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BOC Group, Inc. v. Chevron Chemical Company, LLC

359 N.J. Super. 135, 819 A.2d 431 (App. Div. 2003)

CONTRACTS; SUPPLY AGREEMENTS—Where a supply agreement provides that the customer’s sole remedy for failure of its supplier to fulfill the customer’s needs is to “cover” the shortage, the customer cannot instead choose to terminate the contract unless the specific facts involved show that such an exclusive remedy failed in its essential purpose.

A supplier of liquid nitrogen contracted to meet all of an oil refinery’s requirements for liquid nitrogen. The contract provided that the oil refinery’s exclusive remedy if the nitrogen producer failed to timely deliver the nitrogen was “to recover from [its] supplier the difference between the cost to [the refinery] of any reasonable purchase of product in substitution for the product that [the nitrogen supplier] so failed to deliver and the lesser price of such quantity of product hereunder, reduced by any expenses saved by [the oil refinery].” The nitrogen supplier failed to provide timely deliveries and the oil refinery terminated the contract. As a result, the nitrogen supplier sued for damages. Under the Uniform Commercial Code (UCC) as adopted in New Jersey, “parties to a contract may establish an exclusive remedy, which, if so labeled, ‘is the sole remedy’ available to them under the terms of the contract.” On the other hand, “despite this exclusive remedy provision, ‘[w]here circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in [the UCC].’” Under case law, the “exclusive remedy provision is “not concerned with arrangements which were oppressive at their inception, but rather with the application of an agreement to novel circumstances not contemplated by the parties.” The Court reviewed various case law concerning when exclusive remedies may not be effective. This is because to determine “whether an exclusive remedy has failed of its essential purpose, a court must examine ‘the facts and circumstances surrounding the contract, the nature of the basic obligations of the party, the nature of the goods involved, the uniqueness or experimental nature of the items, the general availability of the items, and the good faith and reasonableness of the provision.’” Here, the exclusive remedy was the right to “cover” the difference between the contract cost of the nitrogen and the cost to replace the nitrogen. Although the oil refinery claimed it was unable to purchase nitrogen from other suppliers, the proofs before the Court did not support that argument. Further, it was clear from testimony from the oil refinery’s manager that he did not know what the contract required if the nitrogen supplier breached the agreement, consequently “there was no reason for him to invoke the contract’s exclusive remedy.” Under the circumstances, the Appellate Division agreed with the lower court that, as a matter of law, “a rational factfinder could not find that the exclusive remedy failed in its essential purpose.”

The oil refinery also argued that the lower court “did not entertain its claim that [the nitrogen supplier’s] repeated lateness in delivering the nitrogen was tantamount to a breach of installments, impairing the value of the contract as a whole, giving [the oil refinery] the right to cancel the contract.” Even though the oil refinery pointed to twenty-one occasions when nitrogen deliveries were late, it continued to accept delivery, “without ‘seasonably’ notifying [the nitrogen supplier] of its decision to cancel the contract.” Therefore, the oil refinery’s argument that its supplier’s repeated late deliveries permitted cancellation” was found to be without merit.

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