Friday, November 16, 2012

Eastern Air Lines, Inc. v. Gulf Oil Corp. case brief

Eastern Air Lines, Inc. v. Gulf Oil Corp. case summary
415 F.Supp. 429 (1975)

Facts:
-P and D had been dealing for several years in good faith.
-D has supplied jet fuel to P based on a requirements contract for all the fuel they would reasonably need at a price based on the fluctuating Texas Sour index (a measure of the market price).
-However, when OPEC raised prices during the oil embargo, the Texas Sour index became much lower than the real world market price because it only reported domestic oil prices which were under government control.
-Because of this, D threatened to cut off π's fuel supply if π did not agree to pay a higher price than stipulated in the requirements contract. π obtained a temporary injunction and sued for specific performance of the contract. D argued that the contract was invalid because:
1. It lacked mutuality of obligation, and
2. π breached the contract by practicing "fuel freighting" whereby a plane bought more fuel than it needed from the lowest price gas station, and then only "topped off" at the higher priced station.


The Nature of the Risk: The P risked that they would not have enough fuel at a low enough price to run their airline. D risked that they would not be able to sell as much oil as they desired for as high of a price as they desired.

Issue:
1. Is there sufficient consideration for a contract even though the π had no obligation to buy a particular amount (quantity was not fixed)?
2. Was there a breach of contract by π's practice of "fuel freighting", even though it was common practice and known by the ∆?


Holding:
1. Yes. A requirements contract is binding on the seller to provide a reasonable amount of product to the buyer, consistent with commercial standards of fair dealing, and is binding on the buyer to act in good faith in making orders consistent with his requirements.
2. No. A requirements contract is not breached by the buyer making fluctuations in the requirements in accordance with normal business practices of which the seller is aware.


Reasoning:
Under UCC §2-306:
1. Both parties identified and understood the risks involved in making the requirements contract. The fact that the price went up drastically was one of the foreseeable risks that was redistributed to the ∆ when the π and ∆ redistributed their respective pre-contractual risks. Since the parties had relied upon each other over the years in light of the understanding of these risks, it should not have been a surprise to ∆ that he was contractually bound.
2. The practice of "fuel freighting" in the industry was a well known and accepted practice, and as such did not violate the nature of the requirements contract which required good faith dealing. "Good-faith" between merchants means "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." The court then awarded specific performance because to award anything less would be useless.


Uniform Commercial Code (UCC) § 2-306. Output, Requirements and Exclusive Dealings.

(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.
(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

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1 comment:

  1. Eastern Air Lines v. Gulf (1975) (UCC §§ 2-102, 2-306(1) court read in more)
    During an oil embargo, P seeks an injunction to prevent D from breaching the requirements contract for fuel
    Requirement contracts (seller agrees to provide whatever quantity the buyer requires) are neither indefinite nor lacking in mutuality
    UCC § 2-306 Output, Requirements and Exclusive Dealings
    (1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.
    (2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.
    Contracts for the sale of goods
    Requirements contract: an agreement pursuant to which one party agrees to purchase all its required goods or services from the other party exclusively for a specified time – requires good faith in execution
    Output contract: an agreement by the buyer to purchase all the seller’s goods – requires good faith in execution
    Relational contract: a contract which lasts over a long period of time, thus there is a relationship between the parties
    Exclusive dealing: a contract in which a party is exclusively bound to purchase from another – requires best efforts in execution

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