ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, August 13, 2012

Gnarly Formation and Damages Case out of the Fifth Circuit

The facts of Westlake Petrochemicals v. United Polychem are complicated.  Here's a nutshell of the facts:

  • In July 2008, A broker matched a bid for 5 million pounds of ethylene per month in 2009 by United Polychem (UPC) with an offer to sell by Westlake Pharmaceuticals (Westlake);
  • Westlake's offer to sell was subject to approval of UPC's credit;
  • Credit approval proved problematic, and UPC's President was required to provide a personal guaranty
  • In September 2008, Westlake also demanded that UPC secure its credit with a $2 million letter of credit; and 
  • In October 2008, UPC claimed that because Westlake had never formally accepted UPC's credit, the deal had never closed.

At trial, the District Court found UPC liable for $6.3 million in damages plus $634,000 in attorneys' fees.  The District Court also held UPC's President jointly and severally liable based on the guaranty.

On appeal, UPC contended that there was no consideration for the agreement.  Westlake's obligations were contingent on its approvel of UPC's credit, which it never gave.  The Fifth Circuit ruled as follows:

  • Westlake did not have a unilateral right to reject UPC's credit, but would have been subject to a breach of contract claim had it done so, as the deal is considered made with the expiration of a short window after the broker brings the parties together;
  • Because credit is not considered an "eseential element for the purposes of the Statute of Frauds, the Statute was satisfied here by the broker's written confirmations to both parties by instant message (!) and e-mail, even thought those writings omitted the credit term;
  • The broker had authority to bind the parties; and 
  • Westlake's approval of UPC's credit was not a condition precedent to the formation of the contract.

 On the damages issue, the District Court ruled that the jury shoudl be instructed that, pusuant to UCC s. 2-708(a) Westlake was entitled to the difference between the contract and market price at the time and place of tender.  The parties gave various estimates of what damages would be appropriate, but since the price of ethylene dropped after the contract was formed, the amount was considerable.  However, in this case the Fifth Cicuit found that s. 2-708(b) applies instaed of 2-708(a) and that Westlake is only entitled to its lost profits.  The Fifth Circuit so concluded because Westlake never purchased the ethylene it was to sell to UPC, and awarding it full expectation damages in such circumstances would constitute a windfall.  The Fifth Circuit remanded the case to the Distirct Court for a new calculation of damages.  

As to UPC's President's liability, the Fifth Circuit found the Guaranty ambiguous.  It had been cancelled before the first payment on ethylene shipments would have been due.  It was not entirely clear whether the Guaranty was to apply to all shipments under the contract or only to those on which payment was due prior to calculation. In such circumstances, the Fifth Circuit held that the guaranty must be construed in favor of UPC's President and that he could not be held jointly and severally liable with UPC.


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