A dispute between a carbon buyer and seller has once again resolved in the buyer’s favor, with the 7th Circuit Court of Appeals finding the buyer was entitled to terminate a contract based on the seller’s breach.
The dispute at issue arose between BRC Rubber & Plastics Inc., a rubber and plastic products designer and manufacturer, and Continental Carbon Company, a manufacturer of carbon black, an ingredient often used in rubber products. The two companies entered into a five-year contract in January 2010 that included baseline prices for three types of carbon black, which were “to remain firm throughout the term of this agreement.” The contract also provided instructions on calculating a “feedstock” adjustment for fluctuating oil and natural gas prices.
In 2011, however, Continental sought to increase the baseline prices due to carbon black shortages. A Continental salesman, Thomas Nunley, protested the increase as breaching the contract, but he proceeded to raise the prices on the order of marketing and development vice president Thomas Moccia. Moccia also told Nunley to withhold shipping unless BRC agreed to the increase.
BRC continued placing new orders under the contact prices while Continental did not respond to their objections to the increase. Nunley eventually called BRC and said he had been told not to communicate with the buyer. He was fired shortly thereafter.
Moccia continued to ignore BRC’s communications, and Continental subsequently missed a May 2011 shipment. Without a confirmation that Continental would perform under the contract, BRC began looking for alternate suppliers and eventually received a shipment from another provider at a higher rate.
BRC then invoked Section 2-609 of the Uniform Commercial Code, asking Moccia for “adequate assurance that Continental would continue to supply carbon black under the existing contract.” In the U.S. District Court for the Northern District of Indiana, a magistrate judge determined that Continental did not provide adequate assurance because Continental continued to hedge on fulfilling orders and continued to demand the price increase, despite a letter from Continental’s lawyer stating that the company would do otherwise.
The 7th Circuit upheld that finding Wednesday. Thus, BRC was entitled to repudiate the contract, as it did on June 2, 2011. The buyer then began to “cover,” or replace its lost supply at higher prices from another seller.
Continental, however, argued that its lawyer’s assurance was adequate by itself, and that the price dispute was not substantial and was merely pretextual. Additionally, the seller claimed the increase “would not have substantially impaired the contract as a whole,” and that BRC should have been required to prove “clear, absolute, and unconditional” repudiation under Section 2-610 of the Uniform Commercial Code.
But the 7th Circuit upheld the district court in full, with Judge David Hamilton noting in the Wednesday opinion that this was the third time this case has come before the appellate court.
The circuit judges rejected Continental’s proposition that BRC should have been required to restart the assurance process under Section 2-609 once it discovered a contradiction with the assurance from Continental’s lawyer. The judges likewise rejected the argument that BRC “embraced a pretext for repudiation (the ‘peanuts’ price increase).’”
“Continental offers a reasonable view of the conflicting evidence. The problem is that BRC’s and the district court’s view of the evidence is also reasonable,” Hamilton wrote. “… Even after Continental’s lawyer gave the supposed assurance that it would honor the contract, Continental continued to insist on its price increase. Precedents under § 2-609 teach that continuing to push for a price increase or a contract modification after a demand for adequate assurance amounts to a failure to provide adequate assurance.”
Additionally, Continental showed BRC that it “was not a trustworthy business partner and supplier,” Hamilton wrote, and BRC reasonably believed that the unilateral price increase would affect future shipments for several years. Thus, the district court reasonably found that the demand for a price increase “substantially impaired the value of the contract as a whole.”
The panel went on to reject Continental’s argument under Section 2-610, which poses a more demanding standard for anticipatory repudiation. It also rejected the argument that BRC failed to mitigate damages when it began buying black carbon from another supplier at a higher price.
Finally, Continental challenged the award of prejudgment interest to BRC for the costs of its cover from 2011 to 2014. The circuit panel found no error in the district court’s calculations, which awarded a total of $400,184.12.
The case is BRC Rubber & Plastics, Inc. v. Continental Carbon Company, 20-1011.