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Ticona Polymers, Inc. v. Solutia, Inc.

A-2266-06T1 (N.J. Super. App. Div. 2008) (Unpublished)

CONTRACTS; REQUIREMENTS — A buyer under a requirements contract is not obligated to go out of business in order to adhere to the contract because it is the buyer’s need for a product that determines how much of the product it is required to purchase.

A processing company contracted to buy a raw ingredient that it then processed through polymerization to sell in its processed form. The purchase agreement was a requirements contract. According to the agreement, the seller was obligated to supply a certain amount of the material to the processor but the processor was not obligated to purchase a minimum amount. The agreement also contained a price formula and allowed the processor to purchase the material at a lower price from another supplier with price-matching rights for the seller. Later, amendments to the agreement restricted either party from assigning its respective rights and obligations to a third party without the consent of the other party and also required 48 months’ notice to terminate.

When the processor experienced financial difficulties, it sought to get price relief, but the seller only agreed to two temporary price modifications. At this point the processor had already given its notice of termination. The processor’s board of directors, after considering purchasing the already processed form of the material instead of the raw ingredient, decided that the processor would either stop manufacturing and selling the processed product or exit the industry as a whole to focus on other operations. The seller told the processor that it did not object to the sale of the processor’s operations to a third party but insisted that such sale include an assignment of the agreement. The seller also stated that it would consider the processor’s purchase of the processed from of the material from another party to be a breach of the agreement and claimed that it spent considerable capital on the expansion of its operations in order to supply the raw ingredients to the processor.

The processor sued, seeking a declaration that it had the right to purchase the processed form of the material from another party. It also sought declarations that its decisions to cease its manufacture and sale of the processed material and to sell its operations without assigning the agreement would not constitute a breach of the agreement. The seller brought a six-count counterclaim that included allegations of breach of contract, breach of the implied covenant of good faith and fair dealing, anticipatory breach, and a claim for equitable recoupment. The lower court bifurcated the matter into two separate hearings; one to determine whether the processed form of the material equaled the raw form, and the second to assess damages due to the seller if, in the first hearing, the processed form of the material was found to equal the raw form. The lower court ruled that the processor had no obligation to assign the contract to a purchaser of its business. The lower court also found that the agreement did not require the processor to go out of business if that would be the result of continuing its operations in order to adhere to the agreement. It added that, under the agreement, the seller bore the risk of reduced demand for the raw material from the processor and that the processor would not have been in breach if the processor’s business decision to reduce demand was made in good faith.

On appeal, the sellers argued that the lower court improperly bifurcated the matter. Its claim was rejected by the Appellate Division on the basis that the issue of whether the raw ingredient was equivalent to the processed form and if there were any resulting damages were not so intertwined that the seller would have suffered any prejudice as a result of the bifurcation. The Court also agreed with the lower court that the processor’s decision to quit manufacturing and selling the processed form of the material was a legitimate business decision that was made in good faith. Additionally, it agreed with the lower court that the processor was not obligated to go out of business in order to adhere to the requirements contract and pointed out that under requirement contracts it is the buyer’s need for a product that determines how much of the product is needed. The Court also found that the seller never clearly established that its capital expenditures were made in reliance on its contractual relationship with the processor and, even if it did, relief on such a basis was only granted in limited situations not present in this case. Furthermore, it found that the processor was not obligated to assign the agreement to a party that purchased its business if it was already in the process of ending its purchase of the raw ingredients from the seller. Based on its findings and conclusions, the Court affirmed the lower court’s decisions to bifurcate the matter and that the processor did not breach its agreement with the seller.


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