Texas Business Court Decision –
No. 24-BC11B-0023 Westlake Longview Corp., et al. v. Eastman Chemical Co. (Eleventh Division, Judge Andrews, sitting by assignment)
Contracts.
Background. In 2006, Eastman sold Westlake its polyethylene facilities in Longview and a pipeline that runs from Longview to a major ethylene trading hub in Mont Belvieu. Before the sale, Eastman owned “crackers” that produce ethylene in Longview; it also owned the polyethylene facility in Longview which was the largest customer for that ethylene, and the pipeline; essentially, Eastman was its own biggest supplier, customer, and transporter of the Longview ethylene product. After the deal, Eastman would still own the crackers, but Westlake would own the polyethylene facilities and the pipeline needed to reach non-local customers. The parties executed an “Ethylene Sales and Exchanges Agreement” (the ESA), a long-term agreement which secured Westlake the opportunity to buy Eastman’s ethylene and Eastman a way to get ethylene not purchased by Westlake to customers outside Longview.
Under the ESA Eastman retained the right to produce ethylene at its Longview crackers and Westlake received a right of first-refusal to purchase that ethylene – designated Excess Ethylene Quantities (EEQ) – on both a monthly and annual basis; before the beginning of the year, Eastman must offer Westlake the EEQ it intends to produce the coming year and any amount Westlake does not timely commit to purchase may be contracted to third-parties for that one-year period (the annual nomination process). Any EEQ not sold to Westlake or third parties under the annual nomination process must be offered to Westlake again on a month-to-month basis, and, again, any EEQ Westlake does not take maybe then sold to third parties; in other words, Westlake has an opportunity to take advantage of favorable price differentials based on projections for the coming year and favorable price differentials based on current monthly pricing; in exchange, Eastman gets free transit on the pipeline for any EEQ Westlake does not buy. If Eastman needs to buy extra ethylene not covered by the ESA, Westlake must transport it from Mont Belvieu to Longview at Eastman’s cost.
This dispute concerns the mechanics of the nomination process, the scope of Eastman’s right to free pipeline exchanges, and the evidentiary weight of the parties’ course of performance. The matter comes before the court on plaintiff Westlake’s motion for summary judgment. The motion is granted in part and denied in part.
Held:
(1) The dispute is governed by Delaware law based on the choice-of-law provision in the ESA; the court will construe the contract as a whole under an objective standard and will enforce plain and unambiguous language without resort to extrinsic evidence.
(2) On the annual nomination process, Eastman must, in good faith, offer to sell Westlake all EEQ it intends to produce for the coming year, consistent with Section 4(f) of the ESA and Delaware’s implied covenant of good faith and fair dealing.
(3) The ESA does not required Westlake to purchase its annual commitment in equal monthly installments, as the agreement is silent on the timing of delivery, and the ESA is structured and designed to allow Westlake to take advantage of favorable monthly price differentials; this is a part of what Westlake bargained for.
(4) On third-party sales of uncommitted EEQ, the court rejects Westlake’s argument that Section 4(f) imposes a strict December 31 deadline for entering into third-party sales agreements for the coming year, but the section authorizes only one-year contracts and not spot sales; the ESA’s structure gives Westlake two rights of first refusal on EEQ: first, a right of first refusal on annual purchase contracts, after which Eastman can pursue annual purchase contracts with third parties and, second, a right of first refusal on short-term sales, after which Eastman can pursue short-term sales to third parties; under this process, it is Westlake, not Eastman, that has the option to take advantage of favorable market prices on monthly EEQ; in exchange, Eastman gets the right to freely transport any of the EEQ Westlake did not purchase.
(5) Under this interpretation of the ESA, a third-party contract entered into on January 1 and running through December would likely qualify, while a contract entered into mid-year would not; allowing open-ended spot sales would effectively eliminate Westlake’s monthly right of first refusal.
(6) Reading Section 4(e), 4(g), 7, and 8(b) of the ESA together, Eastman is entitled to free exchange of EEQ regardless of whether that EEQ went through the monthly nomination process; the court rejects Westlake’s argument that only monthly-nominated EEQ qualified for free transport, finding the ESA’s reference to “total” EEQ rather than “nominated” EEQ controls this issue. Westlake is entitled to buy any EEQ not committed under Section 4(f) and Eastman is entitled to free exchange of any portion Westlake does not buy.
(7) Eastman’s right of free exchange does not extend to a category of ethylene classified as “converted/tolled ethylene,” which is ethylene converted in Longview on Eastman’s behalf, as it was excluded from the EEQ definition; the ESA address non-EEQ exchanges in only one context – ethylene Eastman purchases from outside sellers – and that exchange carries a fee; the absence of any provision for converted/tolled ethylene reflects the parties’ deliberate choice and is not a gap to be filled.
(8) In sum, the ESA is unambiguous and the only reasonable interpretation is: In the annual nominations, Eastman must offer to sell Westlake all EEQ Eastman intends to produce in the following year; for any portion Westlake timely commits to buy, the ESA does not mandate equal monthly installments. For any portion Westlake does not timely commit to buy, Eastman may sell it to third-parties under one-year contracts for the calendar year to which the annual nomination applies; EEQ sold to a third party under such contracts is exempt from the monthly nomination process set out in Section 4(e) of the ESA, and is entitled to free exchange. In the monthly nomination process, Eastman must offer, and Westlake is entitled to buy, any EEQ not already committed to Westlake or a third party in compliance with Section 4(f). Eastman is entitled to free exchange of any EEQ quantities offered to, but not purchased by, Westlake in monthly nominations for that month.
Some evidentiary issues:
(9) The ESA is a hybrid transaction involving both the sale of goods (ethylene) and the provision of services (the exchange of ethylene). In such a situation, if the sale-of-goods aspect predominates, the Delaware UCC applies, though not necessarily to the exclusion of other law. If the sale-of-goods does not predominate, only the sections of the UCC which related primarily to the sale-of-goods aspect of the transaction apply and the provisions that related primarily to the transaction as a whole do not. Here, the sale-of-goods aspect of the ESA is not predominant – the services aspect is equally important.
(10) Thus, the Delaware UCC does not authorize the court to consider course-of-performance evidence to determine the parties’ exchange rights and obligations under the ESA, which is unambiguous. The court reaches its conclusions as set out above based solely on the four-corners of the ESA. Even if the court were to consider Eastman’s putative “course of performance” evidence, the result would be the same, as it was either consistent with the court’s textual conclusions or insufficient to override the ESA’s express terms.