Legal Watch: Volume 16

Prepared by William H. Bode
Bode & Grenier, LLP
1150 Connecticut Ave., NW
Washington, D.C. 20036
Telephone: 202-862-4300 | Email: wbode@bode.com

COASTAL PETROLEUM PERMITTED TO CANCEL TERMINALING AGREEMENT DESPITE AUTOMATIC RENEWAL CLAUSE

Case Summary: Carbo Industries, Inc. on January 1, 2000 entered into a Terminaling Agreement with Coastal Refining and Marketing, Inc. and El Paso Corporation for the storage of petroleum products in Carbo’s storage terminal in Lawrence, New York. The term of the Agreement was one year; however, the contract also included an automatic renewal clause, which provided that unless either party received written notice of cancellation at least six months prior to the end of the then-current term, the contract would automatically renew the following year. Neither party cancelled the contract for the years 2001, 2002, or 2003. On November 12, 2003, however, the defendants sent a letter to Carbo stating that they were canceling the contract. Carbo sued for breach of contract, and a federal court granted summary judgment to Coastal Refining and El Paso Corporation. Carbo appealed to the Second Circuit Court of Appeals. The question before the appeals court was whether New York General Obligation Law, Section 5-903 applied. That Section provides that when there is a “contract for service, maintenance, or repair for any real or personal property” the service provider (Carbo) must give the other party (Coastal) at least fifteen, but not more than thirty days’ notice of the existence of the automatic renewal provision for that provision to take effect. The appeals court noted that the Terminaling Agreement required Carbo not only to maintain storage facilities, but also to provide “insurance coverage…automated card controlled truck loading…inventory verification… and special additive equipment.” Thus, the Circuit Court concluded that the contract was for “services” and Carbo’s failure to provide notice of the pending expiration date permitted Coastal Refining and El Paso Corporation to cancel the Agreement.

LESSON: It would be prudent for terminal operators to determine whether statutes similar to New York’s Section 5-903 exist in states where terminaling agreements exist. In such cases, the terminal operator should establish a noticing system that assures timely notice of the expiration date is given. The terminal operator also may wish to insert contract language that provides that the customer waives its right to receive any statutory notices. Not all states will enforce such a waiver clause but, nevertheless, there exist tactical reasons for including them in terminaling agreements. (Carbo Industries, Inc. v. Coastal Refining & Marketing, Inc. and El Paso Corporation)

CLARK USA, INC., A HOLDING COMPANY, CAN BE SUED FOR WRONGFUL DEATH BECAUSE ITS “OVERALL BUSINESS STRATEGY” RESULTED IN SEVERE BUDGET CUTS THAT ELIMINATED SAFETY TRAINING AT SUBSIDIARY CLARK REFINING AND MARKETING, INC.

Case Summary: Michael Forsythe worked as a maintenance mechanic for Clark Refining and Marketing, Inc. at its Blue Island facility. He was killed during lunch break when a fire erupted as a result of an inexperienced worker’s failure to remove flammable material from the Isomax unit he was repairing. Mr. Forsythe’s estate sued the parent holding company, Clark USA, Inc., on the theory that severe budget cuts imposed by Clark USA required Clark Refining to minimize training costs and to inadequately monitor safety at the refining facility. The trial court dismissed the suit ruling that the employee was limited to remedies under the Unemployment Compensation Act, and that the “corporate veil” could not be pierced to make Clark USA, the parent holding company, liable. The Appellate Court of Illinois reversed, citing the doctrine of “direct participation” liability. Essentially, the Appellate Court ruled that Clark USA should have been aware that the severe budget cuts it implemented (a 25% cost reduction) would minimize training and fail to ensure safe operating conditions. The Court held that Mr. Forsythe’s death was thus foreseeable and attributable to Clark USA’s actions.

LESSON: Clark USA probably would have been spared the lawsuit had it commissioned a study, in connection with the budget cuts, to evaluate the effects of the cutbacks on safety. And as a general matter, it is a sound corporate practice to commission periodic “safety reviews” which examine, among other things, the adequacy of employee training. (Forsythe v. Clark USA, Inc.)

COMPANY THAT DISCHARGED NEW EMPLOYEE BECAUSE HE TESTIFIED AGAINST THE COMPANY IN AN EARLIER LITIGATION ORDERED TO PAY $500,000 IN PUNITIVE DAMAGES PLUS THREE YEARS PAY

Case Summary: Dan Reust sought employment with Alaskan Petroleum Contractors, Inc. (“APC”) and was given a “hire package” to complete and told to report for work the following day. Upon reporting for work, Mr. Reust was told that he was being “let-go” due to his participation in previous litigation between APC and another former employee. Mr. Reust sued and the trial court awarded him $132,000 for past lost wages, $156,800 for future wage loss, $100,000 for pain and emotional suffering, and $4.3 million in punitive damages. APC appealed and the Alaskan Supreme Court affirmed and reversed in part. First, the Court affirmed that a valid employment contract existed. Second, the Court affirmed that “a retaliatory discharge in violation of an explicit public policy (witness retaliation is against Alaskan policy) gives rise to a tort as well as a contract claim.” Third, the Court ruled that damages for lost future profits should have been limited to three years, rather than the eight year period used by the jury. Fourth, the Court upheld the award for emotional suffering even though there was no evidence of such emotional injury, because APC failed to preserve the issue at trial. And fifth, the Court reduced the punitive damages award to $500,000 based on a recently enacted Alaskan statute capping damages to that level. (Under the damage-cap statute, one-half of the punitive damages award – $250,000 – is paid to the State treasury).

LESSON: Any decision to terminate an employment agreement ideally should be reviewed by counsel. In particular, an employer should never inform a worker that he is being terminated because of any acts performed in public or legal proceedings deemed harmful to the company. (Reust v. Alaskan Petroleum Contractors, Inc.)

Please address any comments or questions to Mr. Bode at 202-862-4300 or wbode@bode.com.

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