the document that it did so that the Court must hold the contract is unambiguous. DVM's position — that it contracted away only the right to use other shippers itself — is at least equally reasonable. Therefore, the Court holds that the contract is ambiguous, and the jury will decide what it means.
The Court notes briefly BNSF's argument that the history of negotiations shows the parties intended its interpretation. Certainly, this history shows that the volume of shipping was an issue for the parties. However, it must be read against the background facts, which seems to indicate that the parties anticipated only shipments to the various Pillsbury plants. Thus, the Court concludes that the information in the record about the negotiations does not render the parties' intent entirely clear on the crucial question whether DVM flour could move adverse to the contract when the buyer arranged shipping. Thus, it will be for the jury to hear, judge and interpret this evidence at trial.
Finally, the Court will briefly address DVM's argument that this is a contract of adhesion. It is not. It is clear that DVM had a measure of bargaining power in its negotiations. See In re: H.E. Butt Grocery Co., 17 S.W.3d 360, 371-72 (Tex.Ct.App. 2000) (defining an adhesion contract as one in which one party has "absolutely no bargaining power"). Indeed, DVM's ability to ship a portion of its flour on the Canadian Pacific greatly undercuts this argument, as does the fact that the parties did, in fact, engage in negotiations, changing various terms along the way. Id.
In any event, to obtain relief on this basis, DVM would need not only to prove that the contract was one of adhesion, but that it was unconscionable. See Pony Express Courier v. Morris, 921 S.W.2d 817, 821 (Tex.Ct.App. 1996). It has not done so. Thus, the Court rejects that the contract was wither adhesionary or unconscionable. The question is one of interpretation, a question to be answered at trial.
To the extent that DVM's argument for adhesion focuses on the liquidated damages clause, the Court notes that this clause is subject to an independent review below.
3. Liquidated damages mitigation of damages
BNSF asserts its right to damages pursuant to a liquidated damages clause in the contract. That clause provides: `If customer fails to meet the 100% of outbound volume of flour movements routed BNSF linehaul excluding shipments destined to Lowell, MA, the customer is responsible for the Tariff rate minus the Allowance payment for liquidated damages payable to the BNSF of $1500 per car.' Under this clause, for each car shipped adverse to the contract, BNSF is entitled to recover as if the car was actually shipped under the contract. DVM challenges this clause as an impermissible penalty and argues that BNSF, in the event it proves breach, must prove its actual damages; as part of that proof, it argues that BNSF failed properly to mitigate its damages. As explained below, the Court concludes the clause is permissible, rendering the mitigation issue moot.The Court begins its inquiry with Texas' statutory law:
Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.
Tex. Bus. Com. Code § 2.718(a). Whether a clause is permissible or a penalty is a question of law for the court to decide. See Phillips v. Phillips, 820 S.W.2d 785, 788 (Tex. 1991). Generally, the burden is on the party challenging the clause. Id.
In applying this statute, Texas courts engage in a two-part inquiry. The court must find "(1) the harm caused by the breach is incapable of being estimated or is difficult to estimate at the time of entry into the agreement, and (2) the amount of liquidated damages called for is a reasonable forecast of just compensation." Arthur's Garage, Inc. v. Racal-Chubb Sec. Systems, Inc., 997 S.W.2d 803, 810 (Tex.Ct.App. 1999). Failure to find either invalidates the provision. Id.
First, the Court concludes that actual damages for each breach would be difficult to predict. Id. Several considerations drive this conclusion. The first is the very nature of the contract. While each adverse car shipped constituted a breach, it did not result in termination of the contract. Thus, without setting damages by contract, BNSF would be required to prove damages for each individual breach. This is unreasonable, especially in light of the second consideration, below.
This second consideration is that the contract contemplated a low cost per car but a high volume of cars. This means that the profit per car — the amount which would have to be proven to recover for each breach — was fairly low, creating a disincentive to pursue each individual breach. Further, the Court notes that during the extensive negotiations undertaken by the parties, the price constantly trended down as the volume requirement trended up. Thus, BNSF was clearly trading cost for volume. In light of such circumstances, it is reasonable for parties to put in their contract a method of easily determining and assessing damages. Therefore, the first part of the test is met. Id.
The second question is the reasonableness of the damage amount. Arthur's Garage, 997 S.W.2d at 810. Here, the amount stipulated is the actual price set for performance of the contract. This stands in contrast to stipulations of a multiple of the actual costs, which is always impermissible. Phillips, 820 S.W.2d at 789 (stating that a multiple damages provision is "on its face, an unenforceable penalty"). Further proof of reasonableness is that the damages are driven by the number of adverse cars, directly linking the breach with the damages. Finally, the fact that the contract was predicated on low costs but high volumes supports the reasonableness of a damage amount equal to the performance price.
Therefore, the Court concludes that the liquidated damages provision is enforceable. In light of this conclusion, the Court must reject DVM's mitigation arguments. Generally, the court need not concern itself with mitigation of damages if a contract contains an enforceable liquidated damages provision. See Nautilus Training Center No. 2, Inc. v. Seafirst Leasing Corp., 647 S.W.2d 344, 347 (Tex.Ct.App. 1982) (`When there exists a valid liquidated damages clause in a contract, the courts will enforce it, and in doing so, need not consider the issue of mitigation.'). Thus, if BNSF prevails at trial, it can collect under the clause, and DVM cannot attempt to show BNSF failed to mitigate damages. Id.
4. Estoppel
Finally, DVM asserts that BNSF should be estopped from seeking damages on the grounds that it withheld its position from DVM until after DVM `made its deal with ADM. DVM argues that if it had known BNSF's position earlier, it could have required Pillsbury to continue paying under the contract while it sought a new buyer which would have allowed it to ship under the contract. It's failure to do so, according to DVM, means BNSF should be equitably stopped from seeking damages.
Under Texas law, equitable estoppel has five elements:
(1) a false representation or concealment of material facts; (2) made with knowledge, actual or constructive, of those facts; (3) with the intention that it should be acted on; (4) to a party without knowledge or means of obtaining knowledge of the facts; (5) who detrimentally relies on the representations.
Johnson Higgins of Texas, Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 515 (Tex. 1998). While the decision to impose an equitable remedy ultimately lies with the court, factual disputes are to be determined by the jury sitting as factfinder. See generally Kneip v. Unitedbank-Victoria, 734 S.W.2d 130, 133 (Tex.Ct.App. 1987). Here, there appear to be factual disputes over several issues, such as when and if BNSF made its position on the contract known to DVM and whether DVM relied on BNSF's purported failure to disclose its position.
Therefore, the Court will revisit this issue at trial. If it appears necessary, the Court will submit these questions to the jury for findings. On the other hand, if the Court determines, as a matter of law, that estoppel is not an issue, it will announce its ruling at that time. In any event, the Court cannot make a final ruling on the basis of the record before it.
IT IS SO ORDERED.