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Monday, June 30, 2014

Statute of Frauds to the Rescue in Deepwater Horizon Case

Oil_Spill_Containment_BoomAfter BP's oil drilling rig, the Deepwater Horizon (below, right) located off the Gulf Coast of Louisiana, caught fire and sank in April 2010, BP sought to purchases millions of feet of oil containment boom (pictured).  Plaintiff Packgen sought to capitalize on this demand by manufacturing boom, although it had never done so before.  Assuming the facts as alleged by Packgen, already by May 2010, Pathgen had secured an oral agreement from BP to purchase boom at $21.75/sq. ft., subject to inspection of Packgen's facilities and testing of Packgen's products to confirm that they met standards established by the American Society of Testing and Matierals (ASTM).  Such inspection occurred, and Packgen's products satisfied ASTM's standards.

Although the parties seemed committed to working together and Packgen geared up to produce 40,000 square feet of boom per day, the parties continued to exchange communications throughout May.  BP began to express concern about the connectors on Packgen's boom and demanded various modifications to Packgen's boom design.  A field test of Packgen's boom did not go well.  BP's needs changed.  It demanded further changes and Packgen scrambled to comply.  By the time Packgen was producing boom that met BP's needs, BP had capped the Deepwatern Horizon and its need for boom quickly dimishinished.  It never purchased any boom from Pathgen, and Pathgen was left with 60,000 feet of boom, which it eventually sold for $2/sq. ft. 

Packgen sued, alleging misrepresentation, breach of contract, and equitable claims.  The District Court dismissed all of Packgen's claims, and it appealed, drawing a panel that included retired Supreme Court Justice David Souter.

Deepwater HorizonThe First Circuit affirmed the District Court's dismissal of all claims in Packgen v. BP Exploration and Production, Inc.  The Court found that there was no misrpresentation because the BP personnel who indicated an intention to purchase Packgen's boom sincerely intended to do so at the time they made those representations.  

As this alleged contract was for the sale of goods with a value in excess of $500, it was within the Statute of Frauds (SoF) and thus had to be evidenced by a writing.  Packgen did not claim that the sale was evidenced by a writing but claimed that the transaction fell within two UCC exceptions to the SoF: the specially manufactured goods exception and the judicial admission exception.  

On the specially-manufactured-goods exception, the facts were interesting.  In short, Packgen could not avail itself of the exception because it re-sold the goods.  Packgen pointed out that it had repeatedly modified the product to meet BP's specifications and that BP was buying 90% of the boom produced in the U.S. markets at the time.  The Court pointed out that those circumstances are not relevant.  The only question is whether the goods could be re-sold to another purchaser, and they could.  The fact that the market for boom collapsed once BP stopped buying and that Packgen consequently could get only 10% of its original selling price does not change the fact that the product could be sold to another purchaser.  

On the judicial admission exception, Packgen cited to an e-mail from a BP employee who, in reference to Packgen, wrote: "I do not understand why we keep placing orders with suppliers like this[.]"  Seen in its context, the Court found that the e-mail was insufficient to overcome other evidence indicating that, at the time that e-mail was sent, both parties believed themselves to be negotiating a contract rather than as having a contract.

Packgen's equitable claims failed as well.  It could not show evidence that BP had benefitted from the information it had provided regarding boom speicifications nor that it had provided any services in connection with the parties' on-going negotiations for which it expected payment.  Packgen's promissory estoppel claim, like its breach of contract claim, fell because of the SoF.  While the SoF is not a complete bar of promissory estoppel claims relating to promises to sell goods in excess of $500, in order to overcome the SoF, plaintiff must allege conduct such that refusal to enforce the alleged promise would be tantamount to allowing the SoF itself to become an instrument of fraud.  But as Packgen's misrepresentation claims failed, it could show no actual intent to deceive. 

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