Petition for Writ of Certiorari — PSI Energy, Inc. v. Exxon Coal USA, Inc.
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Supreme Court, U.S.
FILED
‘\) 931862 MAY 25199
GEFICE OF IHE CLERK
IN THE
Supreme Court of the United States
October Term, 1993
No.
PSI EnerGy, INc.,
Petitioner,
Vs.
Exxon Coa. USA, INc. and Exxon CorPORATION,
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF
APPEALS FOR THE SEVENTH CIRCUIT
CHERYL M. FOLEY
DONALD P. BOGARD
Counsel of Record
Attorneys for Petitioner
PSI Energy, Inc.
1000 East Main Street
Plainfield, Indiana 46168
Telephone: (317) 838-1163
<—_—— SEE
Graphics LTD., Indianapolis, IN 46202
QUESTION PRESENTED FOR KEVIEW
Whether the United States Court of Appeuis for the Seventh
Circuit erred by failing to adhere to the clearly erroneous
standard of Rule 52(a) of the Federal Rules of Civil Procedure,
and acted ir conflict with the decisions of this Court by
improperly :*jecting the findings of fact, including findings
assessing the credibility of witnesses, issued by the district
court in a contract renegotiation dispute.
TABLE OF CONTENTS
Page
Been OE AOGITNO ok caus 40.0 bas boa ns edereiitee ill
CANE TE © is kc ccc ks a SR ees Gs 2
CE 69055 5 eRe ee eee 2
Statutory Provisions Involved ...............ceeeeees 3
tk a en Pe er 3
I. Course of Proceedings Below ................45. 3
II. Facts Material to Issue Presented for Review ..... 5
III. Basis for Jurisdiction in District Court ........... 8
Reasons for Allowance of the Writ ................... a
In reversing the decision of the District Court relating to
Exxon’s lack of good faith in negotiations and its omission
of material terms from its last offer, the Seventh Circuit
failed to adhere to the principles established by this Court
regarding the clearly erroneous standard of Rule 52(a).. = &
I. Exxon did not negotiate with PSI in good faith ... &
II. Exxon’s “last offer” omitted material terms that pre-
cluded PSI from determining the price of Exxon’s
coal at the beginning of the next Contract Period . 13
Come obs occ cada udoedwdedn eee ae 15
il
TABLE OF AUTHORITIES
Cases Page
Anderson v. City of Bessemer City, North Carolina, 470
I oe bio oon oe co vccccccus.. 8, 9,12, 13
Castellano v. Marion Partners, 960 F. 2d 636 (7th Cir
RST aah sG S00 soe 0 06.4 ¥6'scnccencn, 14
PSI Energy, Inc. v. Exxon Corporation, et al. 831 F.
Supp. 1419 (S.D. Ind. 1992) .................... 2
PSI Energy, Inc. v. Exxon Corporation, et al. 991 F. 2d
it ee
PSI Energy, Inc. v. Exxon ( ‘orporation, et al. 831 F.
Supp. 1430 (S.D. Ind. 1993) ..................... 1,2
PSI Energy, Inc. v. Exxon Corporation, et al. __ F. 2d __
A 1,2
United States v. Yellow Cab Co., 338 U.S. 388 (1949) .. 8
Zenith Radio Corporation v. Hazeltine Research, Inc..
PI OMI 5 oo occ co ceccsccecceca..... 13
Statutory Provisions
ER rare, ON ae ee ER 1]
ae 2
sos bv owew sce cocecce. ce. 8
ES ne eee ee 2
RE EE A Ae )
Rule 52, Federal Rules of Civil Procedure,
EEE ee +e
Rule 10, Rules of the Supreme Court of the United States,
I eee ee te 2
Rule 13, Rules of the Supreme Court of the United States,
SEE ee 21a ean oe eer 2
IN THE
Supreme Court of the United States
October Term, 1993
No.
PSI ENerGy, INc.,
Petitioner,
VS.
Exxon Coa USA, INc. and Exxon CorPoORATION,
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF
APPEALS FOR THE SEVENTH CIRCUIT
Petitioner, PSI Energy, Inc. (“PSI”)! respectfully urges this
Court to issue a Writ of Certiorari to review the opinion of the
United States Court of Appeals for the Seventh Circuit (“Sev-
enth Circuit”) issued in cause number 93-3191 on February 22,
1994, which reversed the decision of the United States District
Court for the Southern District of Indiana, Indianapolis Divi-
sion (“District Court”) entered on August 27, 1993.2
! PSI is a wholly-owned subsidiary of PSI Resources, Inc. (“Resources”), and
PSI does not have any subsidiaries which are not wholly-owned by PSI.
Resources is in the process of combining in a merger transaction with The
Cincinnati Gas & Electric Company to form a new company named CI Nergy
Corp. '
2 The names of all parties are listed in the caption herein.
|
te
OPINIONS BELOW
The opinion of the Seventh Circuit issued on February 22,
1994, has not been officially reported. A copy of that opinion
may be found in the Appendix attached hereto at page A-1
(“App. —”). PSI’s Petition for Rehearing With a Suggestion for
Rehearing En Bane was denied by the Seventh Circuit on
March 21, 1994. App. 12.
The decision of the District Court which gave rise to the
appeal to the Seventh Circuit was issued on August 27, 1993,
has been officially reported at 831 F. Supp. 1430 (S.D. Ind.
1993), and may be found at App. 13.
Earlier decisions by the District Court and the Seventh
Circuit in this matter are 831 F. Supp. 1419 (S.D. Ind. 1992),
App. 58 reversed and remanded 991 F. 2d 1265 (7th Cir. 1993),
App. 37, petitions for rehearing denied 1993 U.S. App. LEXIS
11734 (7th Cir. May 20, 1993), App. 50. In response to a Motion
for Recall and Clarification of Mandate filed by the Respon-
dents (“Exxon”) following the Seventh Circuit’s 1993 Decision,
the Seventh Circuit issued an Order dated July 12, 1993. App.
ol.
JURISDICTION
The jurisdiction of this Court is invoked pursuant to 28
U.S.C. §1254(1) and Rule 10 of the Rules of this Court to review
an opinion of the Seventh Circuit issued in contravention to
Rule 52 of the Federal Rules of Civil Procedure, 28 U.S.C., and
applicable decisions of this Court. The opinion of the Seventh
Circuit was issued on February 22, 1994, and a Petition for
Rehearing with a Suggestion for Rehearing En Banc was
denied on March 21, 1994. This Petition is timely in that it is
filed prior to the expiration of the ninety-day period allowed by
28 U.S.C. §2101(c) and Rule 13 of the Rules of this Court.
y
”
STATUTORY PROVISIONS INVOLVED
Rule 52(a) of the Federal Rules of Civil Procedure, 2%
U.S.C., provides, in part, as follows:
Effect. In all actions tried upon the facts without a
jury . . . the court shall find the facts specially and state
separately its conclusions of law thereon . . . Findings of
fact, whether based on oral or documentary evidence,
shall not be set aside unless clearly erroneous, and due
regard shall be given to the opportunity of the trial court
to judge of the credibility of the witnesses. .
STATEMENT OF THE CASE
This Petition arises from a decision of the Seventh Circuit
involving a price reopener provision of a long-term coal supply
agreement between the parties and the renegotiations related
thereto (“Reopener”). That decision reversed a decision of the
District Court issued on remand from the Seventh Circuit.
I. Course of Proceedings Below
PSI filed for a declaratory judgment against Exxon on May
15, 1992, seeking to have the District Court determine that an
offer PSI had received for the supply of coal to PSI by a third
party was a “competitive offer” pursuant to $7.03 of the Coal
Supply and Purchase Agreement entered into by the parties on
April 26, 1974 (“Agreement”). On December 28, 1992, the Dis-
trict Court issued its decision granting PSI’s request for
declaratory relief, holding that the third party offer was a
“competitive offer,” that Exxon had failed to meet that offer as
allowed by the Agreement, and that the Agreement would
terminate by its terms on December 31, 1992. App. 79.
Exxon filed an appeal to the Seventh Circuit, and on April 15,
1993, that Court reversed the District Court, holding that the
third party offer was not a “competitive offer” because it con-
tained a multi-mine bid which made the calculation of a single
delivered price difficult, and that Exxon was only required to
match a single delivered price. App. 47-49. The Seventh Circuit
remanded the case to the District Court to “consider argu-
ments it had bypassee in light of its conclusion that Black
Beauty's offer was ‘competitive’ and that Exxon had not met
it.” 991 F.2d 1265; App. 49. Specifically, the Seventh Circuit
instructed the District Court to consider PSI’s arguments that
Exxon had not negotiated with PSI in good faith as required by
the Agreement and that Exxon’'s “last offer” during the nego-
tiations lacked material terms, which prohibited PSI from
determining the actual price Exxon was offering. Id.
PSI interpreted the Seventh Circuit's opinion to mean that if
Exxon had not met its contractual requirement to negotiate
with PSI in good faith the Agreement would still be termi-
nated. Upon Exxon’s Motion for Recall and Clarification of the
Mandate, the Seventh Circuit issued an order on July 12, 1993,
App. 51, which provided that:
The language in the opinion was designed to focus the
attention of the parties and the district judge on a single
ultimate question: what price will be effective as the Base
until the next reopening? Whether the contract itself
remains in force is an issue the panel fully considered and
resolved. We wrote: “Under § 7.03 [of the contract] the
parties must proceed during 1993-97 using Exxon’s ‘last
offer’.” Exxon’s bid of $30 per ton might be deemed not the
“last offer” either because Exxon acted in bad faith in
making that bid or because its offer omitted material
terms; in either event $23.266 would become the “last
offer.”
(Emphasis supplied)
Following the remand hearing, the District Court issued its
Entry, containing findings of facts and conclusions of law, and
Supplement to Final Judgment Entered Pursuant to Order of
Remand. In that Entry, the District Court made findings, with
appropriate references to the evidence, regarding the oral and
documentary evidence and the credibility of witnesses, and
concluded that Exxon had not negotiated in good faith with
PSI; that Exxon’s $30 per ton offer omitted material terms; and
that Exxon’s “last offer” was, therefore, in accordance with the
Seventh Circuit's July 12, 1993, Order, $23.266 per ton. $31 F.
Supp., at 1440; App. 31-32.
Exxon appealed the District Court's decision, and on Febru-
ary 22, 1994, the Seventh Circuit again reversed the District
Court, holding that the District Court’s findings on lack of
material terms were “unexceptionable,” but as a construction
of the contract were incorrect; that the findings of a lack of good
faith were clearly erroneous; and that the price for the coal
should be $30 per ton.
II. Facts Material to the Issue Presented for Review
Article VII of the Agreement provides that the parties may
renegotiate the base price and the price adjustment factors
(“Exhibit A”) at five-year intervals. District Court’s Finding of
‘act 8 (“FOF __”); App. 21. Each five-year period between
renegotiations is called a “Contract Period.” Id. If renegotia-
tion is requested, §7.03 of the Agreement requires each party
to negotiate “in a good faith effort to reach agreement.” Jd. If
an agreement cannot be reached, PSI “will accept |Exxon’s]
last offer or present [Exxon] witha firm, written offer which it
has received from another supplier, which it is willing to
accept.” Jd. Exxon has the right to meet that competitive offer.
Id.
The coal Exxon is supplying to PSI under the Agreement is
classified as “high sulfur coal.” FOF 23; App. 26. In 1990,
Congress passed amendments to the Clean Air Act, 42 U.S.C.
$7651d, which affected the ability of PSI and other electric
utilities to burn high sulfur coal. The amendments pro-
gressively reduce the amount of sulfur dioxide utilities may
emit. FOF 27; App. 26. As the cost to utilities of burning high
sulfur coal has increased, the market value of high sulfur coal
has decreased significantly. FOF 28; App. 26. During 1991-1992,
the market price for high-sulfur coal similar to Exxon’s was
approximately $17 to $20 per ton. FOF 29; App. 27.
The District Court found that the primary purpose of Article
VII is to manage market risk, and that the Reopener “allows
6
the parties to reconcile deviations in the contract price with the
prevailing market price.” FOF 9; App. 23. At the time of the
Reopener, the price of Exxon’s coal had escalated through the
Exhibit A adjustments from the 1974 base price of $11.017 per
ton to $38.13 per ton. PSI Exhibit 249. However, when Exxon
entered into the Reopener, it “knew that the market price for
its coal at the Monterey No. 2 Mine was approximately $20 per
ton. The evidence of this fact is abundant.” FOF 32; App. 27.
The District Court further found that:
The uncontroverted documentary evidence from Exxon’s
own files establishes that they were operating on a factual
basis with respect to the market value of the coal from the
Monterey No. 2 Mine which they consistently misrepre-
sented in their dealings with PSI.
FOF 33; App. 28, and that:
. . . [dJespite what it knew about the market price for coal
from the Monterey No. 2 Mine, Exxon repeatedly advised
PSI that the market would support a price in excess of $30
delivered to [PSI’s] Gibson [Generating] Station. See
Veenstra Testimony, Hearing Tr., at 60-61; Veenstra Tes-
timony, Trial Tr., at 68-70; Veenstra Testimony, Trial Tr.,
at 134-135, 136; Veenstra Testimony, Trial Tr., at 191-192,
200.
FOF 34; App. 28.
The District Court found that “Exxon’s representations to
PSI regarding the market price of its coal were knowingly and
intentionally inaccurate.” FOF 35; App. 28. The District Court
also found that:
The testimony of Wendell Ellis [Exxon’s principal nego-
tiator] was in critical respects evasive and deceptive. For
instance, when asked whether Exxon expected the mar-
ket price for coal from the Monterey No. 2 Mine to be
approximately $17-$20 per ton at the start of the next
contract period, his response was: “/ would not say it [7.e.
the price of $17 to $20 per ton] represented what we
expected it to be; it represented what it could possibly be.”
Ellis Testimony, Hearing Tr., at 151 (emphasis added).
Contrary to this representation by Mr. Ellis to the Court,
there is no doubt from the documentary evidence created
before and during these negotiations and discussions with
PSI, supra, that Exxon fully expected the price of coal
from the Monterey No. 2 Mine to be approximately $20 at
the mine, supra. The Court is unable to afford much
credibility to the testimony of Mr. Ellis.
FOF 36; App. 28 (Emphasis supplied).
The base price and Exhibit A cumulatively define the price of
the coal under the Agreement. FOF 39; App. 29. It is impossi-
ble to calculate the price without an accompanying Exhibit A.
FOF 40; App. 29. Because Exxon refused or failed to provide a
proposed Exhibit A to PSI, PSI was unable to calculate the
price for Exxon’s coal for the next Contract Period from
Exxon’s $30 per ton offer. FOF 41; App. 29. Section 7.05 of the
Agreement specifically requires that the parties renegotiate
Exhibit A, FOF 42; App. 30, but Exxon “steadfastly refused to
discuss the terms of Exhibit A.” FOF 43; App. 30.
The District Court further found that:
In an Exhibit A attached to Exxon’s previous offer of
$29.60, Exxon did not incorporate a “reference date of
January 1, 1993, but pegged the escalation to commence on
December 1, 1991, or 13 months prior to the start of the
next contract period. See Veenstra Testimony, Trial Tr., at
61. As Mr. Veenstra explained to Mr. Ellis, “{wlithout a
firm Base price effective January 1, 1993, it will be difficult
for us to solicit and compare potential competitive offers.
We believe that an offer of a firm Base price referenced and
effective January 1, 1993, is what is intended by Article
VII of the Agreement, and we repeat our request to be
provided with this number.”
FOF 44; App. 30.
The District Court determined the testimony of PSI’s chief
negotiator, Robert Veenstra, “relating to the details of these
negotiations with Exxon to be highly credible.” FOF 45; App.
30.
Ill. Basis for Jurisdiction in the District Court
Jurisdiction in the District Court was pursuant to 28 U.S.C.
§1332(a)(1). Plaintiff PSI is an Indiana corporation, having its
principal place of business in Plainfield, Indiana. FOF 1; App.
20. Defendant Exxen Corporation is a New Jersey corporation,
having its principa: pace of business in a state other than
Indiana; and Defendant © xxon Coal USA, Inc., a subsidiary of
Exxon Corporation, is a Delaware ccrporation, having its prin-
cipal place of business in a state other than Indiana. FOF 2;
App. 20. The amount in controversy exceeded the sum of
$50,000. FOF 3; App. 20.
REASONS FOR THE ALLOWANCE OF THE WRIT
In reversing the decision of the District Court relating to
Exxon’s lack of good faith in negotiations and its omission
of material terms from its “last offer,” the Seventh Circuit
failed to adhere to the principles established by this Court
regarding the clearly erroneous standard of Rule 52(a).
i. Exxon did not negotiate with PSI in good faith
Rule 52(a) of the Federal Rules of Civil Procedure, 28
U.S.C., provides, in part, that “[flindings of fact shall not be
set aside unless clearly erroneous, and due regard shall be
given to the opportunity of the trial court to judge of the
credibility of the witnesses.” In Anderson v. City of Bessemer
City, North Carolina, 470 U.S. 564, 573 (1985), citing United
States v. Yellow Cab Co., 338 U.S. 338, 342 (1949), this Court
stated as follows:
... Ifthe district court’s account of the evidence is plausi-
ble in light of the record viewed in its entirety, the court of
appeals may not reverse it even though convinced that had
it been sitting as the trier of fact, it would have weighed
the evidence differently. Where there are two permissible
views of the evidence, the factfinder’s choice between them
cannot be clearly erroneous... .
(Emphasis supplied)
In that decision, this Court also directed the courts of
appeals not to substitute their judgments for those of the
district courts, unless all of the evidence leads to the conclusion
that a mistake has been committed. However:
... [this standard plainly does not entitle a reviewing
court to reverse the finding of the trier of fact simply
because it is convinced that it would have decided the case
differently. The reviewing court oversteps the bounds of
its duty under Rule 52(a) if it undertakes to duplicate the
role of the lower court. “In applying the clearly erroneous
standard to the findings of a district court sitting without
a jury, appellate courts must constantly have in mind
that their function is not to decide factual issues de novo.”
Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S.
100, 123 (1969). . . .
Anderson v. City of Bessemer City, supra, 470 U.S., at 573.
(Emphasis supplied)
In the case at bar, the parties were involved in a contract
renegotiation relating to the price of high-sulfur coal Exxon
was selling to PSI under a long-term coal supply agreement.
The Reopener provision of that Agreement provides in §7.03
for notice to be issued by either party to the other party if there
is a desire to renegotiate the price. That notice must be given
within the first 30 days of the fourth year of any Contract
Period, and the parties then have at least 17 months in which to
attempt to renegotiate the price. FOF 8; App. 21. PSI com-
menced that process in January, 1991, and in April, 1992, the
parties agreed that their positions had become polarized and
that PSI should submit a competitive offer to Exxon. FOF 13:
App. 24.
The District Court correctly found that during that 16 month
period of renegotiations, Exxon’s offers to PSI were con-
tinually escalating. Exxon made an offer to PSI on July 17,
1991, to sell its coal to PSI at $20.10 per ton plus freight. FOF
12; App. 24. On November 26, 1991, Exxon increased that offer
to $25 per ton at the mine. Id. On December 3, 1991, Exxon
10
provided PSI a delivered price of $29.60 per ton. Id. On April
28, 1992, Exxon presented PSI with its “last offer” of $30 per
ton. However, in response to the competitive offer PSI
obtained, Exxon submitted a conditional offer to PSI on July 1,
1992, of $23.266 per ton. FOF 19; App. 25.
When Exxon entered into renegotiations with PSI, Exxon
knew that the market price for its coal was approximately $20
per ton. As the District Court found:
[t]he evidence of this fact is abundant. See, e.g., Plaintiffs
Exhibit 203, at 3 (“Our currert mine price to PSI is about
$32/ton. PSI believes it can purchase coal for an equiv-
alent of about $20/ton at No. 2 Mine. Thus, PSI expects to
dramatically lower its prices for the 5-year period starting
in 1993. We believe PSI’s assessment is in the right
range.”); Plaintiffs Exhibit 202, Appendix B, at 3 (“The
sales price is subject to renegotiation effective 1/1/93 and
is expected to drop significantly at that time as it
approaches a level closer to market. The sales price
expected at that time ($20.50/ton) is slightly less than
current operating costs ($23/ton YTD July 1990).”;.. . .
FOF 32; App. 27 (Emphasis supplied).
The District Court also found that “[t/he uncontroverted
documentary evidence from Exxon’s own files establishes that
they were operating on a factual basis with respect to the
market value of the coal from the Monterey No. 2 Mine which
they consistently misrepresented in their dealings with
PSI... .” FOF 33; App. 28. “Despite what it knew about the
market price for coal from the Monterey No. 2 Mine, Exxon
repeatedly advised PSI that the market would support a price
in excess of $30 delivered to the Gibson Station.” FOF 34;
App.28. Based upon all of the evidence the District Court cited
in support of those two findings, [See, App. 28], and the testi-
mony of the witnesses at trial, the District Court issued finding
35: “Thus, Exxon’s representations to PSI regarding the mar-
ket price of its coal were knowingly and intentionally inaccu-
rate.” App. 28.
1]
In Conclusion of Law 6, the District Court held that Exxon
did not negotiate in good faith with PSI, and that Exxon had
deviated from the “honesty in fact” requirement of the Indiana
Uniform Commercial Code, 1.C. 26-1-2-103(B). The Seventh
Circuit determined that this Conclusion “is a factual finding, so
our review is deferential. Anderson v. Bessemer City, 470 U.S.
564 (1985). We conclude, however, that the finding is clearly
erroneous.” App. 31. In reaching its conclusion, the Seventh
Circuit ignored all of the exhibits and testimony cited by the
District Court, stating as follows:
. . . Exxon’s bad faith lay, in other words, in lying to PSI
about the market price for coal. . . The antecedent prob-
lem, however, is that the portions of the record the district
court cited offer no support for the conclusion that Exxon
told a lie.
All of the district court’s references are to testimony
concerning four pages of price data Exxon’s negotiating
team handed to PSI’s team . . . PSI has never suggested,
and the district court did not find, that Exxon doctored
the data to make the average price look higher, or even that
it selected high-price contracts for inclusion while omit-
ting lower-price contracts. . . .
App. 8.
On the contrary, that is precisely what PSI contended, both
at trial and in its Brief on appeal to the Seventh Circuit, and
what the District Court held. Those “four pages of price data,”
which were represented by Exxon to PSI as support for a price
of over $31 per ton for its coal, were admitted into evidence as
Exxon’s Exhibit 205. Seth Schwartz, PSI’s “expert on fuel
contracts and pricing,” FOF 16, App. 25, testified at the
remand hearing that the “four pages of price data” were not an
honest representation of the market price for Exxon’s coal:
There are four major flaws to this chart as to why it does
not reflect the market price for Monterey’s coal.
Probably the first and foremost is that it showed the
delivered prices of the existing contracts at the time with-
12
out regard to the date of those contracts and when the
price was set. As a result, these delivered prices do not
reflect the current market price at the time that it was
offered, but rather reflect the market price over a variety of
periods of time, including many high priced old contracts
just like Exxon’s old contract with PSI.
Secondly, the presentation of data on this exhibit is selec-
tive and biased. The exhibit excludes many other long-
term contracts for the same coal as described under this
exhibit that had lower prices that were not included in this
analysis.
Third, the exhibit is not selective as to the coal quality at
issue here. Specifically, nwmerous contracts on this
exhibit are for low-sulfur coal, which carries a much
higher market price than the coal called for under the
[Agreement].
And fourth and finally, the prices shown here are deliv-
ered prices to a wide variety of utilities and power plants,
including many with much higher transportation costs
than would be appropriate for the delivered price analysis
to the Gibson power plant, and as a result it’s a false
presentation of what an average delivered price would be
to the Gibson power plant in these contracts.
Hearing on Remand Transcript, July 28, 1993, pp. 22-25, App.
82.
PSI would submit that the District Court's findings are
clearly correct relating to Exxon’s lack of good faith and lack of
honesty in fact, and should have been affirmed. However, when
there are two permissible views of the evidence, the District
Court’s “choice between them cannot be clearly erroneous.”
Anderson v. City of Bessemer City, supra, 470 U.S., at 574.
Thus, the Seventh Circuit’s attempt to show that its view of the
facts was correct, even though in direct conflict with the Dis-
trict Court’s analysis, must be rejected by this Court.
Accordingly, this Court should grant the Writ to review and
correct the Seventh Circuit’s failure to give appropriate defer-
13
ence to the District Court's findings of fact as required by Rule
52(a) of the Federal Rules of Civil Procedure.
II. Exxon’s “last offer” omitted material terms that
precluded PSI from determining the price of Exxon’s coal
at the beginning of the next Contract Period.
As stated above, Exxon’s offers to PSI were continually
escalating. Exxon’s initial offer was $20.10 per ton plus freight,
which, four months later was increased to $25 per ton at the
mine. Shortly thereafter, Exxon provided PSI a delivered
price of $29.60 per ton, and on April 28, 1992, Exxon presented
PSI with its “last offer” of $30 per ton. However, in response to
the competitive offer PSI obtained, Exxon submitted a condi-
tional offer of $23.266 per ton.
The District Court found that Exxon only supplied PSI with
an Exhibit A for the $29.60 offer, and that Exhibit A had a
reference date of December 1, 1991, 13 months prior to the start )
of the next Contract Period. FOF 44; App. 30. That early
reference date made it difficult for PSI to solicit and compare
potential competitive offers. Jd. Exxon’s “last offer” of $30 per
ton did not include an Exhibit A. FOF 43; App. 30.
Based upon the testimony of Robert Veenstra, PSI’s prin-
cipal negotiator; Seth Schwartz; and Andrew Twadelle,
Exxon’s former employee charged with administering the
Agreement, the District Court found that “PSI was unable to
calculate a Price for Exxon’s coal on or after January 1, 1993,
from Exxon’s $30 per ton offer.” FOF 41; App. 29. This inability
arose “(because Exxon refused or failed to provide a proposed
Exhibit A to PSI.” Jd.
Contrary to this Court's directions in Anderson v. City of
Bessemer City, supra, 470 U.S., at 573, and Zenith Radio
Corporation v. Hazeltine Research, Inc., 395 U.S. 100, 123
(1969), the Seventh Circuit, after agreeing that the District
Court's findings on Exxon’s failure to provide an Exhibit A and
the inability of PSI to determine the January 1, 1993 price were
14
“unexceptionable,” tried to convert those findings into a con-
struction of the Agreement, which, it opined, would thereby
allow it to exercise plenary review. The Seventh Circuit stated
as follows:
. . . The [$30] offer did not include a copy of the Exhibit A
that would be effective on that date [January1,1993], but
Exxon promised to update its figures: “The new Base of
$30.00 per ton would be subject to adjustments in union
welfare, taxes/fees and new laws/regulations between
May 1, 1992 and the revised reference date of January 1,
1993.” In other words, . . . changes in taxes and union
welfare funds (plus the costs of new laws) from May
through December 1992 would lead to adjustments under
Exhibit A. The structure of Exhibit A would remain the
same, but the figures would be updated as of January 1 (or
May 1) so that only changes after those dates would alter
the delivered price of coal. (E’mphasis in the original) The
offer does not state a price per ton as of January 1, 1993,
but it provides the formulas from which the price could be
computed once that date arrived. . .
... the parties must update Exhibit A to reflect eco-
nomic conditions on the date the new Base takes effect. In
effect, the Base is the Price at the start of the new con-
tract period; any later change in one of the 12 categories
covered by Exhibit A will lead to an adjustment in the
Price. Exxon’s offer in April 1992 conformed to this
approach, with the proviso that Exxon wanted to make
adjustments for changes “in union welfare, taxes/fees and
new laws/regulations between May 1, 1992 and the revised
reference date of January 1, 1993.” Exxon offered a Base
of $30; PSI’s inability to convert this into a Price as of
January 1, 1993, until seeing what happened to the three
open categories between May and December is neither
here nor there under the contract.
App. 4-5; (Emphasis supplied)
Therefore, even though PSI would not know in January,
1993, how much it would be paying for Exxon’s coal, the Sev-
enth Circuit held that the District Court’s finding that Exxon’s
15
last offer lacked material terms was incorrect. In so holding,
the Seventh Circuit ignored the applicable decisions of this
Court noted above and decisions it had previously issued. See,
e.g., Castellano v. Marion Pa rtners, 960 F.2d 636, 638 (7th Cir
1992) (“even if the trial court's findings were mixed findings of
law and fact, the clearly erroneous standard would nonetheless
apply to this court’s review.”) (E’mphasis in the original).
CONCLUSION
The District Court conducted two trials relating to the
Reopener, reviewed hundreds of exhibits, listened to the testi-
mony of several witnesses, assessed the credibility of the oral
and written evidence and of the witnesses, and issued exten-
sive findings of fact adequately supported by record citations.
Those findings are not to be overturned on appeal unless they
are clearly erroneous. Nevertheless, the Seventh Circuit
ignored those findings, considered the matter de novo, and
substituted its judgment for that of the District Court. That
clear error by the Seventh Circuit should be reversed by this
Court.
Therefore, for these reasons, a Writ of Certiorari should be
issued to review the decision of the Seventh Circuit.
Respectfully submitted,
CHERYL M. FOLEY
DONALD P. BOGARD
Counsel of Record
Attorneys for Petitioner
1000 East Main Street
Plainfield, Indiana 46168
Telephone: 317-838-1163
* Pursuant to the Agreement, PSI is to purchase three million tons of coal
from Exxon each year for the next five years. At a difference of nearly seven
dollars per ton between the District Court's price of $23.266 and the Seventh
Circuit's price of $30, the impact of the Seventh Circuit's decision is over $100
million.
Appendix
Inu The
United States Court of Appeals
For the Seventh Circuit
No. 93-3191
PSI EnNereay, INc.,
Plaintiff-Appellee,
(PA
EXXON CoA USA, INc., and Exxon Corporation,
Defendants-Appellants.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division
No. [P92 645-C—Sarah Evans Barker, Chief Judy
SUBMITTED JANUARY 3, 1994*—Decipep Fesruarny 22, 1994
Before BAUER, REAVLEy,** and Easrersrook, Circuit
Judges.
EASTERBROOK, Circuit Judge. Our prior opinion, 991 F.2d
1265 (1993), held that the long-term coal contract between PSI
Energy and Exxon Coal USA remains in effect. We remanded
so that the district judge could determine the Base price of coal
for the period 1993-97. Under the contract, Exxon’s “last offer”
sets the price for that period. According to Exxon, the “last
offer” was a Base of $30 per ton. According to PSI, the $30 offer
* An earlier appeal was argued on March 31, 1993, to this panel, which has
unanimously decided that further oral argument is unnecessary.
** Hon. Thomas M. Reavley, of the Fifth Circuit, sitting by designation.
A-1
A-2
was incomplete and made in bad faith, and Exxon’s bid of
$23.266 per ton, matching a rival’s proposal in the event it
qualified as a “competitive offer” under the contract (which, we
held, it did not), is the only suitable “last offer.” The district
court took additional evidence and held not only that Exxon
had negotiated in bad faith but also that its $30 bid omitted
essential terms. 831 F. Supp. 1430(S.D. Ind. 1993). As a result,
the court held, the Base during 1993-97 is $23.266 per ton.
PSI raises a jurisdictional question. After January 1, 1993,
PSI began accepting deliveries from Black Beauty Coal Com-
pany, believing that Exxon’s failure to match Black Beauty's
offer brought their contract to an end. Not until July 1993,
three months after our opinion held that the PSI-Exxon con-
tract remains in force, did PSI resume taking deliveries from
Exxon. We issued a supplemental order on July 12, 1993,
clarifying the issues to be resolved on remand; this order
suggested that the proceedings should include a determination
of the damages PSI owes for failure to accept Exxon’s coal. The
district court did not assess damages on remand, which, PSI
believes, makes the order non-final. Cf. Liberty Mutual Insur-
ance Co. v. Wetzel, 424 U.S. 737 (1976). When issuing the order
of July 12 we were unaware, however, that Exxon had com-
menced a separate action seeking damages. The district court
has wrapped up all of the issues actually presented by this suit,
and its decision is appealable.
The contract between PSI and Exxon provides for price
renegotiation every five years. If the parties do not reach
agreement, the price is set in one of two ways: either Exxon’s
“last offer” prevails during the ensuing five years, or PSI
obtains a “competitive offer,” which Exxon may match. If it
elects not to match the rival’s bid, then the rival gets the
business (although PSI may require Exxon to supply coal for
an additional two years, while the rival prepares to perform).
Sections 7.03 and 7.05 of the contract describe the mechanism:
[$7.03] Either party may require renegotiation of the
Base by giving to the other, at any time in the first thirty
A-3
(30) days of the fourth year of any contract. period. . .,
written notice of its desire to do so. Promptly after the
giving of such notice, the parties will commence negotia-
tions to agree upon a new Base to be effective as of
commencement of the next contract period. Each party
covenants with the other to participate in such negotia-
tions in a good taith effort to reach agreement. If the
parties are unable to reach agreement, BUYER will
accept SELLER’ last offer or present SELLER with a
firm, written offer which it has received from another
supplier, which it is willing to accept, for the supply of coal
called for under the remaining term of this Agreement
(herein referred to as a “competitive offer”). It shall also
provide SELLER with documentary proof of such offer,
and permit SELLER to examine all supporting data and
information submitted with the offer. SELLER shall have
the right to meet such competitive offer.
If, by the one hundred and eightieth day preceding the
end of the contract period in which notice of price
renegotiation was given, the parties have agreed upon a
new Base, appropriate changes shall be made to the
adjustment factors provided in Exhibit “A”. The Price of
coal effective at the commencement of the next contract
period shall be computed from the new Base adjusted
under the provisions of Exhibit “A” from the reference
date of the new Base. If, by such time, the parties have not
reached agreement upon a new Base and SELLER
declines to meet a competitive offer submitted by
BUYER pursuant to the above provisions, this Agree-
ment shall terminate at the end of the contract period in
which notice of price negotiation was given, or at
BUYERS election, at the end of the temporary continu-
ance of deliveries as provided for in Section 7.04.
[$7.05] It is understood and agreed that the purpose and
intent of Sections 7.01 to 7.04, inclusive, are only to pro-
vide for renegotiation of Base and Exhibit “A”, and nei-
ther party shall inject into such negotiations, as a
condition of agreement upon a new Price for the coal, any
A-4
demand or request that other terms and conditions of this
Agreement be altered.
“Base” is the negotiated figure; “Exhibit A” describes adjust-
ments to be made while a Base remains in force. Exhibit A
specifies the effects of 12 fluctuating factors, including labor
costs, taxes, freight, and changes in the value of money.
After the parties reached a stalemate in April 1992, PSI
asked Exxon to make a formal “last offer” within the meaning
of §7.03. Exxon offered a Base of $30 per ton, F.O.B. PSI’s
Gibson generating station, effective January 1, 1993. The offer
did not include a copy of the Exhibit A that would be effective
on that date, but Exxon promised to update its figures: “The
new Base of $30.00 per ton would be subject to adjustments in
union welfare, taxes/fees and new laws/regulations between
May 1, 1992 and the revised reference date of January 1, 1993.”
In other words, Exxon would absorb any increases in wages,
freight, and the cost of living between April 1992 and January
1993, but changes in taxes and union welfare funds (plus the
costs of new laws) from May through December 1992 would
lead to adjustments under Exhibit A. The structure of Exhibit
A would remain the same, but the figures would be updated as
of January 1 (or May 1) so that only changes after those dates
would alter the delivered price of coal. The offer does not state a
price per ton as of January 1, 1993, but it provides the formulas
from which the price could be computed once that date arrived.
The district court concluded that this combination of a $30 Base
plus a promise to update the table of adjustments is not a
proper “last offer” under the contract because “[i]t is not possi-
ble to calculate the Price under the Contract without an accom-
panying Exhibit A.” 831 F. Supp. at 1438. As a finding of fact —
that only Base and Exhibit A put together yield a dollar price
— this is unexceptionable. As a construction of the contract, a
subject on which our review is plenary (given the parties
agreement that the contract is not ambiguous), it is incorrect.
Section 7.03 does not call for the parties to renegotiate the
Price (a defined term, starting with Base and including adjust-
A-5
ments per Exhibit A and several other portions of the con-
tract). It provides, instead, that if either party gives the
appropriate notice, “the parties will commence negotiations to
agree upon a new Base to be effective as of commencement of
the next contract period.” Section 7.03 adds that once the
parties agree on a new Base, “appropriate changes shall be
made to the adjustment factors provided in Exhibit ‘A’.”
Although the contract does not say what “appropriate changes”
are, the context furnishes the explanation: the parties must
update Exhibit A to reflect economic conditions on the date the
new Base takes effect. In effect, the Base is the Price at the
start of the new contract period; any later change in one of the
12 categories covered by Exhibit A will lead to an adjustment
in the Price. Exxon’s offer in April 1992 conformed to this
approach, with the proviso that Exxon wanted to make adjust-
ments for changes “in union welfare, taxes/fees and new laws/
regulations between May 1, 1992 and the revised reference
date of January 1, 1993.” Exxon offered a Base of $30: PSI’s
inability to convert this into a Price as of January 1, 1993, until
seeing what happened to the three open categories between
May and December is neither here nor there under the con-
tract.
Things would have been more complicated had the parties
been negotiating some of the formulas in Exhibit A. Although
$7.03 speaks of renegotiating Base, §7.05 says that “the pur-
pose and intent of Sections 7.01 to 7.04, inclusive, are only to
provide for renegotiation of Base and Exhibit ‘A’ We may
assume, therefore, that PSI was entitled to put on the table a
proposal to alter the extent to which Exhibit A translates
changes in Exxon’s costs into changes in the Price. For exam-
ple, Part 2 of Exhibit A provides that whenever an adjustment
is made under Part 1 for changes in labor costs, “an additional
adjustment in the amount of fifty percent (50%) of the adjust-
ment so made, shall be made effective on the same date for
changes in the cost of administrative, supervisory, technical,
and clerical help at the mine and for changes in SELLER’
allocated administrative costs.” PSI might have proposed
A-6
changing this figure to 25% or abolishing it altogether. Then
Exxon'’s offer of a $30 Base plus an Exhibit A updated to
January 1, 1993, could have been ambiguous. Did it include
PSI’s desired change or not? Yet the parties were not negotiat-
ing the structure of Exhibit A: Exxon had made it clear that it
viewed the subject as non-negotiable, and PSI had not made
any concrete proposal concerning the text and structure of
Exhibit A. Exxon’s offer of April 1992 set a firm Base of $30. It
therefore was a “last offer” within the meaning of $7.03.
The district court recognized this, albeit indirectly. The
court's declaratory judgment reads: “Exxon’s offer of $30 per
ton omitted material terms and was not made in good faith.
Accordingly, Exxon’s ‘last offer’ to PSI for coal from the Mon-
terey No. 2 Mine was $23.266 per ton.” The district court itself
thought that the specification of a Base is sufficient — that the
parties can work out for themselves the adjustments needed to
update Exhibit A as of January 1, 1993. The parties negotiated
the original contract in this fashion, agreeing on a Base and the
formulas of Exhibit A more than a year before deliveries
began, while leaving its precise numbers to be filled in later.
Whatever uncertainties there may be in the computation pro-
cess do not change the fact that renegotiation under §7.03
concentrates on Base.
Under §7.03, “[eJach party covenants with the other to par-
ticipate in such negotiations in a good faith effort to reach
agreement.” Our supplemental order of July 12 remarked:
[T]he Uniform Commercial Code defines “good faith” as
“honesty in fact in the conduct or transaction concerned.”
UCC §1-201(19). An obligation to negotiate in good faith is
not an obligation to be kind to one’s trading partner or to
refrain from taking commercial advantage of the contrac-
tual provisions one has negotiated. See Kham & Nate’s
Shoes No. 2 v. first Bank of Whiting, 908 F.2d 1351 (7th
Cir. 1990). Nothing we have seen suggests that the con-
tractual reference to “good faith” has a meaning other
than the one specified by the UCC.
A-7
On remand the district court bypassed PSI’s contention that
Exxon’s bids, approximately $6.75 per ton more than the mar-
ket price later revealed by the Black Beauty bid, were them-
selves evidence of “bad faith.” PSI had proposed that Exxon
sell the coal! for as little as $15 per ton, an even greater depar-
ture from the Black Beauty bid; when one side is persistently
high and the other persistently low, it is hard for either to Say
that the other's departure demonstrates “bad faith.” Nonethe-
less, the district court held, Exxon deviated from “honesty in
fact” and therefore did not live up to its contractual obligation.
This is a factual finding, so our review is deferential. Anderson
v. Bessemer City, 470 U.S. 564 (1985). We conclude, however,
that the finding is clearly erroneous.
The district court found that Exxon expected the price to be
driven down to approximately $20.50 per ton at the mine
mouth, 831 F. Supp. at 1437-38, or $25 per ton F.0.B. Gibson
station. This finding is amply supported. The market for ccal
was weak, and for high-sulfur coal (the kind Exxon produced at
Monterey No. 2) weaker still. During 1991 and early 1992, spot
prices for such coal were $17 to $20 per ton. Exxon itself offered
one million tons of this coal per year to Springfield, Illinois, for
$20 per ton F.0.B. mine. But the PSI-Exxon contract called for
3 million tons per year, and a firm commitment of that size could
fetch a premium, which Exxon’s consultant pegged at approx-
imately $2 per ton. Exxon did not reveal these assessments to
PSI, which for that matter did not reveal its own internal
assessments to Exxon. An obligation to negotiate “in good
faith” nixes trickery and certain forms of obduracy, see Market
Street Associates Limited Partnership v. Frey, 941 F.2d 588,
594-96 (7th Cir. 1991), but it does not require one side in
negotiations to reveal its bargaining strategy or its reservation
price, to disclose every tidbit that would be of use to the other
side, or to refrain from taking advantage of its opportunities.
See Continental Bank, N.A. v. Everett, 964 F.2d 701, 703-05
(ith Cir. 1992); E. Allan Farnsworth, 1 Contracts §3.26¢ at
341-45 (1990). Not even an employer's legal duty to negotiate in
good faith with a union goes so far, see 29 U.S.C. §158(d) (duty
A-8
to bargain does not require the making of concessions), and the
concept of good faith under the UCC, which applies to this
contract, is decidedly more confined than the obligation to
bargain in labor law.
The district court’s key findings are:
34. Despite what it knew about the market price for coal
from the Monterey No. 2 Mine, Exxon repeatedly advised
PSI that the market would support a price in excess of $30
delivered to the Gibson Station. See Veenstra Testimony,
Hearing Tr., at 60-61; Veenstra Testimony, Trial Tr., at
68-70; Veenstra Testimony, Trial Tr., at 134-135, 136;
Veenstra Testimony, Trial Tr., at 191-192, 200.
35. Thus, Exxon’s representations to PSI regarding the
market price of jts coal were knowingly and intentionally
inaccurate. See Schwartz Testimony, Hearing Tr., at 25;
Veenstra Testimony, Hearing Tr., at 59; Veenstra Testi-
mony, Hearing Tr., at 109-110; Veenstra Testimony, Trial
Tr., at 68-70; Veenstra Testimony, Trial Tr., at 134-135,
136; Veenstra Testimony, Trial Tr., at 191-192, 200.
831 F. Supp. at 1438. Exxon’s bad faith lay, in other words, in
lying to PSI about the market price for coal. The district court
did not find that PSI was taken in, or even that there was a risk
that PSI would be snookered. A breach of contract without
injury — without even a potential for injury — does not lead to
the sort of remedy imposed here. (A reduction in Base from $30
to $23.266 per ton is worth about $100 million during 1993-97).
See Rauch v. Circle Theatre, 176 Ind. App. 130, 140, 374
N.E.2d 546, 553 (1978); see also Lincoln National Life Insur-
ance Co. v. NCR Corp., 772 F.2d 315, 320-22 (7th Cir. 1985).
The antecedent problem, however, is that the portions of the
record the district court cited offer no support for the conclu-
sion that Exxon told a lie.
All of the district court’s references are to testimony con-
cerning four pages of price data Exxon’s negotiating team
handed to PSI’s team (led by Robert Veenstra) during a meet-
ing on March 18, 1992. Exxon’s handout listed the price that
A-9
other public utilities in the Midwest were paying for coal under
long-term contraets. The handout identified approximately 40
contracts by buyer, seller, and price — which ranged from
$22.97 to $50.48 per ton, for an average of $31.70. In response—
to PSI’s inquiry, Exxon said that it had assembled these data
from forms the public utilities filed with the Federal Energy
Regulatory Commission. Veenstra immediately dismissed the
figures, remarking that many of the contracts had been negoti-
ated more than a decade ago and were about to expire, while
PSI and Exxon had to reach agreement on a new price in light
of current conditions. The adjusted price of Exxon’s own deliv-
eries to PSI exceeded $38 per ton; PSI knew that that price
greatly exceeded the current market and was not impressed by
a demonstration that other utilities also had signed long-term
contracts during period of higher prices. As Veenstra testified,
the handout did not reflect “very good market intelligence.”
What we find dispositive, however, is that the handout was
accurate in every particular. PSI has never suggested, and the
district court did not find, that Exxon doctored the data to
make the average price look higher, or even that it selected
high-price contracts for inclusion while omitting lower-price
contracts. If the district court meant that the data were inaccu-
rate, the finding is clearly erroneous. If, instead, the district
court meant that simply handing out a recap of prices being
paid under long-term contracts signed years ago — as opposed
to prices recently negotiated — establishes bad faith, the con-
clusion is a legal mistake. Exxon represented the document to
be no more than what it was, and PSI was well able to apply the
appropriate discount. CF. Wielgos v. Commonwealth Edison
Co., 892 F.2d 509, 512-16 (7th Cir. 1989), Similarly, the court
was legally mistaken if it believed that distributing accurate
data establishes bad faith when the party believes that it will
have to settle for less. That would be equivalent to saying that
each negotiator must reveal his reservation price rather than
take a hard line in bargaining.
Much of PSI’s brief is devoted to an argument that permit-
ting Exxon to use a Base of $30 during the next five years
A-10
simply isn’t fair when the market price is about 20% lower. PSI
believes that Exxon should not have maneuvered in an effort to
retain a portion of its supra-market price. In commercial trans-
actions, however, the question is not what is fair but what
comports with the contract. An obligation to bargain in good
faith differs from an obligation to make concessions, as it
differs from a fiduciary duty. Feldman v. Allegheny Interna-
tional, Inc., 850 F.2d 1217, 1223 (7th Cir. 1988) (“[OJ|ne cannot
characterize self-interest as bad faith. No particular demand in
negotiations could be deemed dishonest, even if it seemed
outrageous to the other party.”); Farnsworth, Contracts at
343. Parties may and often do write contracts calling for adjust-
ment to market prices. These parties omitted such a provision.
Courts frustrate rather than advance the institution of con-
tract when they treat one kind of clause as if it were the other.
Contracts allocate risks, and judicial reallocation interferes
with not only negotiation but also the economic processes the
contracts govern. By enforcing contractual language rather
than molding it until the outcome looks more fair, ex post,
courts in the end serve all contracting parties’ interests.
Exxon offered to cut more than $8 per ton from the price it
was charging in 1991; PSI wanted an even deeper reduction.
Each side in this negotiation took a hard-nosed position. Just
as Exxon’s negotiating position was consistently above market,
PSI's was consistently below. This contract contains a mecha-
nism to bridge such a gap: the competitive offer. As our first
opinion described, PSI set out to obtain the lowest bid it could,
without regard to the structure imposed by the contract. Today
might find PSI in a much better position had it solicited bids
and negotiated with Exxon’s rivals differently. Under the con-
tract, when the parties do not agree and there is no valid
competitive offer, the seller's last offer prevails. Not “the mar-
ket price” in the abstract, but the seller’s last offer. Persons
negotiating such a contract would understand that this default
rule gives the seller the whip hand; it is simultaneously an
element of compensation for taking the risk of developing a new
mine (which cost Exxon several hundred million dollars, 831 F.
A-11
Supp. at 1431) and a goad to accommodation. Knowing that it is
apt to pay more than the market price if it fails to come up with
a competitive offer, PSI had every incentive to be scrupulous in
finding a proper bid. We concluded on the prior appeal that it
had failed. Now we quantify the price of that failure: $30 per
ton.
{EVERSED
A true Copy:
Teste:
Clerk of the United States Court of
Appeals for the Seventh Circuit
A-12
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
March 21, 1994.
Before
Hon. WinuiAm J. Bauer, Circuit Judge
Hon. THOMAS M. Reavuiry, Circuit Judge*
Hon. FRANK H. Eastersrook, Circuit Judge
PSI Eneray, INc.,
Plaintiff-Appellee,
No. 93-3191 v.
Exxon Coa USA, INc., and
EXXON CORPORATION,
Defendants-Appellants.
Appeal from the
United States
District Court for
the Southern
District of Indiana,
Indianapolis
Division.
No. IP92 645-C
Sarah Evans
Barker, Chief
Judge.
eee eee ee ee
Order
Plaintiff-Appetlee filed a petition for rehearing and sug-
gestion of rehearing en bane on March 8, 1994. No judge in
regular active service has requested a vote on the suggestion of
rehearing en banc,** and all of the judges on the panel have
voted to deny rehearing. The petition for rehearing is therefore
DENIED.
* Hon. Thomas M. Reavley, of the Fifth Circuit, sitting by designation.
** Judge Cummings and Judge Coffey did not participate in the considera-
tion or decision of this case.
A-13
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
PSI ENerGy, INc.,
Plaintiff,
vs. [P92 645-C
Exxon Coa USA, INc., and
EXXON CORPORATION through
its Division Exxon Coal and
Minerals Company,
Defendants.
)
)
)
)
)
)
)
)
)
)
)
ENTRY
PSI Energy, Inc., (“PSI”) and Exxon are signatories to a
twenty-five year contract (the “Contract”) which requires
Exxon to supply coal to PSI through the year 2001, subject to
the parties agreeing at five-year intervals to a new base price
(the “Base”) and escalation provisions (“Exhibit A”) which
together determine the actual price of the coal “(the “Price”).
The last renegotiation period ended on December 31, 1992.
Long before that deadline, however, the parties realized that
they were unable to agree on the meaning of Article VII to the
Contract (the “reopener provision”), which governs renegotia-
tion of the coal’s price. Especially troublesome to the parties
was Section 7.03, which states in pertinent part:
Each party covenants with the other to participate in such
negotiations in a good faith effort to reach agreement. If
the parties are unable to reach agreement, BUYER will
accept SELLER’ last offer or present SELLER with a
firm, written offer which it has received from another
supplier, which it is willing to accept, for the supply of coal
called for under the remaining term of this Agreement
(herein referred to as a “competitive offer”)... . If. . . the
A-14
parties have not reached agreement upon a new base and
SELLER declines to meet a competitive offer submitted
by BUYER pursuant to the above provisions, this Agree-
ment shall terminate at the end of the contract period in
which notice of price renegotiation was given... .
Plaintiffs Exhibit 1. Because the parties were unable to reach
agreement, PSI presented Exxon with what it believed was a
competitive offer from the Black Beauty Coal Company
(“Black Beauty”). The terms of the Black Beauty offer differed
in many respects from the terms of the Contract. From
Exxon's perspective, the most significant difference was Black
Beauty's willingness to supply more than one PSI station from
several of its mines, which Exxon contended prevented it from
calculating a single base that it could meet. Exxon had always
supplied just one PSI station — the Gibson Station in East
Mount Carmel, Indiana — from its Monterey No. 2 Mine and
had built that facility at a cost of several hundred million dollars
with the understanding that its coal could be dedicated to PSI.
Exxon believed that, with the exception of the base, a “com-
petitive offer” presented under Section 7.03 had to have sub-
stantially the same terms as the Contract and that PSI was
required to specify a new Base determined on a delivered basis
to the Gibson Station.
In contrast, PSI read Section 7.03 as requiring Exxon to
match all the terms and conditions of the competitive offer, or,
at a minimum, match those terms that PSI deemed significant.
The result of the parties’ inability to agree was a lawsuit in
which PSI asked this Court to enter a declaratory judgment
that: (1) the written offer which PSI received from Black
Beauty is a “competitive offer” within the meaning of the
Contract; (2) Exxon did not meet the competitive offer, and
therefore, the Contract shall terminate on December 31, 1992,
or at PSI’s election, at the end of the temporary continuance of
deliveries as provided for in Section 7.04 of the Agreement; and
(3) Exxon be prohibited from taking any action, at law, in
equity, or otherwise, from enjoining or preventing or seeking
to enjoin or prevent PSI from accepting and executing a new
A-15
agreement for the supply of coal under the Contract. A bench
trial was conducted on December Ist, 2nd, érd, 4th, 7th and
8th, 1992.
This Court delivered its decision on December 28, 1992,
granting PSI’s request for declaratory relief and holding that
the Contract was not ambiguous, that the Black Beauty offer
was a “competitive offer”, and that Exxon had failed to meet
that offer. The Court began its analysis by noting that the
primary purpose of Article VII is to manage market risk by
allowing the parties to reconcile deviations in the ( vontract’s
price with the prevailing market price. It then rejected
Exxon’s interpretation of the reopener provision which
required that any competitive offer mirror the terms of the
Contract with the exception of the Base. It was this Court’s
view that restricting competition to only a single dimension —
the base — would so limit the field of firms that would be able to
tender an offer that it would undermine the competitive offer
process. The Court explained:
The evidence presented establishes that any given coal
supplier occupies a unique market position. The com-
petitive advantage it possesses depends on such factors as
the quality of the coal it can produce, the distance that the
coal must travel to the buyer, the nature of its mining
operations, and other idiosyncratic variables. Not every
competitive advantage, though, derives from efficiencies
in the cost of production because other considerations
besides cost enter into the decision calculus for the buyer.
For example, the supplier's flexibility in scheduling and
delivering the coal is also an important competitive
dimension. See Masselink Depo. III, at 249. The point
seems too obvious to warrant much discussion, but
whether a coal buyer enters into a contract witha particu-
lar supplier depends on the totality of circumstances sur-
rounding the contract and the overall value that it renders
to the buyer. Thus, it is not impossible for a coal supplier
which is situated at a farther distance from the buyer than
a competitor, with an interior quality coal, to prevail in his
negotiations with the buyer by offering non-cost related
A-16
concessions that offset whatever disadvantages he may
face. Exxon’s reading of the Agreement would foreclose
any competition on non-base terms. Such a reading not
only is inconsistent with the overriding purpose of Article
VII, it also directly contradicts its express language.
Article VII was included in the Agreement primarily to
manage market risks. Exxon’s interpretation, if adopted,
would shift far too much risk onto PSI by creating a
barrier to competition that few coal suppliers (i.e. third
party competitors) could overcome. The Court can find no
language in the Agreement that would warrant impeding
market competition in this way.
Exxon’s interpretation also betrays the parties’ original
intent as manifested in the words they chose to incorpo-
rate inthe Agreement; “competitive” , as that term is used
in “competitive offer”, means nothing less than fully com-
petitive. Exxon’s own reasoning supports this finding:
[aJs a practical matter neither Exxon nor any other
seller could meet literally all the terms and condi-
tions of the Black Beauty offer. That offer contains
many idiosyncratic features tailored to the unique
circumstances of Black Beauty’s proposed opera-
tions. Explicit reference is made to production at and
sales from each of Black Beauty's three mines, by
name; different coal quality standards for each mine;
different “starting prices” are quoted for each mine;
and delivered prices are calculated by adding to
those “starting prices” the actual transportation
costs incurred on each shipment from those mines.
Defendants’ Trial Brief, at 32-33 (emphasis added).
The adage, “what is good for the goose is good for the
gander,” applies here. Exxon is just as uniquely situated
in the market as Black Beauty. Why should the Court
require Black Beauty to do what Exxon correctly implies
is impossible: mirror all the terms of another coal sup-
pliers’ agreement and compete just on one term, the base?
Simply put, the contract does not indicate that the parties
intended that the third-party competitor would have to
A-17
develop its offer shackled by the limitations that Exxon
now seeks to impose. Under the Agreement, PSI had the
right to obtain a competitive offer from another supplier
which contained terms and conditions which were differ-
ent from the terms and conditions of the Agreement.
Entry, at 17-19. Although the Court recognized the long-term
nature of the Contract and the extent of Exxon’s capital com-
mitments to supply the Gibson Station, it could not ignore the
fact that no sensible buyer would enter into an economic rela-
tionship which would leave its resources bottled-up for a
quarter-century in a venture requiring it to pay above-market
prices with only a modest hope that another firm would happen
to occupy a market position that would make feasible the
tender of a competitive offer.
The Court also rejected PSI’s contention that Exxon was
required to match all the terms of a competitive offer, as this
would fail to protect Exxon’s interest in maintaining predicta-
bility in the Contract’s terms. The Contract was a twenty-five
year contract and not five separate five-year contracts. The
Court wrote:
Pursuant to Section 7.05, Exxon need not modify any-
thing but the Base to “meet” the competitive offer. PSI’s
interpretation of Section 7.03 that Exxon must match the
competitive offer term for term and in kind is incorrect, as
this would be contrary to the express meaning of Section
7.05. That Section states that “the purpose and intent of
Sections 7.01 to 7.04, inclusive, are only to provide for
renegotiation of Base and Exhibit A’, and neither party
shall inject into such negotiations, as a condition of agree-
ment upon a new Price for the coal, any demand or request
that other terms and conditions of this Agreement be
altered.” Because the competitive offer is not limited to
base competition, as this is the only interpretation that
would allow the third party competitor to bring the full
range of its resources to bear in the marketplace, the
meaning of Section 7.03 that Exxon “shall have the right
to meet such competitive offer” means that it must be
A-18
allowed to match the overall value that the competitive
offer would confer on PSI. If it chose not to enter into
negotiations outside of Article VII, Section 7.03 allows
Exxon to offset non-base related concessions in the com-
petitive offer with corresponding reductions in the Base.
Entry, at 21-22. Although value admittedly has a subjective
component, the language of the reopener provision indicated to
this Court that dialogue was to be an important part of the
reopening process and that negotiations were to occur regard-
ing how Exxon would “meet” a competitive offer. This Court
found that “[njothing in the language of Section 7.03 indicates
that Exxon had the right to determine unilaterally whether it
had met the competitive offer; based in part from experience
with other reopener provisions, the parties recognized the
necessity of discussing the competitive offer and making
adjustments in their negotiating positions accordingly. See
Brister Testimony, Trial Tr. at 679; Veenstra Depo. III, at
444-451; Ashley Depo. II, at 206-08.” Entry, at 12. It was this
Court’s opinion that if all Exxon was required to do was match a
single base figure which the competitive offer would supply,
there really wouldn’t be much to discuss or negotiate after the
competitive offer had been received. Rather, the Court
believed that the parties’ expected to engage in bona fide
negotiations even after that time.
Thus, it was the Court's view that the only reasonable inter-
pretation of the Contract was one that would respect the legiti-
mate expectations of both the buyer and the seller. To ensure
that the competitive offer process was fully competitive, and
thereby guarantee that the Contract price was in accord with
the market, the Court refused to impose a requirement that
competitive offers mirror the Contract’s terms excepting the
Base. The Court also refused to force Exxon to renegotiate an
entirely new contract every five years. Exxon needed only to
adjust the Base.
Exxon appealed to the Seventh Circuit Court of Appeals,
which rendered its decision on April 15, 1993. Like the District
A-19
Court, the Court of Appeals found that a “competitive offer”
did not need to duplicate the non-price terms of the Contract
and that §7.05 entitles Exxon to match a competitive offer by
changing only the Base and Exhibit A. See PS/ Energy, Inc. v.
Exxon Coal USA, Inc., 991 F.2d 1265, 1270-71 (7th Cir. 1993).
The Court of Appeals ruled, however, that the Contract con-
tained a “latent ambiguity” resulting from “the unanticipated
event... [of] a multi-mine competing bid, which makes the
calculation of a single delivered price difficult.” 991 F.2d at
1270. It also held that the District Court erred in finding that
Exxon was required to modify the Base to reflect the value of
the non-price elements of the competitor's bid:
Exxon’s ability to limit the competition to price, and price
alone, for the kind of coal Exxon has to offer, is what
makes this a genuinely long-term contract with corre-
sponding protection for any relationship-specific capital
investments. This cannot be achieved if Exxon must
match the value of a rival's non-price terms by reducing its
Base. Moreover, the entire conception of the renegotiation
and competitive bid process as a way to mark Base to
market would fail if non-price aspects of rival bids had to
be evaluated and reflected in the Base. How can these
terms be reduced to a single price? PSI does not know, and
neither do we.
991 F.2d at 1270-71. The Court of Appeals therefore reversed
the District Court and remanded the case so that it could
consider arguments that it bypassed in light of its conclu-
sion that Black Beauty's offer was competitive’ and that
Exxon had not met it. PSI maintained that Exxon did not
renegotiate in good faith, as §7.03 requires, and that
Exxon’s ‘last offer’ was $23.266 rather than $30 because
the offer of $30 lacked some important terms.
991 F.2d at 1272. The Court of Appeals further clarified the
scope of the remand proceedings by way of its denial of Exxon’s
“Motion for Recall and Clarification of Mandate”:
7 mn | -
A-20
The language in the opinion was designed to focus the
attention of the parties and the district judge on a single
ultimate question: what price will be effective as the Base
until the next reopening? Whether the contract itself
remains in force is an issue the panel fully considered and
resolved. We wrote: “Under §7.03 [of the contract] the
parties must proceed during 1993-97 using Exxon’s ‘last
offer’.” Exxon’s bid of $30 per ton might be deemed not the
“last offer” either because Exxon acted in bad faith in
making that bid or because its offer omitted material
terms; in either event $23.266 would become the “last
offer.”
PSI Energy, Inc. v. Exxon Coal USA, Inc., No. 93-1088, slip
op. at 2 (7th Cir. July 12, 1993).
In deference to the Court of Appeals’ well-reasoned instruc-
tions, this Court held a hearing on July 28, 1993, to consider
whether Exxon renegotiated in good faith and whether
Exxon's $30 offer omitted any material terms. Having heard
and considered the evidence, the Court hereby finds that
Exxon failed to renegotiate in good faith as §7.03 requires and
that its offer of $30 was incomplete. The Court accordingly
enters the following findings of fact and conclusions of law.
FINDINGS OF FACT
Introduction
1. Plaintiff PSI is an Indiana corporation having its prin-
cipal place of business in Plainfield, Indiana.
2. Defendant Exxon Corporation is a New Jersey corpora-
tion having its principal place of business in a state other than
Indiana. Defendant Exxon Coal USA, Ine. is a Delaware cor-
poration having its principal place of business in a state other
than Indiana. Exxon Coal is a subsidiary of the Exxon Corpo-
ration. Exxon Coal USA, Inc., and Exxon Corporation are
hereinafter referred to collectively as “Exxon”.
3. The amount in controversy in this action exceeds
$50,000.00, exclusive of interest and costs.
A-21
4. On April 26, 1974, PSI, which was then known as Public
Service Company of Indiana, Inc., and The Carter Oil Com-
pany (“Carter”) signed a long-term Coal Sale and Purchase
Agreement (the “Contract”). Pursuant to the Contract, PSI
agreed to purchase, and Carter agreed to supply, certain quan-
tities of coal each year.
5. The Contract was assigned by Carter to the Monterey
Coal Company (“Monterey”).
6. Exxon Coal USA, Inc. is the successor by merger to the
interests of Monterey.
The Contract
7. On February 6, 1984, the parties entered into a Contract
Modification (“Modification”), which included revisions to Arti-
cle VII of the Contract. Article VII is otherwise known to the
parties as the “reopener’”.
8. Article VII of the Contract, as modified, provides:
7.01 The Price of coal delivered hereunder shall be com-
puted from a Base of $11.07 per ton, hereafter called the
“Base”, and shall be determined by adding to or deducting
from the Base appropriately for each price adjustment
factor listed in Exhibit “A” attached hereto and as a part of
this Agreement, and in accordance with the adjustment
procedures there stated. The price as so determined shall
be the basis for computing the compensation for devia-
tions in the gross calorific value as provided in Article X.
7.02 Price Renegotiation. The Base specified above shall
be subject to renegotiation as provided in this Article,
with the next new Base to be effective as of January 1,
1993; and, if this Agreement continues in effect to the
successive times herein specified, said Base (and any coal
price agreed to pursuant to any renegotiation or com-
petitive offering as provided for herein) shall again be
subject to renegotiation, effective as of the start of the
16th contract year, and the start of the 21st contract year,
all in the manner herein provided. For purposes of this
A-22
Article, the first contract period started January 1, 1978,
and ended December 31, 1982; the second contract period
started January 1, 19838, and ends December 31, 1987; the
third contract period starts January 1, 1988, and ends
December 31, 1992; the fourth contract period starts Jan-
uary 1, 1993, and ends December 31, 1997; and the fifth
contract period starts January 1, 1998, and ends
December 31, 2002. For purposes of this Article, the
calendar year 1978 shall be deemed the first contract year.
7.03 Either party may require renegotiation of the Base
by giving to the other, at any time in the first thirty (30)
days of the fourth year of any contract period except the
second contract period, written notice of its desire to do
so. Promptly after the giving of such notice, the parties
will commence negotiations to agree upon a new Base to
be effective as of commencement of the next contract
period. Each party covenants with the other to partici-
pate in such negotiations in a good faith effort to reach
agreement. If the parties are unable to reach agreement,
BUYER will accept SELLER’s last offer or present
SELLER with a firm, written offer which it has received
from another supplier, which it is willing to accept, for the
supply of coal called for under the remaining term of this
Agreement (herein referred to as a “competitive offer”). It
shall also provide SELLER with documentary proof of
such offer, and permit SELLER to examine all support-
ing data and information submitted with the offer.
SELLER shall have the right to meet such competitive
offer.
If, by the one hundred and eightieth day preceding the
end of the contract period in which notice of price
renegotiation was given, the parties have agreed upon a
new Base, appropriate changes shall be made to the
adjustment factors provided in Exhibit “A”. The Price of
coal effective at the commencement of the next contract
period shall be computed from the new Base adjusted
under the provisions of Exhibit “A” from the reference
date of the new Base. If, by such time, the parties have not
reached agreement upon a new Base and SELLER
4
4
NE NEE Me Sn a ee a
A-23
declines to meet a competitive offer submitted by
BUYER pursuant to the above provisions, this Agree-
ment shall terminate at the end of the contract period in
which notice of price renegotiation was given, or at
BUYER’ election, at the end of the temporary continu-
ance of deliveries as provided for in Section 7.04.
7.04 Ifin any such renegotiation of Base, the parties fail
to reach agreement on a new Base and if SELLER
declines to meet the competitive offer, and BUYER
desires SELLER to continue delivering coal, then
SELLER agrees to continue deliveries under the terms
and conditions of this Agreement for the period of time
BUYER shall designate, but not to exceed twenty-four
(24) months beyond the current contract period. The Price
to be paid for such additional coal shall be determined
from a new Base equal to SELLER’ last Base proposed
in good faith during the negotiations, adjusted under
appropriate amendments to Exhibit “A”, from the refer-
ence date of the new Base.
7.05 It is understood and agreed that the purpose and
intent of Sections 7.01 to 7.04, inclusive, are only to pro-
vide for renegotiation of Base and Exhibit “A”, and nei-
ther party shall inject into such negotiations, as a
condition of agreement upon a new Price for the coal, any
demand or request that other terms and conditions of this
Agreement be altered.
Plaintiffs Exhibit 1.
9. The primary purpose of Article VII of the Contract is to
manage market risk. See Brister Testimony, Trial Transcript
(“Trial Tr.”) at 657-58; Veenstra Depo. I, at 22. The reopener
allows the parties to reconcile deviations in the contract price
with the prevailing market price. See Brister Testimony, Trial
Tr. at 657-58; Veenstra Depo. II, at 140. As the Court of
Appeals explained: “The possibility of a competitive offer,
which defines the current market price, propels the parties
toward agreement while ensuring that, as long as it charges no
more than the current market price, the seller continues to
A-24
receive the business. And this is what the Exxon-PSI contract
provides.” PSI Energy, 991 F.2d at 1267.
10. Under the Modification, PSI was obligated to purchase
at least 3,000,000 tons of coal annually, and Exxon was obli-
gated to supply no more than 3,300,000 tons annually, from
January 1, 1984, through December 31, 2002. See Contract,
Contract Modification at 2.
Negotiations Between Exxon and PSI
11. On January 7, 1991, pursuant to Section 7.03 of the
Contract, PSI gave written notice to Exxon of its desire to
renegotiate the Base as provided in Article VII. See Plaintiffs
Exhibit 14.
12. Exxon made its first reopener proposal to PSI on July
17, 1991, offering an undelivered price of $20.10 per ton. Subse-
quent offers by Exxon proposed higher prices. On November
26, 1991, Exxon proposed an undelivered price of $25.00 per
ton. See Plaintiffs Exhibit 35. This offer was soon withdrawn,
and on December 3, 1991, Exxon proposed a delivered price to
the Gibson Station of $29.60 per ton. See Plaintiffs Exhibit 38.
13. On April 15, 1992, Exxon Coal and PSI agreed that: (1)
their positions had become polarized and that they had been
unable to reach agreement pursuant to Section 7.03 of the
Contract; (2) PSI would submit a competitive offer along with
an Exhibit “A” to Exxon Coal as early in May, 1992, as reasona-
bly practicable; and (3) if Exxon Coal decided to meet the
competitive offer, it would do so by written notification deliv-
ered to PSI no later than 5:00 p.m., Houston time, on July 3,
1992. See Plaintiffs Exhibit 53.
14. In a letter to PSI dated April 28, 1992, Exxon Coal
presented PSI with its last offer within the meaning of Section
7.03 of the Contract. Exxon proposed a price of $30 per ton
f.0.b. Gibson Station. See Plaintiffs Exhibit 58. Exxon did not
furnish an Exhibit A with this offer. See Veenstra Testimony,
A-25
Hearing Transcript (“Hearing Tr.”), at 79. PSI subsequently
rejected Exxon’s offer.
15. By May 11, 1992, PSI had received offers from three
coal suppliers to furnish coal under the Contract. These offers
came from the Black Beauty Coal Company, Freeman Coal
Sales, and Franklin Coal Sales, see Veenstra Testimony, Trial
Tr. at 70-71, and called for the same quantity of coal as the
Contract, better quality, with penalties, lower price, and
greater delivery flexibility. See Veenstra Testimony, Trial Tr. at
76.
16. PSI employed two mining consultants, John Sabo of
Marshal] Miller & Associates and Seth Schwartz of Energy
Ventures Analysis, Inc., to evaluate the offers. Mr. Sabo is a
mining engineer, and Mr. Schwartz is an expert on fuel con-
tracts and pricing.
17. Based on the opinions of Messrs. Sabo and Schwartz,
on May 13, 1992, PSI timely submitted to Exxon the offer from
Black Beauty Coal Company as the competitive offer called for
under Section 7.03.
18. Pursuant to the parties’ memo of understanding of
April 15, 1992, Exxon had until July 3, 1992 to meet the
competitive offer.
19. On July 1, 1992, Exxon informed PSI that, based on
certain assumptions, “meeting such Black Beauty offer would
require that the new ‘Base’ (which would become effective
under Section 7.01 of the Contract on January 1, 1993) would be
$23.266 per ton.” See Plaintiffs Exhibit 77, at 2.
20. On August 13, 1992, PSI informed Exxon that in its
view, “Exxon [had] declined to meet th{e] Competitive Offer”
and that “PSI hereby notifies Exxon that it does not elect to
receive any temporary deliveries after December 31, 1992.
...” Defendant’s Exhibit 250.
A-26
The Coal Market
21. Coal is not a fungible resource. Its value to a utility
depends on several defining characteristics which render
unique any given quantity of coal. These include sulfur, BTU,
ash and water content; ash fusion temperature; hardness; and
delivery factors. See Veenstra Testimony, Trial Tr. at 13-26.
22. The coal supplied by Exxon under the Contract has
come primarily from Exxon’s Monterey No. 2 Mine, located in
Clinton County, Illinois, which is part of the Illinois coal basin.
23. On the average, coal produced at the Monterey No. 2
Mine and delivered to PSI yields on combustion 6.2 pounds of
sulfur dioxide per million BTU’s (#SO./MMBTU). Coal from
the Monterey No. 2 Mine is considered “high sulfur coal.”
24. The Clean Air Act (CAA) requires all states to formu-
late an implementation plan (a “SIP”) for national primary and
secondary ambient air quality standards. See 42 U.S.C. §7410.
25. In 1988, pursuant to the CAA, the State of Indiana
adopted a SIP for Gibson County that restricted PSI’s sulfur
dioxide emissions at the Gibson generating station.
26. Beginning January 1, 1992, the Gibson SIP limited SO.
emissions to 3.57 pounds per million BTU, and futher reduces
those emissions to 3.13 pounds of SO./MMBTU on January 1,
1994. See Veenstra Testimony, Trial Tr. at 16.
27. In 1990, amendments were passed to the CAA, which
further affected the ability of PSI and other electric utilities to
burn high sulfur coal. The amendments progressively reduce
the amount of sulfur dioxide which utilities may emit. Specifi-
cally, the CAA imposes system-wide emissions limits of 2.5
pounds of SO./MMBTU starting January 1, 1995, see 42
U.S.C.A. §765l¢e (West Supp. 1992), and 1.2 pounds of SO./
MMBTU starting January 1, 2000, see 42 U.S.C.A. §7651d
(West Supp. 1992).
28. As the cost to utilities of burning high sulfur coal has
increased, the market value of high sulfur coal has decreased
;
=
<7
a2 a —— >. pom ri es a
A-27
significantly. See Veenstra Testimony, Trial Tr. at 21; Chancel-
lor Testimony, Trial Tr. at 264-65. Coal from the Illinois basin
has not been immune from these market forces; the price of
coal from the Illinois basin has dropped steadily over the last
five years, especially high sulfur coal. See Chancellor Testi-
mony, Trial Tr. at 265; Schwartz Testimony, Hearing Tr., at 19;
Plaintiffs Exhibit 202, Appendix B, at 1; Plaintiffs Exhibit
202, Appendix C, at 1.
29. During 1991-1992, the market price for high-sulfir coal
from the Illinois basin was approximately $17 to $20 a ton. See
Veenstra Testimony, Hearing Tr., at 55.
30. The market for large tonnages of high sulfur coal is
virtually non-existent. See Raw] Depo. at 157.
Exxon’s Good Faith
31. In its earlier entry, this Court specifically found the
PSI had negotiated with Exxon in good faith during 1991 and
1992. The Court did not reach the issue of Exxon’s good faith
because its findings that Black Beauty's offer was competitive
and that Exxon had not met that offer made it unnecessary to
address that issue.
32. As it entered into negotiations with PSI, Exxon knew
that the market price for its coal at the Monterey No. 2 Mine
was approximately $20 per ton. The evidence of this fact is
abundant. See, e.g., Plaintiffs Exhibit 203, at 3 (“Our current
mine price to PSI is about $32/ton. PSI believes it can purchase
coal for an equivalent of about $20/ton at No. 2 Mine. Thus, PSI
expects to dramatically lower its prices for the 5-year period
starting in 1993. We believe PSI’s assessment is in the right
range.”); Plaintiffs Exhibit 202, Appendix B, at 3 (“The sales
price is subject to renegotiation effective 1/1/93 and is expected
to drop significantly at that time as it approaches a level closer
to market. The sales price expected at that time ($20.50/ton) is
slightly less than current operating costs ($23/ton YTD July
1990).”); Plaintiffs Exhibit 202, Appendix C, at 2; Plaintiffs
A-28
Exhibit 202, Appendix D, No. 5, at 1; Plaintiffs Exhibit 205, at
2; Plaintiffs Exhibit 207, at 2; Plaintiffs Exhibit 230, at 2, 12;
Plaintiffs Exhibit 235; Plaintiffs Exhibit 266, at 1.
33. The uncontroverted documentary evidence from
Exxon’s own files establishes that they were operating on a
factual basis with respect to the market value of the coal from
the Monterey No. 2 Mine which they consistently misrepre-
sented in their dealings with PSI. See, e.g., Plaintiffs Exhibit
203, at 3 (Exxon Briefing Paper on PSI and the Monterey No. 2
Mine); Plaintiffs Exhibit 202, Appendix B, at 3 (Exxon Opera-
tions Plan); Plaintiffs Exhibit 202, Appendix C, at 2 (Exxon
“Long-Term” Plan); Plaintiffs Exhibit 202, Appendix D, No. 5,
at 1 (Exxon Marketing Analysis); Plaintiffs Exhibit 205, at 2
(Exxon Budget Memorandum); Plaintiffs Exhibit 207, at 2
(Exxon Budget Memorandum); Plaintiffs Exhibit 230, at 2, 12
(Exxon Briefing Paper); Plaintiffs Exhibit 235 (Exxon Market
Projections for Illinois High Sulfur Coal); Plaintiffs Exhibit
266, at 1 (Monterey Memo to Employees).
34. Despite what it knew about the market price for coal
from the Monterey No. 2 Mine, Exxon repeatedly advised PSI
that the market would support a price in excess of $30 delivered
to the Gibson Station. See Veenstra Testimony, Hearing Tr., at
60-61; Veenstra Testimony, Trial Tr., at 68-70; Veenstra Testi-
mony, Trial Tr., at 134-135, 136; Veenstra Testimony, Trial Tr.,
at 191-192, 200.
35. Thus, Exxon’s representations to PSI regarding the
market price of its coal were knowingly and intentionally inac-
curate. See Schwartz Testimony, Hearing Tr., at 25; Veenstra
Testimony, Hearing Tr., at 59; Veenstra Testimony, Hearing
Tr., at 109-110; Veenstra Testimony, Trial Tr., at 68-70;
Veenstra Testimony, Trial Tr., at 134-135. 136; Veenstra Testi-
mony, Trial Tr., at 191-192, 200.
36. The testimony of Wendell Ellis was in critical respects
evasive and deceptive. For instance, when asked whether
Exxon expected the market price for coal from the Monterey
A-29
No. 2 Mine to be approximately $17-$20 per ton at the start of
the next contract period, his response was: “/ would not say it
[i.e. the price of $17 to $20 per ton] represented what we
expected it to be; it represented what it could possibly be.” Ellis
Testimony, Hearing Tr., at 151 (emphasis added). Contrary to
this representation by Mr. Ellis to the Court, there is no doubt
from the documentary evidence created before and during
these negotiations and discussions with PSI, supra, that
Exxon fully expected the price of coal from the Monterey No. 2
Mine to be approximately $20 at the mine, supra. The Court is
unable to afford much credibility to the testimony of Mr. Ellis.
Exhibit A and Exxon’s $30 Offer
37. The purpose of the reopener is to renegotiate a new
Price for the Contract. See Veenstra Testimony, Hearing Tr.,
at 54. Article VII of the Contract is plainly titled, “Price and
Price Renegotiation”.
38. Exhibit A contains the price adjustment provisions
under the Contract. See Schwartz Testimony, Hearing Tr., at
15.
39. The Base and Exhibit A cumulatively define the Price
under the Contract. See Schwartz Testimony, Hearing Tr., at
15; Veenstra Testimony, Hearing Tr., at 54; see also Contract
Section 7.01.
40. It is not possible to calculate the Price under the Con-
tractwithout an accompanying Exhibit A. See Schwartz Testi-
mony, Hearing Tr., at 16; Veenstra Testimony, Hearing Tr., at
74; Veenstra Testimony, Trial Tr., at 55, 58; Plaintiffs Exhibit
241.
41. Because Exxon refused or failed to provide a proposed
Exhibit A to PSI, PSI was unable to calculate a Price for
Exxon’s coal on or after January 1, 1993, from Exxon’s $30 per
ton offer, Plaintiffs Exhibit 58. See Schwartz Testimony, Hear-
ing Tr. at 29; Veenstra Testimony, Hearing Tr., at 74; Veenstra
Testimony, Hearing Tr., at 79 and 81; Veenstra Testimony,
A-30
Hearing Tr., at 89-91; Deposition of Andrew Twadelle, at 50,
122.
42. In addition, Section 7.05 of the Contract specifically
requires that the parties renegotiate Exhibit A.
43. Throughout its negotiations with PSI, Exxon stead-
fastly refused to discuss the terms of Exhibit A. See Veenstra
Testimony, Hearing Tr., at 78; Veenstra Testimony, Trial Tr., at
58-59; Veenstra Testimony, Trial Tr., at 75. With the exception
of Exxon’s offer of $29.60, Exxon refused to furnish PSI with a
proposed Exhibit A. See Veenstra Testimony, Hearing Tr., at
75; Veenstra Testimony, Trial Tr., at 75.
44. The only Exhibit A which Exxon provided to PSI dur-
ing these negotiations did not contain a reference date of Janu-
ary 1, 1993. Rather, it pegged the escalation time period to
commence on December 1, 1991, 13 months prior to the start of
the next contract period. See Veenstra Testimony, Trial Tr., at
61. As Mr. Veenstra explained to Mr. Ellis, “|wJithout a firm
Base price effective January 1, 1993, it will be difficult for us to
solicit and compare potential competitive offers. We believe
that an offer of a firm Base price referenced and effective
January 1, 1993, is what is intended by Article VII of the
Agreement, and we repeat our request to be provided with this
number.” Defendant’s Exhibit 192.
45. The Court considers Mr. Robert Veenstra’s testimony
relating to the details of these negotiations with Exxon to be
highly credible.
46. Any finding of fact which is determined hereafter to be
a conclusion of law shall be treated as a conclusion of law and
incorporated into the conclusions of law which follow.
CONCLUSIONS OF LAW
1. The Court has subject matter jurisdiction over this
action pursuant to 28 U.S.C. §1332(a)(1).
2. The Court has personal jurisdiction over the parties.
A-31
3. Pursuant to 28 U.S.C. 1391(a), venue in this action is
proper in the Southern District of Indiana.
4. By its own terms, the Contract is to be interpreted in
accordance with the laws of the State of Indiana.
5. Under the Indiana Uniform Commercial Code, “‘Good
faith’ in the case of a merchant means honesty in fact and
observance of reasonable commercial standards of fair dealing
in the trade.” Ind. Code §26-1-2-103(B) (Burns 1992).
6. Exxon did not negotiate in good faith with PSI. Having
heard the testimony and evaluated the credibility of the wit-
nesses, it is this Court’s judgment that Exxon’s represen-
tatives were not acting with honesty in their attempts to reach
agreement with PSI, most specifically, in their assertions to
PSI respecting the market value of their coal. While the con-
cept of “taking commercial advantage of the contractual provi-
sions one has negotiated”, PS] Energy, No. 93-1088, slip op. at
2(7th Cir. July 12, 1993), is squarely within the bounds of “good
faith” bargaining under the Indiana U.C.C., Exxon exceeded
the rules of fair play when it incorporated dishonesty and
deception into its negotiating tactics. As stated previously, the
statements of Exxon’s representatives to PSI regarding the
market price of the coal from the Monterey No. 2 Mine were not
honest, and it was these statements which formed the basis for
their $30 offer. In the words of one commentator, “[dJeception
can destroy a contract’;' by intentionally interjecting material
misrepresentations of fact into the negotiations, Exxon was
not “honest in fact” as required under the Indiana U.C.C. for
“good faith” dealings.
‘Geoffrey M. Peters, The Use of Lies in Negotiation, 48 Ohio St.,
L.J. 1 (1987), citing, 12 S. Williston, A Treatise on the Law of
Contracts §1486, at 321-22 (3d ed. 1970); see generally, Robert S.
Summers, “Good Faith” in General Contract Law and the Sales
Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195, 243
(1968) (“ y acts in bad faith when, in an attempt to stall or bluff,
he pretends to dispute, not really believing in his position.”).
y
A-32
7. In reaching this conclusion concerning “good faith”, the
Court has been careful to differentiate between the manage-
ment of the Monterey Coal Company and the management of
Exxon Coal and Minerals. From all evidence available to the
_s + Court, Monterey appears to have worked very hard to have the
' No. 2 Mine in a competitive posture by the time the reopener
negotiations were in progress. See Plaintiffs Exhibit 202,
Appendix.C, at 3; Plaintiffs Exhibit 226. Unfortunately,
Exxon’s inartful and deceitful negotiating tactics only suc-
ceeded in alienating what should have been a valued customer.
8. Besides the underlying deceit in Exxon’s $30 offer to
PSI, it was an incomplete offer. The reopener in the Contract
was included so that the parties could renegotiate the Price.
Without an Exhibit A, it is impossible to calculate a Price under
the Contract. Supra. Because Exxon’s $30 offer failed to
include an Exhibit A, PSI was prevented from being able to
calculate a Price from that offer. Supra.
CONCLUSION
Exxon’s offer of $30 per ton omitted material terms and was
not made in good faith. Exxon’s “last offer” to PSI for coal from
the Monterey No. 2 Mine was therefore $23.266 per ton.
It is so ORDERED this 27th day of August, 1993.
/s/ Sarah Evans Barker
SARAH EVANS BARKER, JUDGE
United States District Court
Southern District of Indiana
Copy to:
Donald P. Bogard (2812-49)*
PSI ENERGY, INC.
1000 East Main Street
Plainfield, IN 46168
(317) 839-9611
;
;
|
2
:
4
ER a SEE ar i SV ae titanate
A-33
Hugh E. Reynolds, Jr.*
Thomas L. Davis (4423-49)
Alan S. Brown (3536-49)
LOCKE REYNOLDS BOYD & WEISELL
1000 Capital Center South
201 North Illinois Street
Indianapolis, IN 46204
(317) 237-3800
Richard Wilson
FULBRIGHT & JAWORSKI
1301 McKinney
Houston, TX 77010-3095
Robert A. Burgoyne
FULBRIGHT & JAWORSKI
801 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
David J. Beck
BECK, REDDEN & SECREST
1331 Lamar, Suite 1570
Houston, TX 77010
James K. Wilson
James J. McGowan, Jr.
Exxon Coal and Minerals Company
P.O. Box 1314
Houston, TX 77251-1314
William P. Wooden
John D. Nell
Mary Titsworth
WOODEN McLAUGHLIN & STERNER
1600 Capital Center South
201 North Illinois Street
Indianapolis, IN 46204
A-34
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
PSI ENERGY, INc.,
Plaintiff,
vs. IP92 645-C
Exxon Coat USA, INc., and
Exxon CORPORATION through
its Division Exxon Coal and
Minerals Company,
Defendants.
ee
SUPPLEMENT TO FINAL JUDGMENT ENTERED
PURSUANT TO ORDER OF REMAND
In accord with this Court’s entry issued this date, Exxon’s
offer of $30 per ton omitted material terms and was not made in
good faith. Accordingly, Exxon’s “last offer” to PSI for coal
from the Monterey No. 2 Mine was $23.266 per ton.
It is so ORDERED this 27th day of August, 1993.
/s/ Sarah Evans Barker
SARAH EVANS BARKER, JUDGE
United States District Court
Southern District of Indiana
Copy to:
Donald P. Bogard (2812-49)*
PSI ENERGY, INC.
1000 East Main Street
Plainfield, IN 46168
(317) 839-9611
A-35
Hugh E. Reynolds, Jr.*
Thomas L. Davis (4423-49)
Alan S. Brown (3536-49)
LOCKE REYNOLDS BOYD & WEISELL
1000 Capital Center South
201 North Illinois Street
Indianapolis, IN 46204
(317) 237-3800
Richard Wilson
FULBRIGHT & JAWORSKI
1301 McKinney
Houston, TX 77010-3095
Robert A. Burgoyne
FULBRIGHT & JAWORSKI
801 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
David J. Beck
BECK, REDDEN & SECREST
1331 Lamar, Suite 1570
Houston, TX 77010
James K. Wilson
James J. McGowan, Jr.
Exxon Coal and Minerals Company
P.O. Box 1314
Houston, TX 77251-1314
William P. Wooden
John D. Nell
Mary Titsworth
WOODEN McLAUGHLIN & STERNER
1600 Capital Center South
201 North Illinois Street
Indianapolis, IN 46204
A-36
United States Court-of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
JUDGMENT — WITH ORAL ARGUMENT
Date: April 15, 1993.
Before
Hon. WitiiaM J. BAurEr, Chief Judge
Hon. FRANK H. EASTERBROOK, Circuit Judge
Hon. THOMAS M. REAVLEY, Senior Circuit Judge*
No. 93-1088
PSI EnerGy, INc.,
Plaintiff-Appellee
v.
Exxon Coat USA, INnc., and
EXXON CORPORATION, through
its Division Exxon COAL
and MINERALS COMPANY,
Defendants-Appellants
Appeal from the
United States
District Court for
the Southern
District of Indiana,
Indianapolis
Division
No. 92 C 645,
Sarah Evans
Barker, Judge
Ne eee eee ee”
This case was heard on the record from the above mentioned
District Court, and was argued by counsel.
On consideration whereof, IT IS ORDERED AND
ADJUDGED by this court that the judgment of the District
Court is REVERSED, with costs, and the case is
REMANDED for further proceedings; Circuit Rule 36 shall
not apply on remand, in accordance with the decision of this
Court entered this date.
* The Hon. Thomas M. Reavley, of the Fifth Circuit, sitting by designation.
A-37
In The
United States Court of Appeals
For the Seventh Circuit
No. 93-1088
PSI ENERGY, INC.,
Plaintiff-Appellee,
v,
Exxon Coat USA, INc., and Exxon CoRPORATION,
Defendants-Appellants.
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. [P92 645-C—Sarah Evans Barker, Judge.
Arcuep Marcu 31, 1993—Decipep Aprit 15, 1998
Before BAuER, Chief Judge, EASTERBROOK, Circuit Judge,
and REAVLEY, Senior Circuit Judge.*
EASTERBROOK, Circuit Judge. PSI Energy burns coal to
supply southern Indiana with electricity. Increasingly strin-
gent environmental regulation requires PSI to limit the sulfur
dioxide emitted from its plants. To do this PSI must install
“scrubbers,” large devices that precipitate the sulfur out of the
stack gasses and leave a noxious slurry of sulfur and limestone.
High costs of removing sulfur from coal after combustion give a
competitive advantage to coal that contains less sulfur, and to
plants situated in places where the EPA permits the emission
of extra sulfur dioxide. Utilities that have not found the optimal
mix of clean coal at low prices and pollution control technology
*Hon. Thomas M. Reavley, of the Fifth Circuit, sitting by designation.
a —s .
A-38
have encountered pressure from regulatory agencies. See
Northern Indiana Public Service Co. v. Colorado West-
moreland, Inc., 667 F. Supp. 613 (N.D. Ind. 1987), affirmed
mem., 845 F.2d 1024 (7th Cir. 1988); Northern Indiana Public
Service Co. v. Carbon County Coal Co., 799 F.2d 265 (7th Cir.
1986).
Nineteen years ago PSI Energy contracted with a predeces-
sor to Exxon Coal for a 29-year supply of high-sulfur coal, some
3 million tons per year. Exxon’s coal is approximately 3.3%
sulfur, leading to 6.2 pounds of sulfur dioxide per million Btu.
The EPA has reduced allowable emissions at PSI’s Gibson
generating station (where it burns the coal Exxon supplies) to
3.57 pounds of SO, per million Btu, and by 1995 PSI must cut
these emissions to 2.5 pounds per million Btu. Complying with
these rules requires additional scrubbers or reducing the sul-
fur content of the coal to be burned. Further reductions may lie
in store, yet costly rules do not permit PSI to avoid its obliga-
tion. Under the agreement PSI must take the coal “regardless
of conditions imposed by [environmental] laws, rules or regula-
tions”. Section 16.01. PSI would like to escape its commitment
or drive down the price to recoup the cost of removing the
sulfur from the coal Exxon delivers.
The contract provides a way to do just this. The price of coal
is not fixed. It has several components: a “Base” defined as the
price F.0.B. the customer's power plant (see U.C.C. §2-319)
and a table of adjustments called “Exhibit A”. These adjust-
ments produce changes in the effective price on account of
changes in the cost of labor, transportation, and the value of
money, among other items. Other clauses of the contract pro-
vide still more adjustments. Article III reduces the price if the
coal has too much water or ash and imposes a penalty for sulfur
exceeding a defined limit. Thus the delivered price changes
frequently. But mechanical computations according to Exhibit
A and other clauses do not necessarily track the market for
coal. At five-year intervals, the parties may renegotiate the
Base and the table of adjustments. Fresh negotiation ensures
A-39
that the price in the long-term contract does not depart too far,
or for too long, from the market price. Paul L. Joskow, Price
Adjustment in Long-Term Contracts: The Case of Coal, 313.1.
& Econ. 47 (1988); Victor P. Goldberg & John R. Erickson,
Quantity and Price Adjustment in Long-Term Contracts: A
Case Study of Petroleum Coke, 30J.L. & Econ. 369 (1987). See
generally Keith J. Crocker & Scott E. Masten, Pretia Ex
Machina? Prices and Process in Long-Term Contracts, 34 J.L.
& Econ. 69 (1991); Victor P. Goldberg, Price Adjustment in
Long-Term Contracts, 1985 Wis. L. Rev. 527; Richard S. Lam-
bert, Long Term Contracts and Moral Hazard, 14 Bell J. Econ.
441 (1983). Rising costs of removing sulfur after combustion
have led to a substantial fall in the market price of high-sulfur
coal relative to low-sulfur coal. Falling prices of energy in
general also have undercut the market position of firms holding
reserves of high-sulfur coal. PSI hoped to take advantage of
both effects in renegotiating with Exxon during 1991 and 1992
for the new price to take effect on January 1, 1993. Because the
Exhibit A adjustments were increasing the delivered price of
Exxon’s coal during the 1980s, while the market price for high-
sulfur coal was eroding, PSI anticipated a substantial savings.
An opportunity to renegotiate in mid-contract poses the
question: what happens if the parties do not agree? If, for
example, the seller's last offer prevails in the event of disagree-
ment, then the seller has little reason to reduce its price to the
current market. There is a similar, though reversed, problem if
the buyer's last bid prevails. If inability to agree permits the
parties to walk away from the deal, then the arrangement is
not really a long-term contract after all. It becomes a five-year
contract with a framework for renewal on mutual consent. Yet
the parties may have strong reasons for preferring a genuine
long-term contract. A long-term contract allows each side to
make capital investments that facilitate performance, invest-
ments in goods whose useful life exceeds five years, and which
therefore may be sensible (if they are specialized in some way
to the other party’s needs) only if they can be amortized over a
longer period.
A-40
One way to drive the offers together during price renegotia-
tion, while preserving the long-term nature of the arrange-
ment, is to permit the buyer to obtain other bids while allowing
the seller to “match” these. The possibility of a competitive
offer, which defines the current market price, propels the
parties toward agreement while ensuring that, as long as it
charges no more than the current market price, the seller
continues to receive the business. And this is what the Exxon-
PSI contract provides. Section 7.03 reads:
Either party may require renegotiation of the Base by
giving to the other, at any time in the first thirty (30) days
of the fourth year of any contract period . . ., written
notice of its desire to do so. Promptly after the giving of
such notice, the parties will commence negotiations to
agree upon a new Base to be effective as of commence-
ment of the next contract period. Each party covenants
with the other to participate in such negotiations in a good
faith effort to reach agreement. If the parties are unable
to reach agreement, BUYER will accept SELLER’ last
offer or present SELLER witha firm, written offer which
it has received from another supplier, which it is willing to
accept, for the supply of coal called for under the remain-
ing term of this Agreement (herein referred to as a “com-
petitive offer”). It shall also provide SELLER with
documentary proof of such offer, and permit SELLER to
examine all supporting data and information submitted
with the offer. SELLER shall have the right to meet such
competitive offer.
If, by the one hundred and eightieth day preceding the
end of the contract period in which notice of price
renegotiation was given, the parties have agreed upon a
new Base, appropriate changes shall be made to the
adjustment factors provided in Exhibit “A”. The Price of
coal effective at the commencement of the next contract
period shall be computed from the new Base adjusted
under the provisions of Exhibit “A” from the reference
date of the new Base. If, by such time, the parties have not
reached agreement upon a new Base and SELLER
declines to meet a competitive offer submitted by
adh na, -
A-41
BUYER pursuant to the above provisions, this Agree-
ment shall terminate at the end of the contract period in
which notice of price renegotiation was given, or at
BUYER’ election, at the end of the temporary continu-
ance of deliveries as provided for in Section 7.04.
Notice that the objective of the renegotiation is to update the
Base in light of market conditions. The contract contemplates
price negotiation for an identified product, not a bid for a
different product or the reworking of the many other terms.
Coal differs in multiple dimensions, including sulfur, ash,
water, and heat content. Renegotiation or competitive bidding
on a price per ton is futile unless these attributes of quality are
held constant. To assure this, §7.05 provides:
It is understood and agreed that the purpose and intent
of Sections 7.01 to 7.04, inclusive, are only to provide for
renegotiation of Base and Exhibit “A”, and neither party
shall inject into such negotiations, as a condition of agree-
ment upon a new Price for the coal, any demand or request
that other terms and conditions of this Agreement be
altered.
Sections 7.03 and 7.05 need not mean that a competitive bid
must duplicate the Exxon-PSI arrangement. Identical terms
are impossible, given that Exxon supplies PSI with coal from a
mine in Clinton County, Illinois. Rivals will offer deliveries
from different places, and different coals necessarily will have
different sulfur, ash, water, and heat contents. What §§7.03 and
7.05 make clear, however, is that Exxon can respond to com-
petition by reducing its price without altering other features of
the arrangement. This protects both sides from the expropria-
tion of any relationship-specific capital investments. Exxon
can’t raise the price above market, and a competitive bid will
reflect the cost to other producers that have yet to make any
relationship-specific investments, so that Exxon can recover
the costs of its own investments. The matching process also
becomes simple. Just as other bidders need not duplicate
Exxon’s terms, so Exxon need not match its rivals’. Differences
A-42
in the quality of coal are handled by the terms of the original
agreement: for example, “dirtier” coal offered by a rival incurs
a penalty under Article III, enabling the parties to disregard
the sulfur content and compare the bids by looking at Base
alone.
When PSI exercised its right in 1991 to renegotiate the price
for the five-year period beginning January 1, 1993, adjust-
ments under Exhibit A had driven the delivered price of coal to
more than $37 per ton. Exxon concedes that “this was consider-
ably higher than the prevailing price for coal of comparable
quality.” Several rounds ef offers left the parties far apart. PSI
contended that a price of $17 per ton, F.0.B. Mine, would be
generous, while Exxon proposed a price of approximately $25
F.0.B. mine. At PSI’s request, Exxon made a final Base offer:
$30 F.O.B. the Gibson station, in the process updating all of the
Exhibit A adjustments so that as of January 1, 1993, this would
be the full delivered price for the coal.
Concluding that it could do better, PSI solicited competitive
offers. Its call for bids invited other suppliers to fix their own
terms. PSI did not ask them to come as close as possible to the
provisions of the Exxon-PSI contract, limiting the competition
to price. It did not ask them to submit alternative bids, one
using the terms they preferred and the other using the Exxon-
PSI agreement as a model. Not surprisingly, the bids PSI
received differed dramatically in both price and structure from
those embodied in the Exxon-PSI agreement. Of the three bids
it received, PSI favored that submitted by Black Beauty Coal
Company. Although Black Beauty offered high-sulfur coal, its
sulfur dioxide emission of 5.0 to 6.2 pounds per million Btu is
less than that of Exxon’s coal. In just about every other way,
too, Black Beauty’s offer is superior to the Exxon-PSI contract:
lower price, more flexible delivery terms, a more lenient force
majeure clause, and so on. Because Black Beauty’s mines are
closer to PSI’s generating stations, transportation costs also
would fall. One catch is hidden in this last sentence: Black
Beauty’s mines. Instead of offering approximately 3 million
A-43
tons of coal annually from one mine, Black Beauty offered
approximately 1 million tons of coal annually from each of the
three mines. Three different coal seams, in three different
locations, with three different price-quality combinations.
Under the Black Beauty offer, each mine’s coal has a separate
“starting price” F.O.B. mine, with adjustments. PSI may des-
ignate any of the three mines as the source for deliveries to a
number of its generating stations.
Flexibility in designating sources would enable PSI to cur-
tail its transportation costs and to mix Black Beauty’s coal with
low-sulfur coal at several stations, rather than burning every-
thing at Gibson, as it had been doing with Exxon’s deliveries.
But the multi-mine offer posed a problem for Exxon. How was
it to match this amalgam of price-quality-delivery combinations
with a single Base price, as §§7.03 and 7.05 contemplate? PSI
did not furnish Exxon with an estimate of the equivalent Base
that would meet Black Beauty’s offer. Instead it demanded that
Exxon duplicate all terms of the Black Beauty bid. Exxon,
which interpreted the contract to require (and allow) a single
Base price, F.0.B. the Gibson station, countered that Black
Beauty's multi-price offer was not a “competitive offer” within
the meaning of §7.03. The only way to make that offer com-
petitive, Exxon insisted, would be to construct a weighted
price. This it did, as follows:
Mine Annual Percentage F.O.B. Gibson | Weighted Price
Tonnage Weight Price
Columbia 1,100,000 366667 $19.50/ton $7.150/ton
Miller Creek 800,000 240 ST 26.75 $7.133
Viking 1,100,000 366667 24.50) $8. 983
Weighted Average Price F.0.B. Gibson $23.266 ra
Each of Black Beauty’s three mines had a minimum and max-
imum annual tonnage under the proposed contract. Exxon
A-44
started with the minimum annual tonnage from each mine. The
“percentage weight” is this number divided by 3 million tons.
Exxon added freight from each mine to the Gibson power
station to derive that mine’s F.0.B. Gibson price. Multiplying
this price by the percentage weight yields a weighted price;
adding these three produces the expected price per ton F.O.B.
Gibson. (Using the mean or maximum tonnages from each
mine would have produced a slightly higher price F.O.B. Gib-
son.) Exxon told PSI that it would be willing to match this
price, $23.266 per ton, and to adopt Black Beauty's Exhibit A
adjustments verbatim, if the Black Beauty bid were indeed a
“competitive offer.”
PSI denied that Exxon’s calculation was correct but offered
no alternative. Instead it commenced this diversity suit, seek-
ing a declaratory judgment that Exxon has failed to meet a
competitive bid, so that the contract terminates on January 1,
1993. PSI insisted that Exxon could match the Black Beauty
offer only by matching the delivered price to each of its gener-
ating stations, and by making additional concessions tracking
Black Beauty's favorable non-price terms (such as the generous
force majeure clause). Exxon filed a counterclaim seeking a
declaration that the Black Beauty offer is not a “competitive
offer” and that, if it is, a Base of $23.266 per ton matches the
offer. Exxon asked the district court to declare that Base for
the period beginning on January 1, 1993, is its offer of $30 plus
an updated Exhibit A. PSI rejoined that the “real” last offer
was $23.266, not $30. On one thing the parties agreed: Indiana
law governs.
The district court held an expedited trial. Ruling that Black
Beauty's bid is a “competitive offer” that Exxon had not met,
the court issued the requested declaratory judgment on
December 28, 1992. The court concluded that the Exxon-PSI
agreement is not ambiguous, that a rival bid need not incorpo-
rate the material terms of the Exxon-PSI agreement to be a
“competitive offer”, but that Exxon can meet such an offer by
adjusting its Base price alone. That is, the court rejected PSI’s
ed ee ee ee ee ee
Ce
A-45
argument that Exxon must duplicate all of the rival’s non-price
terms. Nonetheless, the court concluded, in order to match an
offer containing valuable non-price concessions, Exxon must
“offset non-base related concessions in the competitive offer
with corresponding reductions on the Base.” Because Exxon
had not done this, and because it had not afforded PSI delivery
flexibility that would lead to reduced transportation costs,
$23.266 per ton did not match the value of Black Beauty’s offer
to PSI, and the contract terminated. We accelerated Exxon’s
appeal.
We are less certain than the district court that the contract is
unambiguous. Exxon offered one reading, PSI another, and
the district judge rejected both, reading the agreement in a
way no one had suggested. This implies a latent ambiguity—a
problem that becomes apparent only when an event that the
parties did not contemplate occurs. See Amoco Oil Co. v.
Ashcraft, 791 F.2d 519, 521 (7th Cir. 1986); Ohio Casualty
Group v. Gray, 746 F.2d 381, 383 (7th Cir. 1984) (both discuss-
ing Indiana law). That unanticipated event is a multi-mine
competing bid, which makes the calculation of a single deliv-
ered price difficult. A court encountering a latent ambiguity
should try to reconstruct “how the parties would have dealt
with the contingency had they made specific provision for it.”
Amoco, 791 F.2d at 521. The kinds of extrinsic evidence the
parties offered—such as PSI’s internal planning documents
from the 1980s and that firm’s submissions to the state elec-
tricity regulatory commission between 1988 and 1990—are not
helpful in addressing that question. Instead, when the lan-
guage of the contract runs out, we must try to understand the
function of the language and complete the agreement in light of
the parties’ mutual objectives.
Section 7.03, which establishes the competitive offer pro-
cedure, does not specify the allowable contents of an outside
bid. Like the district court, we believe that a “competitive
offer” cannot be limited to one duplicating the Exxon-PSI
agreement and changing only the Base price plus Exhibit A.
A-46
Duplication is impossible, if only because another supplier's
coal will come from a mine other than Monterey No. 2 in
Clinton County. Article II] of the Exxon-PSI contract, coupled
with Exhibit A, provides automatic adjustments for the most
common quality veriables. If another producer's coal has more
ash, or a different quantity of sulfur, or a different point of
origin, the allowance can be read off the contract. Each party's
Base bid will capture the effects of these variances.
Article III was written to penalize excess ash, water, sulfur,
and the like. Thus if a competitor's coal is cleaner than Exxon’,
or burns better, there is no comparable adjustment. Other
clauses, such as Article XI on force majeure, do not contain
price adjustments of any kind. This means that a rival’s bid can
be superior, from PSI’s perspective, even at the same price per
ton Exxon proposes to charge. An effort to obtain the max-
imum value from other offers is what led PSI to argue that any
bid, even one with substantially different terms and multiple
prices, is a “competitive offer” that Exxon may “meet” only by
matching the rival’s terms as well as its price. Anything else
diminishes the power of competition.
In deciding whether Black Beauty's offer was competitive
within the meaning of §7.03, it is helpful to consider how, under
§7.05, Exxon responds. All agree that under §7.05 Exxon need
not renegotiate with PSI anything other than Base and Exhibit
A. That is what §7.05 says, describing “the purpose and intent
of Sections 7.01 to 7.04, inclusive”. As we read this contract,
the competitive offer process established by §7.03 is an integral
part of price renegotiation—the potential for competition is the
engine driving renegotiation, and by meeting a rival’s offer
Exxon agrees to a renegotiated price. Exxon and PSI agreed
at the outset that they would be better off with a long-term
contract, including some insulation from the full vigor of com-
petition during the next three decades, than with a short
contract followed by an entirely fresh competition for the busi-
ness. Exxon’s ability to limit the competition to price, and price
alone, for the kind of coal Exxon has to offer, is what makes this
A-47
a genuinely long-term contract, with corresponding protection
for any relationship-specific captial investments. This cannot
be achieved if Exxon must match the value of a rival's non-price
terms by reducing its Base. Moreover, the entire conception of
the renegotiation and competitive bid process as a way to mark
Base to market would fail if non-price aspects of rival bids had
to be evaluated and reflected in the Base. How can these terms
be reduced to a single price? PSI does not know, and neither do
we. This is why PSI argued in the district court that Exxon
must match the terms themselves, and not offer price conces-
sions derived from the value of the non-price terms. Where this
leads us, however, is agreement with the district court that
$7.05 entitles Exxon to match a “competitive offer” by chang-
ing its Base and Exhibit A, without matching non-price ele-
ments of the rival’s bid.
This understanding of what Exxon must do to match an offer
implies limits on the content of a “competitive offer.” An offer
may be “competitive” although the non-price terms differ in
some material respects from the terms of the Exxon-PSI con-
tract, but that one indispensible element of a “competitive
offer” is a price that can be matched by a single Base. Black
Beauty quoted three starting prices, not one, and with multi-
ple potential adjustments. This is not a “competitive offer”
because it cannot be matched by a single Base. Exxon tried to
derive a single equivalent from Black Beauty’s offer. By insist-
ing that this conversion was inaccurate—indeed, that a conver-
sion to a single price was impossible and irrelevant—PSI dis-
qualified the Black Beauty bid from treatment as a “com-
petitive offer.” Exxon did not need to match what could not be
matched. Under §7.03 the parties must proceed during 1993-97
using Exxon’s “last offer”.
Although not strictly necessary, it is prudent to resolve the
parties’ dispute about Exxon’s basing point. PSI observes that
the agreement does not limit deliveries to the Gibson plant,
although it concedes that with the exception of a single ship-
ment all of Exxon’s coal has gone to Gibson. PSI may instruct
A-48
Exxon to deliver coal to any of its plants. Application of Exhibit
A leads to an automatic price adjustment: if delivery to this
other plant is more costly than delivery to Gibson, Exxon adds
the difference in freight; if delivery is less costly, Exxon
deducts the difference. That PSI can select a designation of its
choice does not imply that Exxon must quote multiple base
prices. The agreement contemplates one Base, with adjust-
ments for higher or lower freight made through Exhibit A.
Exxon is entitled to use Gibson as the basing point for that
single Base, and for purposes of meeting another bid. Section
6.01 could not be clearer: “Coal shall be delivered to BUYER
by SELLER, F.0.B. BUYER'’s Gibson Power Plant, or other
points in Indiana which BU YER designates.” Because there is
only one Base, the price must be F.O.B. Gibson. PSI has never
asked Exxon to change the (sole) Base to a station other than
Gibson. Quite the contrary, PSI instructed Exxon to quote, as
its “last offer”, a single Base F.O.B. Gibson, with an updated
Exhibit A.
One final comment is apprepriate. We have reasoned back-
ward, from the matching process to a definition of a “com-
petitive offer”, on the assumption that all of the non-price
terms in another bid would be more favorable to PSI. Suppose
it were the other way around—for example, that the rival’s bid
called for PSI to pay for the draglines and other equipment, in
exchange for which the rival would reduce its price dramat-
ically. By matching the rival’s price, Exxon would be swallow-
ing the value of PSI’s concession—a concession PSI extended
only to the rival, not to Exxon. Such a possibility leads to the
conclusion that a bid is not a “competitive offer” unless all of the
terms are at least as favorable to PSI as the terms in the
Exxon-PSI agreement. Black Beauty’s bid omits any provision
comparable to Article VIII of the Exxon-PSI contract, entitled
“price relief for economic hardship”. Exxon submits that this
omission disqualifies the Black Beauty bid. Our approach
makes an answer to this contention unnecessary, but it should
be apparent that in the round of renegotiation preceding the
final five-year period (which begins January 1, 1998) a rival bid
Ne
A-49
inferior to Exxon’s in any material respect runs a substantial
risk of being deemed not a “competitive offer”.
The judgment is reversed, and the case is remanded so that
the district court may consider arguments that it bypassed in
light of its conclusion that Black Beauty's offer was “com-
petitive” and that Exxon had not met it. PSI maintained that
Exxon did not renegotiate in good faith, as §7.03 requires, and
that Exxon’s “last offer” was $23.266 rather than $30 because
the offer of $30 lacked some important terms. It would be
inappropriate for us to address these questions without the
benefit of the district court’s views. Circuit Rule 36 shall not
apply on remand.
A true Copy:
Teste:
Clerk of the United States Court of
Appeals for the Seventh Circuit
United States Court of Appeals
For the Seventh Circuit
Chicago, Illinois 60604
May 20, 1993.
Before
Hon. WiLuiam J. BAvrER, Chief Judge
Hon. FRANK H. EAstTeRBROOK, Circuit Judge
Hon. THOMAS M. REAvLeEy, Senior Circuit Judge*
PSI ENerGy, INc., Appeal from the
Plaintiff-Appellee, United States
District Court for
No. 93-1088 v. the Southern
District of Indiana,
Exxon Coat USA, INc., and Indianapolis
EXXON CORPORATION, Division.
No. IP92 645-C
Sarah Evans
Barker, Judge.
Defendants-Appellants.
Ne meee eee ee”
Order
Defendants-Appellants filed a petition for rehearing on April
26, 1993, and Plaintiff-Appellee filed a petition for rehearing on
April 29, 1993. All of the judges on the panel have voted to deny
rehearing. The petitions for rehearing are therefore DENIED.
Any proceedings after remand will return to this panel.
Counsel should alert the clerk when filing their briefs.
* Hon. Thomas M. Reavley, of the Fifth Circuit, sitting by designation.
a re Toe
A-51
In The
United States Court of Appeals
For the Seventh Circuit
No. 93-1088
PSI Eneray, INc.,
Plaintiff Appellee,
/
Exxon Coat USA, INc., and Exxon CORPORATION,
Defendants Appella nits
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Divisior
No. [P92 645-C-—-Sarah Evans Barker, / ude
(on Motion for Recall and Clarification of Mandate
Before BAUER, Chief Judge, EASTERBROOK, Circuit Judge,
and Reaviey, Senior Circuit Judge.*
Per Curiam. Our opinion in this case reversed the district
court's judgment and remanded “so that the district court may
consider arguments that it bypassed in light of its conclusion
that Black Beauty's offer was ‘competitive’ and that Exxon had
not met it. PSI maintained that Exxon did not renegotiate in
good faith, as §7.03 requires, and that Exxon’s ‘last offer’ was
$23.266 rather than $30 because the offer of $30 lacked some
*Hon. Thomas M. Reavley, of the Fifth Circuit, sitting by designation
A-52
important terms.” Exxon has asked us to recall and clarify our
mandate because PSI has understood this direction as autho-
rization to continue litigating its claims that it is not obliged to
accept deliveries from Exxon during 1993-97, and Exxon inter-
prets an order of the district court as inviting such an argument
at a hearing scheduled for July 28, 1993.
The language in the opinion was designed to focus the atten-
tion of the parties and the district judge on a single utlimate
question: what price will be effective as the Base until the next
reopening? Whether the contract itself remains in force is an
issue the panel fully considered and resolved. We wrote:
“Under §7.03 [of the contract] the parties must proceed during
1993-97 using Exxon’s ‘last offer’.” Exxon’s bid of $30 per ton
might be deemed not the “last offer” either because Exxon
acted in bad faith in making that bid or because its offer omitted
material terms; in either event $23.266 would become the “last
offer.” Nothing in our opinion invited or allowed the parties to
continue litigating the existence of Exxon’s obligation to
deliver, and PSI’s obligation to take and pay for, the coal during
the period before the next price reopening. If, as Exxon states
(and PSI does not deny), PSI is refusing to accept deliveries,
then the proceedings on remand must be enlarged to deter-
mine the damages PSI owes for breach of contract.
PSI's apparent belief that it has additional evidence does not
justify a general enlargement of the issue on remand. Once the
appellate court has spoke, a district court is free to revisit a
subject only on account of an intervening change of law (none
comes to mind) or fraud on the court. The sort of evidence PSI
mentions does not fall into the latter category; indeed we do not
see its relevance to any issue open on remand. PSI apparently
believes that Exxon’s obligation to negotiate “in good faith” is
an obligation to reduce its price without prodding. Yet the
Uniform Commercial Code defines “good faith” as “honesty in
fact in the conduct or transaction concerned.” UCC §1-201(19).
An obligation to negotiate in good faith is not an obligation to be
kind to one’s trading partner or to refrain from taking commer-
A-53
cial advantage of the contractual provisions one has negotiated.
See Kham & Nate’s Shoes No. 2 v. First Bank of Whiting, 908
2d 1351 (7th Cir. 1990). Nothing we have seen suggest that
the contractual reference to “good faith” has a meaning other
than the one specified by the UCC.
Although PSI seriously misreads our opinion, Exxon has not
persuaded us that the district court also misreads it. That
court's order permits the parties to introduce additional evi-
dence and make arguments limited to: “whether Exxon partici-
pated in negotiations in good faith toward reaching an
agreement and whether its ‘last offer’ was the $23.266 amount
rather than the $30 amount.” We are confident that the district
court will carry out this court’s mandate and accordingly deny
Exxon's motion.
A-54
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
PSI Enerey, INc.,
Plaintiff,
vs. IP92 645-C
Exxon Coat USA, INc., and
EXXON CORPORATION through
its Division Exxon CoAL AND
MINERALS COMPANY,
Defendants.
ee
AMENDED ENTRY NUNC PRO TUNC
On December 28, 1992, the Court issued its Entry and Judg-
ment in the above named action. The parties have since moved
the Court to amend the Entry and Judgment by: (1) expressly
granting or denying the relief requested in Exxon Coal’s
Amended Counterclaim; (2) expressly granting or denying
PSI's request for a declaration that Exxon be enjoined from
taking or seeking any action, at law, in equity, or otherwise, to
prevent PSI Energy from accepting and executing a new
agreement for the supply of coal under the Agreement; and (3)
changing the Entry at page 23, line 19 to read “The competitive
offer must be one that PSI is ‘willing to accept’. . .” See Joint
Motion for Amended Judgment and Amended Entry, at %6.
The parties also advise the Court that, contrary to what is
stated in footnote one (1) of the Court’s Entry, they “did not
intend, by their stipulation, to limit the issues for decision and
intended for the Court to proceed to rule on all issues presented
by the Complaint and Amended Counterclaim. The stipulation
was intended only to obviate the necessity of filing any further
claims or pleadings.” /d. at 43.
A-55
Having considered the parties’ requests, the Court hereby
amends its Entry as follows:
(1) Footnote one (1) on page two (2) of the Entry is deleted;
(2) Lines 18-19 on page 23 of the Entry are amended to
read: “The competitive offer must be one that PSI is ‘willing to
accept’... ;
(3) The following language is added to the end of the single
paragraph appearing on page 25 of the Entry: “The relief
requested in Exxon’s Amended Counterclaim is DENIED.
PSI's request for a declaration that Exxon is prohibited from
taking any action, at law, in equity, or otherwise, from enjoin-
ing or preventing or seeking to enjoin or prevent, PSI Energy
from accepting and executing a new agreement for the supply
of coal under the Agreement is DENIED for the reason that
such relief was not supported by the evidence adduced at
trial.”!
(4) An Amended Judgment shall issue containing the fol-
lowing language: “The relief requested in Exxon’s Amended
Counterclaim is DENIED. PSI’s request for a declaration that
Exxon is prohibited from taking any action, at law, in equity, or
otherwise, from enjoining or preventing or seeking to enjoin or
prevent, PSI Energy from accepting and executing a new
agreement for the supply of coal under the Agreement is also
DENIED.”
It is so ORDERED this 7th day of January, 1993 nune pro
tunc to December 28, 1992.
s/ Sarah Evans Barker
SARAH EVANS BARKER, JUDGE
l’nited States District Court
Southern District of Indiana
Any interference with or violation of the Court’s Judgment. as amended
would, of course, be actionable as contempt, however
A-56
Copy to:
Donald P. Bogard (2812-49)*
“PSI ENERGY, INC.
1000 East Main Street
Plainfield, IN 46168
(317) 839-9611
Robert F. Zoccola (1492-49)*
Michael A. Bergin (2703-49)
Thomas L. Davis (4423-49)
Alan S. Brown (3536-49)
LOCKE REYNOLDS BOYD & WEISELL
1000 Capital Center South
201 North Illinois Street
Indianapolis, IN 46204
(317) 237-3800
Richard Wilson
FULBRIGHT & JAWORSKI
1301 McKinney
Houston, TX 77010-3095
Robert A. Burgoyne
FULBRIGHT & JAWORSKI
801 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
David J. Beck
BECK, REDDEN & SECREST
1331 Lamar, Suite 1570
Houston, TX 77010
James K. Wilson
James J. McGowan, Jr.
Exxon Coal and Minerals Company
P.O. Box 1314
Houston, TX 77251-1314
William P. Wooden
John D. Nell
Julie Michaelis
WOODEN McLAUGHLIN & STERNER
1600 Capital Center South
201 North Illinois Street
Indianapolis, IN 46204
A-58
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION
PSI Eneray, INc.,
Plaintiff,
vs. 1P92 645-C
Exxon Coat USA, INc., and
EXXON CORPORATION through
its Division Exxon CoAL AND
MINERALS CoMPANY,
)
)
)
)
)
)
)
)
)
)
Defendants. )
ENTRY
The controversy in this lawsuit centers on the meaning of
certain provisions in a contract that PSI Energy, Inc. (“PSI”)
and Exxon'’s predecessor in interest entered into eighteen (18)
years ago, and that the parties modified in 1984. The contract,
as amended, in general calls for Exxon Coal to continue to
supply PSI with more than three million tons of coal annually
for the next ten years at prices that are subject to escalation.
Plaintiff PSI asks the Court to enter a declaratory judgment
that: (1) the written offer which PSI received from the Black
Beauty Coal Company (“Black Beauty”) is a “competitive offer”
within the meaning of the Agreement; (2) Exxon did not meet
the competitive offer, and therefore, the Agreement shall ter-
minate on December 31, 1992, or at PSI’s election, at the end of
the temporary continuance of deliveries as provided for in
Section 7.04 of the Agreement; and (3) Exxon is prohibited
from taking any action, at law, in equity, or otherwise, from
enjoining or preventing or seeking to enjoin or prevent, PSI
from accepting and executing a new agreement for the supply
‘
A-59
of coal under the contract.! A bench trial was conducted on -
December Ist, 2nd, 3rd, 4th, 7th and 8th, 1992. Having heard
and considered the evidence, the Court hereby GRANTS PSI’s
request for declaratory relief, and holds that the Black Beauty
offer is a “competitive offer” and that Exxon has failed to meet
that offer. The Court, accordingly, enters the following findings
of fact and conclusions of law.
Findings Of Fact
1. Plaintiff PSI is an Indiana corporation having its prin-
cipal place of business in Plainfield, Indiana.
2. Defendant Exxon Corporation is a New Jersey corpora-
tion having its principal place of business in a state other than
Indiana. Defendant Exxon Coal USA, Inc. is a Delaware cor-
poration having its principal place of business in a state other
than Indiana. Exxon Coal is a subsidiary of the Exxon Corpo-
ration. Exxon Coal USA, Inc., and Exxon Corporation are
hereinafter referred to collectively as “Exxon”.
3. The amount in controversy in this action exceeds
$50,000.00, exclusive of interest and costs.
4. On April 26, 1974, PSI, which was then known as Public
Service Company of Indiana, Inc., and The Carter Oil Com-
pany (“Carter”) signed a long-term Coal Sale and Purchase
Agreement (the “Agreement”). Pursuant to the Agrement,
PSI agreed to purchase, and Carter agreed to supply, certain
quantities of coal each year.
5. The Agreement was assigned by Carter to the Monterey
Coal Company (“Monterey”).
6. Exxon Coal USA, Inc. is the successor by merger to the
interests of Monterey.
! The Court will not address PSI’s demand for injunctive relief because the
parties have by their stipulation withdrawn that claim from these proceed-
ings at this time. See Stipulation, November 18, 1992, at {4.
A-60
7. On February 6, 1984, the parties entered into a Contract
Modification (“Modification”), which included revisions to Arti-
cle VII of the Agreement. Article VII is otherwise known to
the parties as the “reopener.”
8. Article VII of the Agreement, as modified, provides:
7.01 The Price of coal delivered hereunder shall be com-
puted from a Base of $11.07 per ton, hereafter called the
“Base”, and shall be determined by adding to or deducting
from the Base appropriately for each price adjustment
factor listed in Exhibit “A” attached hereto and as a part of
this Agreement, and in accordance with the adjustment
procedures there stated. The price as so determined shall
be the basis for computing the compensation for devia-
tions in the gross calorific value as provided in Article X.
7.02 Price Renegotiation. The Base specified above shall
be subject to renegotiation as provided in this Article,
with the next new Base to be effective as of January 1,
1993; and, if this Agreement continues in effect to the
successive times herein specified, said Base (and any coal
price agreed to pursuant to any renegotiation or com-
petitive offering as provided for herein) shall again be
subject to renegotiation, effective as of the start of the
16th contract year, and the start of the 21st contract year,
all in the manner herein provided. For purposes of this
Article, the first contract period started January 1, 1978,
and ended December 31, 1982; the second contract period
started January 1, 1983, and ends December 31, 1987; the
third contract period starts January 1, 1988, and ends
December 31, 1992; the fourth contract period starts Janu-
ary 1, 1993, and ends December 31, 1997; and the fifth
contract period starts January 1, 1998, and ends
December 31, 2002. For purposes of this Article, the cal-
endar year 1978 shall be deemed the first contract year.
7.03 Either party may require renegotiation of the Base
by giving to the other, at any time in the first thirty (30)
days of the fourth year of any contract period except the
second contract period, written notice of its desire to do
so. Promptly after the giving of such notice, the parties
A-61
will commence negotiations to agree upon a new Base to
be effective as of commencement of the next contract
period. Each party covenants with the other to partici-
pate in such negotiations in a good faith effort to reach
agreement. If the parties are unable to reach agreement,
BUYER will accept SELLER’s last offer or present
SELLER with a firm, written offer which it has received
from another supplier, which it is willing to accept, for the
supply of coal called for under the remaining term of this
Agreement (herein referred to as a “competitive offer”). It
shall also provide SELLER with documentary proof of
such offer, and permit SELLER to examine all support-
ing data and information submitted with the offer.
SELLER shall have the right to meet such competitive
offer.
If, by the one hundred and eightieth day preceding the
end of the contract period in which notice of price
renegotiation was given, the parties have agreed upon a
new Base, appropriate changes shall be made to the
adjustment factors provided in Exhibit “A”. The Price of
coal effective at the commencement of the next contract
period shall be computed from-the new Base adjusted
under the provisions of Exhibit “A” from the reference
date of the new Base. If, by such time, the parties have not
reached agreement upon a new Base and SELLER
declines to meet a competitive offer submitted by
BUYER pursuant to the above provisions, this Agree-
ment shall terminate at the end of the contract period in
which notice of price renegotiation was given, or at
BUYER’ election, at the end of the temporary continu-
ance of deliveries as provided for in Section 7.04.
7.04 Ifin any such renegotiation of Base, the parties fail
to reach agreement on a new Base and if SELLER
declines to meet the competitive offer, and BUYER
desires SELLER to continue delivering coal, then
SELLER agrees to continue deliveries under the terms
and conditions of this Agreement for the period of time
BUYER shall designate, but not to exceed twenty-four
(24) months beyond the current contract period. The Price
A-62
to be paid for such additional coal shall be determined
from a new Base equal to SELLER’ last Base proposed
in good faith during the negotiations, adjusted under
appropriate amendments to Exhibit “A”, from the refer-
ence date of the new Base.
7.05 It is understood and agreed that the purpose and
intent of Sections 7.01 to 7.04, inclusive, are only to pro-
vide for renegotiation of Base and Exhibit “A”, and nei-
ther party shall inject into such negotiations, as a
condition of agreement upon a new Price for the coal, any
demand or request that other terms and conditions of this
Agreement be altered.
Plaintiffs Exhibit i.
9. The primary purpose of Article VII of the Agreement is
to manage market risk. See Brister Testimony, Trial Tran-
script (“Tr.”) at 657-58; Veenstra Depo. I, at 22. The reopener
allows the parties to reconcile deviations in the contract price
with the prevailing market price. See Brister Testimony, Tr. at
657-58; Veenstra Depo. II, at 140.
10. Prior to the instant dispute, PSI had never solicited
competitive offers pursuant to Section 7.03.
ll. Under the Modification, PSI was obligated to purchase
at least 3,000,000 tons of coal annually, and Exxon was obli-
gated to supply no more than 3,300,000 tons annually, from
January 1, 1984, through December 31, 2002. See Agreement,
Contract Modification at 2.
12. Coal is not a fungible resource. Its value to a utility
depends on several defining characteristics which render any
given quantity of coal unique. These include sulfur, BTU, ash
and water content; ash fusion temperature; hardness; and
delivery factors. See Veenstra Testimony, Tr. at 13-26.
13. The coal supplied by Exxon under the Agreement has
come primarily from Exxon’s Monterey No. 2 mine, located in
Clinton County, Illinois, which is part of the Illinois coal basin.
A-63
14. On the average, coal produced at the Monterey No. 2
mine and delivered to PSI yields on combustion 6.2 pounds of
sulfur dioxide per million BTU’s (#SO./MMBTU). Coal from
the Monterey No. 2 mine is considered “high sulfur coal.”
15. The Clean Air Act (CAA) requires all states to formu-
late an implementation plan (a “SIP”) for national primary and
secondary ambient air quality standards. See 42 U.S.C. $7410.
16. In 1988, pursuant to the CAA, the State of Indiana
adopted a SIP for Gibson County that restricted PSI’s sulfur
dioxide emissions at the Gibson generating station.
17. Beginning January 1, 1992, the Gibson SIP limited SO,
emissions to 3.57 pounds per million BTU, and further reduces
those emissions to 3.13 pounds of SO./MMBTU on January 1,
1994. See Veenstra Testimony, Tr. at 16.
18. In 1990, amendments were passed to the CAA, which
further affected the ability of PSI and other electric utilities to
burn high sulfur coal. The amendments progressively reduce
the amount of sulfur dioxide which utilities may emit. Specifi-
cally, the CAA imposes system-wide emissions limits of 2.5
pounds of SO./MMBTU starting January 1, 1995, see 42
U.S.C.A. §765le (West Supp. 1992), and 1.2 pounds of SO,/
MMBTU starting January 1, 2000, see 42 U.S.C.A. §7651d
(West Supp. 1992).
19. As the cost to utilities of burning high sulfur coal has
increased, the market value of high sulfur coal has decreased
significantly. See Veenstra Testimony, Tr. at 21; Chancellor
Testimony, Tr. at 264-65. Coal from the Illinois basin has not
been immune from these market forces; the price of coal from
the Illinois basin has dropped steadily over the last five years,
especially high sulfur coal. See Chancellor Testimony, Tr. at
265.
20. The market for large tonnages of high sulfur coal is
virtually non-existent. See Rawl Depo. at 157.
2}. On January 7, 1991, pursuant to Section 7.03 of the
A-64
Agreement, PSI gave written notice to Exxon of its desire to
renegotiate the Base as provided in Article VII. See Plaintiffs
Exhibit 14.
22. As of May, 1991, Exxon also believed that the price that
it was charging PSI for its coal was higher than what the coal
would sell for on the open market. See Goodrich Depo. at 71.
23. Exxon made its first reopener proposal to PSI on July
17, 1991, offering an undelivered price of $20.10 per ton. Subse-
quent offers by Exxon proposed higher prices. On November
26, 1991, Exxon proposed an undelivered price of twenty-five
dollars ($25.00) per ton. See Plaintiffs Exhibit 35. This offer
was soon withdrawn, and on December 3, 1991, Exxon pro-
posed a delivered price to the Gibson Station of twenty-nine
dollars and sixty cents ($29.60) per ton. See Plaintiffs Exhibit
38.
24. On April 15, 1992, Exxon Coal and PSI agreed that: (1)
their positions had become polarized, and that they had been
unable to reach agreement pursuant to Section 7.03 of the
Agreement; (2) PSI would submit a competitive offer along
with an Exhibit “A” to Exxon Coal as early in May, 1992, as
reasonably practicable; and (3) if Exxon Coal decided to meet
the competitive offer, it would do so by written notification
delivered to PSI no later than 5:00 p.m., Houston time, on July
3, 1992. See Plaintiffs Exhibit 53.
25. Ina letter to PSI dated April 28, 1992, Exxon Coal
presented PSI with its last offer within the meaning of Section
7.03 of the Agreement. Exxon proposed a price of $30 per ton
f.o.b. Gibson Station. See Plaintiffs Exhibit 58. PSI did not
accept Exxon Coal’s offer.
26. By May 11, 1992, PSI had received offers from three coal
suppliers to furnish coal under the Agreement. These offers
came from the Black Beauty Coal Company, Freeman Coal
Sales, and Franklin Coal Sales, see Veenstra Testimony, Tr. at
70-71, and called for the same quantity of coal as the Agrement,
better quality, with penalties, lower price, and greater delivery
A-65
flexibility. See Veenstra Testimony, Tr. at 76.
27. PSI employed two mining consultants, John Sabo of
Marshall Miller & Associates, and Seth Schwartz of Energy
Ventures Analysis, Inc., to evaluate the offers. Mr. Sabo is a
mining engineer, and Mr. Schwartz is an expert on fuel con-
tracts and pricing.
28. In terms of the Black Beauty offer, the objective of the
Marshall Miller study was “to determine if BBCC [Black
Beauty Coal Company] has the resources and capability to
produce the quantity and quality of coal as bid, in addition to
meeting current coal supply contrary commitments.” See
Plaintiffs Exhibit 61, Marshall Miller & Associates Report, at
1. Marshall Miller concluded that “BBCC is a viable operation
and has the resources and capability to provide the quantity
and quality of coal as bid [to PSI] in addition to meeting its
current supply contract obligations.” 7D. at 6; see also Sabo
Testimony, Tr. at 424.
29. Mr. Schwartz's analysis of the three offers was com-
parative:
In my opinion, all three offers received by PSI would
qualify as “competitive offers” under Section 7.03 of the
Agreement. All three offers are firm and in writing. All
three suppliers are large producers with the reserves and
the production capacity to perform the proposed contract.
The coal quality specified in the three offers is generally
equal to or superior to the quality specified in the Exxon
Agreement. . . . In my opinion, considering all factors,
the Black Beauty offer is the best offer for PSI, and should
be submitted to Exxon as the “competitive offer”.
Plaintiffs Exhibit 61, Energy Ventures Analysis Report at 2.
30. Mr. Schwartz advised PSI that Exxon’s $29.60 offer
was not competitive. See Schwartz Testimony, Tr. at 449.
31. Mr. Schwartz advised PSI that Black Beauty had the
financial reserves to compensate PSI if they were to default.
See Schwartz Testimony, Tr. at 461-2.
A-66
32. The analyses of Marshall Miller and Energy Ventures
Analysis were forwarded to Exxon. See Veenstra Testimony,
Tr. at 89.
33. Based on the opinions of Messrs. Sabo and Schwartz,
on May 13, 1992, PSI timely submitted to Exxon the offer from
Black Beauty Coal Company as the competitive offer called for
under Section 7.03.
34. Pursuant to the parties’ memo of understanding of
April 15, 1992, Exxon had until July 3, 1992 to meet the
competitive offer.
35. On July 1, 1992, Exxon informed PSI that, based on
certain assumptions, “meeting such Black Beauty offer would
require that the new “Base” (which would become effective
under Section 7.01 of the Agreement on January 1, 1993) would
be $23.266 per ton.” See Plaintiffs Exhibit 77, at 2.
36. On August 13, 1992, PSI informed Exxon that in its
view, “Exxon [had] declined to meet th{e} Competitive Offer”
and that “PSI hereby notifies Exxon that it does not elect to
receive any temporary deliveries after December 31, 1992.
...” Defendant’s Exhibit 250.
37. Black Beauty believes that it can supply the coal as
described in its offer. See Chancellor Testimony, Tr. at 288, 325.
38. PSI has informed Black Beauty that it is willing to sign
the Black Beauty offer. See Chancellor Testimony, Tr. at 325.
39. PSI presented the Black Beauty offer to Exxon. See
Veenstra Testimony, Tr. at 88.
40. The cost to PSI to purchase coal furnished pursuant to
the Black Beauty offer is less than what PSI would have to pay
to Exxon based on its offer of $23.266 per ton. See Plaintiffs
Exhibit 61; Veenstra Testimony, Tr. at 101-105.
41. PSI believes that the Black Beauty offer provides more
value to PSI than does Exxon’s offer. See Veenstra Testimony,
Tr. at 153-54.
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42. Exxon believes that Section 7.05 of the Agreement
prevents extending the scope of the reopener beyond reevalua-
tion of the Base. See Brister Testimony, Tr. at 710-11.
43. PSI believes that Section 7.05 is not applicable to any
competitive offer submitted pursuant to Section 7.03, but
instead applies strictly to the “renegotiation” between PSI and
Exxon as outlined in Section 7.03. See Veenstra, Depo. II at
44. The parties have differing views concerning what con-
stitutes a “comparative offer” under Section 7.03. Exxon’s posi-
tion is that, with the exception of the Base, any competitive
offer must have substantially the same terms as the Agree-
ment. See Brister Testimony, Tr. at 717. In addition, “Exxon
Coal contends that for PSI to submit a ‘competitive offer’ to
Exxon Coal, PSI is required to provide an offer which specifies
a new ‘Base,’ determined on a delivered basis to PSI’s Gibson
Plant... .” Plaintiffs Exhibit 77, at 2 (emphasis added).
45. PSI, in contrast, contends that Section 7.03 requires
Exxon to match all the terms and conditions of the competitive
offer, or, at a minimum, match those terms that PSI deems
significant. See Veenstra Depo. II at 37-41. In a letter dated
May 12, 1992, Mr. Veenstra informed Wendell Ellis that
“{uJnless Exxon matches all the terms and conditions of this
competitive offer by or before 5:00 p.m., Houston time, July 3,
1992, the Agreement by which Exxon Coal USA, Inc. supplies
coal to PSI Energy will terminate under the terms of Article
VII.” Plaintiffs Exhibit 63.
46. Based at least in part on experience with other con-
tracts, the parties contemplated the necessity of discussing the
terms of any competitive offer and adjusting their negotiating
positions accordingly. See Brister Testimony, Tr. at 679;
Veenstra Depo. III, at 444-451; Ashley Depo. II, at 206-08.
47. The Black Beauty contract offer is based not just on
cost factors, but also on intangible elements that add value to
the contract, such as the force majeure provision. See Veenstra
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Testimony, Tr. at 153-54. If the Black Beauty offer did not
include these elements, the contract pricing scheme would be
lower. Jd. at 154.
48. The delivered price of the coal is only one of many
factors that utilities consider when making their supplier selec-
tions. Other factors, such as the financial stability of the sup-
plier, also are part of the buyer's decision calculus. See Hugh
Raw! Depo. at 21-23.
49. Both the Preamble and Article VI of the Agreement
contemplate that Exxon coal could be delivered to any of PSI's
facilities. The Agreement states in pertinent part:
WHEREAS, BUYER owns and operates an electric gen-
eration system in Indiana, and Buyer desires to secure an
assured and dependable long-term supply of coal suitable
for use in its existing and planned power generating sta-
Plaintiffs Exhibit 1, at 1.
6.01 Coal shall be delivered to BUYER by SELLER
F.0.B. BUYER'’s Gibson Power Plant, or other points in
Indiana which BUYER designates, in railroad cars in
unit trains and shall be transported at SELLER'’s
expense. (Emphasis added).
Plaintiffs Exhibit 1, at 8. Although not a requirement of the
Agreement, the Gibson Power Plant had been the exclusive
recipient of coal from the Monterey No. 2 mine.
50. PSI operates power generating stations at several loca-
tions throughout Indiana. The Black Beauty offer provides for
delivery of coal f.0.b. destination to any of these stations. See
Plaintiffs Exhibit 61. PSI and Black Beauty anticipate that
Black Beauty's coal will be delivered only to the Gibson,
Wabash, and Cayuga power stations.
51. PSI negotiated with Exxon in good faith during 1991
and 1992.
52. Any finding of fact which is actually a conclusion of law
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shall be treated as a conclusion of law and incorporated into the
conclusions of law which follow.
Conclusions of Law
1. The Court has subject matter jurisdiction over this
action pursuant to 28 U.S.C. §1332(a)(1).
2. The Court has personal jurisdiction over the parties.
3. Pursuant to 28 U.S.C. 1391(a), venue in th.s action is
proper in the Southern District of Indiana.
4. Pursuant to the Federal Declaratory Judgment Act, as
codified, the Court “may declare the rights and other legal
relations of any interested party seeking such declaration,
whether or not further relief is or could be sought. Any such
declaration shall have the force and effect of a final judgment or
decree and shall be reviewable as such.” 28 U.S.C. $2201.
5. By its own terms, the Agreement is to be interpreted in
accordance with the laws of the State of Indiana.
6. In construing contractual language, the court’s primary
purpose is to discover the mutual intention of the parties at the
time the contract was made. See Western and Southern Life
Ins. Co. v. Vale, 12 N.E.2d 350 (Ind. 1938); Shahan v. Bri-
negar, 390 N.E.2d 1036, 1041 (Ind. App. 1 Dist. 1979).
7. When contractual language is unambiguous, absent rea-
sons to rescind the contract, the court must not look beyond
that language to discover the parties’ intent. See Bland v. Atlas
Van Lines, Inc., 761 F. Supp. 82, 86 (S.D. Ind. 1989); Lewis v.
Burke, 226 N.E.2d 332, 337 (Ind. 1967).
8. Under Indiana law the test for determining whether a
contract is ambiguous is whether reasonable persons would
find the contract subject to more than one interpretation. See
Williams v. National Can Corp., 603 F.Supp. 1268, 1275 (N.D.
Ind. 1985); Fort Wayne Cablevision v. Indiana & Michigan
Electric Co., 443 N.E.2d 863, 866 (Ind. App. 3 Dist. 1983).
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9. Whether contractual terms are ambiguous is a question
of law determined by the court. See Piskorowski v. Shell Oil
Co., 403 N.E.2d 838, 844 (Ind. App. 3 Dist. 1980).
10. Under the Indiana Uniform Commercial Code, an
agreement may be found not only from language, but also “by
implication from other circumstances including course of deal-
ing or usage of trade or course of performance. . . .” Ind. Code
§26-1-201(3) (Burns Supp. 1992). This section is inapplicable to
the instant action, however, because there was no course of
dealing or performance between these parties as concerns the
reopener provision, given that PSI had never submitted com-
petitive offers under Section 7.03. There also was no evidence
presented that was sufficient to establish a particular usage of
trade.
11. Article VII of the Agreement is not ambiguous.
12. Section 7.01 defines the “Base” as “The Price of coal
delivered hereunder. . . .”, meaning the base for coal supplied
by Exxon to PSI pursuant to the Agreement.
13. Section 7.03 addresses three distinct activities: (1) the
parties’ renegotiation of the Base, (2) PSI’s presentation of a
competitive offer, and (3) Exxon’s analysis of the competitive
offer and its presentation to PSI of an offer that meets the
competitive offer. The language of Section 7.03 indicates that
these activities are to occur sequentially. Once the renegotia-
tion of the Base fails, PSI has the right to present Exxon witha
competitive offer. Once PSI has presented Exxon with a com-
petitive offer, Exxon may then analyze the competitive offer
and exercise its right to meet the competitive offer.
14. Section 7.05 states that “the purpose and intent of
Sections 7.01 to 7.04, inclusive, are only to provide for
renegotiation of Base and Exhibit ‘A’.” Given that Section 7.01
defines the “Base” exclusively in terms of the PSI-Exxon
Agreement (i.e. “The Price of coal delivered hereunder. . . .”
meaning pursuant to the Agreement (emphasis added)), Sec-
tion 7.05 is a limitation only on negotiations between Exxon
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and PSI. Section 7.05 places no restriction on the form of the
competitive offer contemplated in Section 7.03 because the
source of the competitive offer is an entity other than Exxon. If
the parties had intended the meaning that Exxon urges on the
Court, they would not have used the proper noun “Base” in
Section 7.05. The language is not ambiguous, “Base” with a
capital “B” means the Exxon-PSI base.
15. Exxon’s interpretation of Section 7.05 and its applica-
tion to Section 7.03 is unreasonable as a matter of law. Exxon
believes that, with the sole exception of the base, Section 7.05
requires the competitive offer to mirror the remainder of the
Agreement. Therefore, in Exxon’s view, any competitive offer
that incorporates non-base terms that differ materially from
the Agreement’s terms could not be a competitive offer under
Section 7.03. The Court finds no justification for such a read-
ing.
The evidence presented establishes that any given coal sup-
plier occupies a unique market position. The competitive
advantage it possesses depends on such factors as the quality of
the coal it can produce, the distance that the coal must travel to
the buyer, the nature of its mining operations, and other ido-
syncratic variables. Not every competitive advantage, though,
derives from efficiencies in the cost of production because other
considerations besides cost enter into the decision calculus for
the buyer. For example, the supplier's flexibility in scheduling
and delivering the coal is also an important competitive dimen-
sion. See Masselink Depo. III, at 249. The point seems too
obvious to warrant much discussion, but whether a coal buyer
enters into a contract with a particular supplier depends on the
totality of circumstances surrounding the contract and the
overall value that it renders to the buyer. Thus, it is not impos-
sible for a coal supplier which is situated at a farther distance
from the buyer than a competitor, with an inferior quality coal,
to prevail in his negotiations with the buyer by offering non-
cost related concessions that offset whether disadvantages he
may face.
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Exxon’s reading of the Agreement would foreclose any com-
petition on non-base terms. Such a reading not only is inconsis-
tent with the overriding purpose of Article VII, it also directly
contradicts its express language. Article VII was included in
the Agreement primarily to manage market risks. Exxon’s
interpretation, if adopted, would shift far too much risk onto
PSI by creating a barrier to competition that few coal supplier
(i.e. third party competitors) could overcome. The Court can
find no language in the Agreement that would warrant imped-
ing market competition in this way.
Exxon’s interpretation also betrays the parties’ original
intent as manifested in the words
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