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Contract – Supply Agreement – Construction of Terms – Excuse of Performance

The parties entered a supply agreement under which defendant agreed to provide plaintiff with synthetic gypsum produced from defendant’s coal-fired electric generation plans. A subsequent drop in natural gas prices led defendant to decrease its utilization of such plants, resulting in lower production of gypsum. Because the parties’ contract and course of performance demonstrated their agreement to a fixed minimum monthly quantity in a supply agreement, the reference to defendant supplier’s production related only to permitted fluctuations in the supply obligation.

We grant plaintiff judgment on its claim for declaratory judgment on the quantity term of the parties’ agreement and on defendant’s obligations pursuant to that term.

The parties thereafter disputed the quantity term of their agreement along with other terms of the agreement. Plaintiff filed a declaratory judgment action to construe the monthly minimum quantity, stockpile, and remedy terms of the parties’ agreement. Defendant contested plaintiff’s interpretation of the agreement and further argued that any failure in its performance was excused.

We first construe the quantity term of the parties’ agreement to require defendant to sell and plaintiff to purchase at least 50,000 net dry tons of gypsum per month, subject to a 10 percent fluctuation bugger. We reject defendant’s argument that the parties revised their agreement to change the quantity to a variable quantity tied to defendant’s actual production. We agree with plaintiff that the addition of an “aggregate actual production clause” did not intend to change the supply obligations, but rather meant to reinforce that the minimum quantity would continue to be 50,000 net dry tons per month and only modified the method to calculate permissible fluctuations. We also reject defendant’s contention that the supply characteristics demonstrated the parties’ intent that defendant only be required to supply from its coal-fired plants, finding that the agreement explicitly contemplated that defendant had the right to supply gypsum from any source.

We rule that the parties’ intention as to the agreement’s stockpile provisions is ambiguous. Referring to extrinsic evidence, we find that the parties intended that defendant exercise commercially reasonable efforts to maintain the stockpile at a volume of at least 250,000 dry net tons and defined commercially reasonable efforts as delivering the minimum quantity and, if the stockpile fell below 250,000 dry net tons, prepare a replenishment plan. Thus, we rule that defendant’s failure to supply the minimum quantities means that it has failed to use commercially reasonable efforts under the parties’ agreement.

We reject defendant’s assertion of the excuse of performance. Although defendant’s obligations under the agreement were subservient to its primary purpose as an energy supplier and defendant could not be compelled to maximize its production of gypsum, we rule that did not excuse defendant from its supply obligations under the parties’ agreement unless subsequent law precluded or restricted defendant from supplying gypsum. We note that defendant had the contractual right to obtain its supply from sources other than its own production.

Finally, we rule that plaintiff’s remedy for defendant’s failure to supply the minimum monthly quantity is to either demand defendant deliver that quantity, or alternatively obtain that supply on the market and recover its expenses from defendant. In the event of a long-term disruption in supply, defined in the agreement as a “discontinuance event,” we find that the parties agreed that plaintiff would have the third option of terminating the agreement and pursuing liquidated damages.

                                                                                 

Judgment is granted.

Certainteed Gypsum NC, Inc. v. Duke Energy Progress, LLC (Lawyers Weekly No. 020-068-18, 82 pp.) (James Gale, J.) Jim W. Phillips, Jr., Brian C. Fork, and Kimberly M. Marston for plaintiff. Donald H. Tucker, Jr. and Isaac A. Linnartz for defendant. 2018 NCBC 90.

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