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BETHLEHEM STEEL CORPORATION v. LITTON INDUSTRIES (02/22/85)

decided: February 22, 1985.

BETHLEHEM STEEL CORPORATION, APPELLANT,
v.
LITTON INDUSTRIES, INC., A CORPORATION, AND ERIE MARINE, INC., A DIVISION OF LITTON INDUSTRIES, TRADING AS ERIE MARINE DIVISION OF LITTON INDUSTRIES, APPELLEES



Appeal from the Order of the Superior Court of Pennsylvania entered November 4, 1983 at No. 197 Pittsburgh, 1980, affirming the final judgment entered on February 15, 1980, of the Court of Common Pleas of Allegheny County, Civil Division, Pennsylvania, at No. 3388 July Term, 1974, Pa. Super. ; Larsen, Flaherty, Hutchinson and Zappala, JJ. Flaherty, J., files an Opinion in Support of Affirmance in which Hutchinson, J., joins. Hutchinson, J., files an Opinion in Support of Affirmance. Zappala, J., files an Opinion in Support of Reversal in which Larsen, J., joins. Nix, C.j., McDermott and Papadakos, JJ., did not participate in the consideration or decision of this case.

Author: Per Curiam

[ 507 Pa. Page 90]

ORDER OF COURT

The Court being evenly divided, the Order of the Superior Court, 321 Pa. Super. 357, 468 A.2d 748, is affirmed.

Opinion IN SUPPORT OF AFFIRMANCE

FLAHERTY, Justice.

On April 25, 1968 Litton Industries, Inc., its wholly owned subsidiary, Erie Marine,*fn1 Inc. and Bethlehem Steel Corporation met to formally exchange an already agreed upon contract for the construction of a multi-million dollar ore vessel. This boat, the Cort, was unique in size and design: it was one thousand feet long and was self-unloading. No similar boat had ever before been built and negotiations for the contract had taken some four months. At this same meeting where the contractual formalities for the Cort were exchanged, Litton initiated a proposal that the parties

[ 507 Pa. Page 91]

    enter into a further agreement which would give Bethlehem a five year option to purchase an additional five vessels identical to the one just contracted for, and the parties jointly prepared the following letter on that subject:

ERIE MARINE, INC.

ERIE, PENNSYLVANIA

April 25, 1968

Bethlehem Steel Corporation

Bethlehem, Pennsylvania

Attn: Ralph K. Smith

Gentlemen:

Reference is made to the ship construction contract signed by our companies this date for the construction by us of a 1,000' self-unloading ore vessel for you. Reference is also made to my letter to you of this date extending to you an option to purchase either one or two additional vessels upon the terms therein set forth.

We hereby extend to you an offer to enter into an option agreement to have us construct for you from one to five additional vessels in accordance with "Specifications covering the Construction of a Self-Unloading Bulk Carrier for Bethlehem Steel Corporation" (Number Y 917) dated March 1968, addendum number 1 thereto dated March 28, 1968 and addendum number 2 thereto dated April 17, 1968. This offer to enter into an option agreement shall be firm and irrevocable until December 31, 1968 at 5:00 P.M. E.S.T.

The terms of the option agreement are to be as follows:

(a) The specifications for the vessels shall be the specifications referred to above, except for mutually agreeable reduced test schedules of the vessels, if the testing of the vessel to be delivered under the contract executed this date proves successful.

(b) Bethlehem to have the right at any time within five years after the effective date of the option agreement to order from one to not more than a total of five vessels,

[ 507 Pa. Page 92]

    for delivery within 24 months from the date of the order for the first vessel ordered and for delivery within 24 months plus 4 months for each additional vessel ordered within any one calendar year; provided however no vessel shall be scheduled for delivery between November 31 and March 31.

(c) The price of the vessels shall be as follows:

1st vessel ordered $22,400,000.00

2nd vessel ordered $21,400,000.00

3rd vessel ordered $20,400,000.00

4th vessel ordered $19,400,000.00

5th vessel ordered $18,400,000.00

(d) The vessel prices are subject to escalation for both labor and material for a base price of $20,400,000.00 for each vessel and based upon Fourth Quarter 1968 mutually agreed upon index such as:

Material -- "Material index for Bureau of Ships steel vessel contracts" furnished to the Naval Ship Systems Command by the Bureau of Labor Statistics of the U.S. Department of Labor.

Labor -- "Index of changes in straight-time average hourly earnings for selected shipyards" (June 1962 = 100) for steel ship construction, furnished to the Naval Ship Systems Command by the Bureau of Labor Statistics of the U.S. Department of Labor.

At the time of exercise of the option for any vessel, the escalation shall be computed to the date of contract execution, and an appropriate contract clause will be included therein providing for quarterly escalation thereafter. We will furnish you the labor and material percentages subject to escalation by May 15, 1968.

(e) The terms and conditions of the ship construction contracts to be in accordance with the attached terms and conditions and any other mutually agreed to terms and conditions and shall contain a clause giving to Bethlehem the right to cancel at any time upon the payment of all of our costs incurred to date of cancellation, including similar vendor and subcontractor cancellation charges, plus 15% of such costs.

[ 507 Pa. Page 93]

Very truly yours,

George K. Geiger

The construction contract referred to in paragraph one consists of approximately 500 pages of specifications for the construction of the Cort, which was built on a fixed price basis. In response to this letter, Bethlehem, on December 31, 1968, wrote: "We hereby accept your offer of an option to have you construct for us from one to five additional vessels . . . ." In all other pertinent respects, the Bethlehem letter repeated the substance of the letter from Geiger, except that Bethlehem's letter was countersigned at its conclusion as follows:

AGREED TO:

ERIE MARINE, INC.

     by George K. Geiger, President

Although the parties never reached agreement as to any of the open terms contained in this writing, in 1973, Bethlehem formally notified Litton that it was exercising its option to purchase three more ore ships of the type specified in the December 31, 1968 letter. Litton refused to perform under the terms of the 1968 letter, and Bethlehem brought an action against Litton claiming that it had repudiated its obligations under the 1968 letter, which Bethlehem characterized as an "option agreement," and that its actions constituted an anticipatory breach of this agreement. Bethlehem's damages for the alleged breach were stated at $95 million. Litton filed counterclaims in assumpsit for lost profits which it allegedly would have made on the building of the three vessels, had Bethlehem negotiated in good faith, and in trespass, for consequential and punitive damages for Bethlehem's alleged failure to negotiate in good faith.

A trial was then conducted in the Allegheny County Court of Common Pleas before Judge Maurice Louik. The proceedings lasted some nine months and produced more than 12,000 pages of testimony and 500 exhibits. It can

[ 507 Pa. Page 94]

    hardly escape notice that the proceedings were somewhat protracted. As counsel for Litton noted during final argument, "May it please the court. Now . . . we enter into the fourth season in this case -- we started in summer, went through the fall and winter and it's now spring, although the snowflakes are still falling . . . ." In spite of the complexity of the case and the length of the litigation, or perhaps because of it, the parties were able to agree that the trial should be bifurcated on the issues of liability and damages. The trial court, without reaching the issue of damages, decided the liability issue against Bethlehem. On appeal, a divided Superior Court affirmed, Judges Hester, Rowley and Wieand dissenting. 321 Pa. Super. 357, 468 A.2d 748. We granted allocatur.

Judge Louik held that Bethlehem's action must fail because there was no enforceable agreement between the parties since the price term was so indefinite as to render the court unable to fill the gap. The Superior Court majority stated that the trial court "held that the plaintiff-appellant had not sustained its burden of proving that the parties intended to be contractually bound." 321 Pa. Superior Ct. at 359, 468 A.2d at 748. The Superior Court majority also observed that the intent to contract is a question of fact which must be affirmed on review if the lower court's finding that there was no intent to contract was supported by competent evidence. After reviewing the evidence, Superior Court held that the trial court's finding as to the intent of the parties must be affirmed because it was supported by competent evidence and because the lower court had not abused its discretion. Superior Court also noted the lower court's determination that the parties had not included the terms necessary to calculate the escalation in price referred to in the contract. These open terms, according to Superior Court, supported an inference that the parties did not intend to be legally bound.*fn2

[ 507 Pa. Page 95]

The dissent, however, observed that under the Uniform Commercial Code, a contract may be made in any manner which indicates agreement, including conduct, and that when a contract exists, it will not fail if there is a "reasonably certain basis" for fashioning a remedy. 13 Pa.C.S.A. § 2204. The dissent then determined that the conduct of the parties indicated an intent to enter a legally binding contract and that under 13 Pa.C.S.A. § 2305, the section of the code concerning contracts containing an "open price term," a "reasonable price at the time of delivery" is the proper remedy and that the court is capable of fashioning such a remedy.

STANDARD OF REVIEW

It is axiomatic, of course, that this Court will not disturb the factual findings of a trial court if there is competent evidence of record to support the findings and if the court has not abused its discretion. Further, when intent to contract is at issue, the lower court's determinations of intent will not be disturbed if supported by competent evidence and if the court did not abuse its discretion. Snow v. Corsica Construction Co., 459 Pa. 528, 329 A.2d 887 (1974); Field v. Golden Triangle Broadcasting, Inc., 451 Pa. 410, 305 A.2d 689 (1973); Hatalowich v. Redevelopment Authority of Monessen, 454 Pa. 481, 312 A.2d 22 (1973); Goldman v. McShain, 432 Pa. 61, 247 A.2d 455 (1968).

[ 507 Pa. Page 96]

Although the dissent in Superior Court characterized the determination of contractual intent as one of ultimate fact, or one of inference drawn from facts, and therefore reversible by an appellate court, it is nevertheless true that Pennsylvania law has traditionally treated such determinations as factual:

The first issue involves the Chancellor's [finding that the parties entered into a particular oral agreement]. We are mindful that the findings of the Chancellor will not be reversed unless it appears that he has clearly abused his discretion or committed an error of law . . . and that the findings have the full force of a jury verdict and, if supported by sufficient evidence and if affirmed by the court en banc, will not be disturbed on appeal . . . . As we stated in Masciantonio Will. . . "The test is not whether we, the appellate court, would have reached the same result had we been acting as the hearing judge who saw and heard the witness, 'but rather whether a judicial mind, on due consideration of the evidence, as a whole, could reasonably have reached the conclusion of the chancellor.'"

Yuhas v. Schmidt, 434 Pa. 453-54, 258 A.2d 616, 619-20 (1969). While the dissent's point is well taken that a finding of contractual intent is an inference drawn from facts, it is also an inference drawn in the context of the whole record, including matters of credibility, and such matters are clearly for the trial court to determine. Thus, our standard of review is to ask whether the findings of fact, including the determination of contractual intent, are supported by any competent evidence of record which a reasonable judicial mind could find as supportive of the determination made by the fact finder.*fn3

Within the context of this standard of review, the two issues which this Court must address in the present case are whether the parties intended to enter into a legally

[ 507 Pa. Page 97]

    enforceable option contract for the sale of ore vessels; and whether, if the parties intended that such a contract exist, its terms are sufficiently clear to be enforceable. Among the evidence of record which has a bearing on these issues are: (1) the writings themselves; (2) statutory provisions concerning the formation of contracts with open terms; (2)(a) conduct having a bearing on the determination of contractual intent; (2)(b) open terms which may have a bearing both on intent and ability of the court to fashion a remedy.

(1) THE WRITINGS

THE LETTERS OF APRIL 25, 1968 and DECEMBER 31, 1968

It is possible, of course, that a clear indication of contractual intent might be gleaned from the documents themselves, and to that end, they must be considered. Litton's letter of April 25, 1968 reads: "We hereby extend you an offer to enter into an option agreement . . . . This offer to enter into an option agreement shall be firm and irrevocable until December 31, 1968 at 5:00 P.M. E.S.T." Bethlehem on December 31, 1968 responded: "We hereby accept your offer of an option . . . ."

As the trial court indicated, if Bethlehem had accepted what was offered, it would have accepted "your offer to enter into an option agreement," not "your offer of an option." By purporting to accept an option, Bethlehem, was, as the trial court put it, accepting more than was offered. Thus, it cannot be said from an examination of the documents alone that the parties intended to be contractually bound to the terms of the writings, for one was offering we know not what and the other was accepting something that was not offered.

Moreover, the writings contain a number of open terms: (a) an excalation index (a multiplier which adjusts the price of labor and materials for inflation), (b) "an appropriate contract clause" providing for quarterly escalation after the option is exercised (hereinafter referred to as an "apportionment

[ 507 Pa. Page 98]

    clause" because it determines the manner in which escalation will be paid or apportioned over each quarter of the contract period); (c) "any other mutually agreed to terms and conditions."

Nevertheless, regardless of the ambiguity of the writings, because the parties' conduct, under the provisions of the Uniform Commercial Code, may indicate that the parties did in fact intend to be contractually bound and, and because under the Code the missing terms may be able to be supplied by a court, we must examine the principles of the law under the Code which govern the formation of sales contracts.*fn4

(2) FORMATION OF A CONTRACT WITH OPEN TERMS

The section of the Uniform Commercial Code, as enacted in Pennsylvania, concerning formation of contracts provides:

§ 2204 Formation in General

(a) General rule -- A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

[ 507 Pa. Page 99]

    terms there are which are left open, the less likely it is that the parties intended a contract, but the comment leaves open the possibility that the parties' actions might so blatantly acknowledge the intent to be contractually bound that an inference of contractual intent may be drawn in spite of the number of terms left open.

Applying these principles to the present case, we must determine whether the parties intended to create a contract and whether there is a "reasonably certain basis" for supplying a remedy if they did so intend. In making the determination as to intent, we may consider the conduct of the parties and the number and nature of terms left open.

(2)(a). INFERENCES AS TO CONTRACTUAL INTENT WHICH MAY BE DRAWN FROM THE CONDUCT OF THE PARTIES

The dissenting opinion of Judge Hester in Superior Court notes a number of matters which, in the dissent's view, constitute conduct indicating an intent to be contractually bound. Two of these items are worthy of comment:

9. In its financial plan of July, 1973, Litton acknowledged the outstanding option as follows:

"It should be noted that Bethlehem has an option for construction of up to five (5) new vessels. That option will not expire until December 31, 1973. The terms of the option, if exercised by Bethlehem, would result in substantial losses by Litton."

14. In a letter of March, 1970, from Litton to Bethlehem, Litton stated as follows:

"Bethlehem already has an option agreement covering the next five vessels of the L.S.C. [Litton Super Carrier] type. We assume that you continually weigh the escalating cost of exercising these options against the projected going rate, your own fleet cost, the cost and benefits of postponing the decision further, and other investment opportunities in Bethlehem."

Slip Op. at 40, 41. Item # 9 overtly acknowledges that "Bethlehem has an option," and item # 14 similarly states, "Bethlehem already has an option agreement covering the

[ 507 Pa. Page 101]

    next five vessels . . . ." Such language clearly indicates that at least some Litton people believed there was an option contract, and if there were nothing more, would constitute conduct of a party indicative of an intent to be contractually bound.

On the other hand, other items listed by the dissent in Superior Court as indicative of contractual intent, are not so indicative:

7. In its internal Financial Forecast of February, 1973, Litton calculated certain escalated contract prices, for the estimated cost of ore vessels and concluded "the contract value, based upon the Bethlehem letter of December, 1968 does not support persuing [sic] this business."

12. In 1971, Litton attempted to sell its shipyard on the Great Lakes to American Shipbuilding; and, in a draft acquisition agreement, Litton listed its obligations "in and pursuant to that certain agreement between Erie Marine Inc., and Bethlehem Steel Corporation set forth in letters dated April 25, 1968, May 8, 1968, November 29, 1968, and December 31, 1968."

Slip Op. at 39, 40. As to item # 7, the fact that Litton calculated "certain escalated contract prices" for the ore vessels does not mean that Litton believed it had a contractual obligation. In fact, the last sentence of # 7 indicates the opposite: it states that the contract value does not support pursuing the business, implying the existence of a choice -- not an obligation -- as to whether the business should be pursued. Concerning item # 12, the fact that Litton told a potential buyer of its Erie shipyard that there was a "certain agreement" between Litton and Bethlehem which was contained in various letters was merely a recognition that this potential purchaser had a right under the draft acquisition agreement to know of potential liabilities. Litton may or may not have thought there was a contractual obligation between the parties, but it had a contractual obligation to inform American Shipbuilding of the possibility that if it purchased the Erie yard, it might be buying a lawsuit.

[ 507 Pa. Page 102]

In all, the dissent below lists a total of sixteen items which allegedly illustrate conduct of the parties indicative of an intent to be contractually bound. Some of these items, in fact, support that inference; others do not. The importance of this observation is only that if there is a case to be made supporting the inference of Litton's intent to be contractually bound derived from Litton's conduct, the case is not so strong as the dissent would have it.

Concerning Bethlehem's conduct, it is self-evident that the letter of August 21, 1973 from A.K. Smith, Bethlehem's Purchasing Agent, indicating that Bethlehem intended to exercise its "options," constituted conduct consistent with an intent to be contractually bound. Further, it cannot be said that Bethlehem's failure to bargain earlier as to the open terms of the option necessarily is conduct which is inconsistent with an intent to be contractually bound. However, even in the August 21, 1973 letter, Bethlehem's Purchasing Agent stated:

Several aspects of the referenced agreement are subject to the mutual agreement of the parties and we request an early meeting with you to resolve these matters. Please let us have your early reply.

Thus, the very letter in which Bethlehem announces its intent to exercise its purported option specifically acknowledges that the agreement has open terms which must be mutually agreed to as a condition precedent to the effectiveness of the agreement. Additionally, Bethlehem's Purchasing Agent admitted at trial: "We indicated on August 21, we intended to exercise our options and there were things that had to be resolved before we actually could have a commitment." This same witness also testified, as follows:

Q. Why didn't you make the downpayment at the time you sent the letter [purporting to exercise Bethlehem's option]?

A. Because, we didn't have an agreement with you. There were clauses that we agreed -- there were clauses that we agreed ...


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