AVX Corporation (AVX) manufactures capacitors for electronic products. Tantalum is an elemental metal, as rare in nature as uranium, used in the manufacture of those products. In January, 2001, AVX entered into a multi-year supply contract with Cabot Corporation (Cabot), a major supplier of tantalum
1. Background. We draw these facts from the undisputed facts in the record. Cabot is a specialty chemicals company, incorporated in Delaware with headquarters in Massachusetts. AVX is also a Delaware corporation and maintains its principal place of business in South Carolina. A majority of its shares are owned by a Japanese conglomerate, Kyocera Corporation. AVX is one of the largest manufacturers and sellers of tantalum capacitors in the world. Both Cabot and AVX are publicly traded corporations and have annual sales of more than one billion dollars.
Tantalum is available in several forms, including wire and numerous grades of powder. The tantalum capacitors that AVX manufactures require the use of various grades of tantalum powder.
The market for tantalum has been volatile. Periods of high demand, supply shortages, inventory hoarding, and sharply rising prices have been followed by recurring episodes of reduced demand, over production, large customer inventories, and rapidly falling prices. The relative scarcity of tantalum and its historical susceptibility to supply shortages have caused fluctuations in its price to be significantly more pronounced than those of other industrial metals.
AVX has purchased tantalum products from Cabot for many years, and the two companies have worked together to develop new tantalum products and technology. By April, 2000, Cabot was supplying approximately twenty per cent of AVX’s total tantalum product requirements. Each year, the parties signed “letters of intent” setting forth estimates of AVX’s anticipated tantalum needs and agreed-on prices for each type of product. Cabot maintains that these letters were for planning purposes only, and that, in actual practice, sales deviated from the prices and quantities stated in the documents without protest from Cabot. AVX contends that the documents were binding contracts, entitled “letters of intent” only because they did not establish specific amounts of product that would be purchased, and were akin to “requirements contracts.”
In the late 1990’s, Cabot attempted to convince AVX to enter
Later in 2000, a worldwide shortage of tantalum developed, and demand for electronic products using tantalum capacitors reached unprecedented levels. Orders from some of AVX’s customers increased by more than 200 per cent, and AVX announced a dramatic increase in sales over prior years. Supplies of raw tantalum were severely limited. Cabot and other tantalum product manufacturers found it difficult to satisfy the rising demand for tantalum products, resulting in a steep rise in its price throughout the industry. In August, 2000, Cabot notified all of its customers that, in the future, it proposed to commit its limited production capacity to those customers who were prepared to enter into binding, long-term supply contracts.
AVX contends that, in the' guise of negotiating a long-term supply contract, Cabot “began a calculated strategy simultaneously (i) to starve AVX of product, and (ii) to issue threats that Cabot would [commit á breach of] the existing short term agreement unless AVX caved into its demands.” Between August and November, 2000, Cabot and AVX negotiated the terms of a binding, long-term supply contract. Proposals and counterproposals were exchanged. Both parties were represented by highly competent legal counsel throughout the process. AVX contends that these negotiations “continued in the context of
During the negotiation process, AVX claimed that Cabot was obligated by the letters of intent to continue selling to AVX particular quantities of tantalum powders and wire through January, 2002, and January, 2001, respectively. Cabot took a contrary position. By the end of October, however, AVX offered to waive its claims relating to the letters of intent if the parties could otherwise agree on an acceptable supply relationship.
On November 7, 2000, Cabot and AVX memorialized the terms of a basic agreement to a binding, five-year contract, under which AVX would purchase specified quantities of tantalum powder and wire at stated prices.
During the first half of 2001, demand for tantalum products and capacitors remained high. AVX insisted that Cabot make deliveries of tantalum products in strict compliance with the terms of the supply contract. When Cabot fell behind on shipments because of production constraints, AVX pressed Cabot “to catch up on the contract.” Cabot agreed, proposed a schedule for future deliveries, and thereafter met the schedule.
Sometime prior to May, 2001, executives at AVX and Cabot began discussing the possibility of making a number of modifications to the supply contract. Those modifications included reducing the quantity and cost of some products that AVX was obligated to take, increasing the amounts of flake powder AVX would be entitled and required to purchase, making changes (sought by AVX) to certain mix restrictions on flake powder products, extending the time for billing and payment, and extending the term of the contract on flake powder by two years. In communications with AVX, Cabot valued its concessions with respect to the principal product on which AVX sought price and quantity reductions at $47.8 million.
These discussions led to an agreement in principle that, in accord with AVX’s corporate policy, needed to be submitted to the AVX “executive group” headed by the company’s president and chief executive officer for approval. This was done in July, 2001, and the agreement was rejected.
Throughout the supply contract’s five-year term, both AVX and Cabot performed under its terms. Between January, 2001, and July, 2002, AVX purchased tantalum products worth more than $173 million from Cabot in 469 separate transactions, at the prices and in the amounts specified in the supply contract. By October, 2003, AVX had purchased tantalum products worth more than $342,809,000 in 739 separate transactions under the
On July 26, 2002, more than twenty months after the supply contract was negotiated, and more than eighteen months after it was executed, AVX commenced an action against Cabot in Federal court. AVX alleged that the 2000 letters of intent were binding contracts and that the supply contract was void because it had been executed by AVX under economic duress. The action was dismissed for lack of diversity jurisdiction.
Cabot commenced this action in March, 2003, seeking a declaration that the supply contract was a valid and binding contract, and that the 2000 letters of intent were not binding contracts, and were, in any event, superseded by the supply contract, which expressly settled and released all claims relating to them. In its answer, AVX asserted economic duress with regard to the supply contract, and filed various counterclaims, seeking declarations that (1) the 2000 letters of intent were binding contracts; (2) Cabot committed a breach of the 2000 letters of intent; (3) Cabot’s knowing disregard of the 2000 letters of intent violated G. L. c. 93A; and (4) Cabot violated the covenant of good faith and fair dealing implied in the 2000 letters of intent when it took “advantage of its market position in the face of a tantalum shortage which it knew was only temporary to coerce AVX into executing” the supply contract. In its answer to the counterclaims, Cabot asserted that AVX had ratified the supply agreement and had released its claims under the letters of intent. Cabot filed a motion for partial summary judgment, which was allowed.
2. Standard of review. We review a grant of summary judgment to determine whether, viewing the evidence in the light
3. Economic duress. It is well established that a contract entered into under duress is voidable. Barnette v. Wells Fargo Nev. Nat’l Bank,
“The elements of economic duress have also been described as follows: ‘(1) that one side involuntarily accepted the terms of another; (2) that circumstances permitted no other alternative; and (3) that said circumstances were the result of coercive acts
AVX bears the burden of proving that the supply contract it entered into with Cabot was executed under economic duress. Willett v. Herrick,
AVX and Cabot are sophisticated and substantial commercial parties. They were represented by highly competent counsel in their negotiations of a contract that was to govern their commercial relationship over the long term, and to settle their differences over the validity of prior agreements, purchase orders, and letters of intent. In these circumstances, we will strictly construe the requirements of economic duress against the party asserting it, so as not to undercut the well-established public policy favoring the private settlement of disputes. Ismert & Assocs. Inc. v. New England Mut. Life Ins. Co.,
There is no dispute that the strength of Cabot’s bargaining position in negotiating the supply contract, as well as AVX’s weakened position, were the result of a worldwide shortage of
The parties also acknowledge, as they must, that it is not infrequent that “when two commercial parties enter into an agreement, one of them has a decided economic advantage over the other,” and that “[t]he weaker party often must often enter into the bargain because of his economic circumstances, a disparity in bargaining power to his disadvantage, or some combination of the two.” VKK Corp. v. National Football League,
Absent any legally cognizable restraint, Cabot was free to drive whatever bargain the market would bear. AVX contends, however, that Cabot did not just engage in hard bargaining, it acted wrongfully in threatening to withhold tantalum deliveries to AVX in violation of the terms of the letters of intent, in order to coerce AVX into signing the supply contract. David Nassif Assocs. v. United States,
The letters of intent are unambiguous and where language is unambiguous, its interpretation is a question of law that may be resolved on a motion for summary judgment. Seaco Ins. Co. v. Barbosa,
The deposition testimony of AVX employees as to their understanding and use of the letters of intent is consistent with the conclusion that they were not binding. One AVX employee who routinely submitted purchase orders to Cabot testified that his understanding of the agreements was that they were flexible so that if AVX’s tantalum needs changed, it “was not required to actually purchase the specific products or the specific quantities set forth” in the letters and that the quantities set forth in the agreements were “listed for reference for planning purposes [and were] not binding.” The AVX materials manager similarly testified that, while he understood the prices set forth were binding, the quantities were not. He further understood that nothing was binding on AVX until it gave a specific order and that order was confirmed by Cabot.
In addition to establishing that Cabot acted wrongfully in order to coerce AVX into signing the supply contract, AVX must also prove that it had no feasible alternative in the face of this wrongful conduct but to enter into the supply contract. Leaving aside the question whether AVX could have bought tantalum product from other suppliers, “[c]ourts have consis
4. Ratification. Even if we were to conclude that, for purposes of summary judgment, material facts regarding the existence of economic duress remain in dispute, Cabot nonetheless would be entitled to summary judgment because the undisputed material facts establish that AVX ratified the contract by its actions.
A contract that is voidable for duress may be ratified and affirmed. Ford v. Retirement Bd. of Lawrence,
As ratification is an affirmative defense to AVX’s claim of economic duress, Cabot bears the burden to show that AVX ratified the contract. Rydman v. Dennison Mfg. Co.,
“A party may ratify an agreement entered into under duress in a number of different ways: ‘first, by intentionally accepting benefits under the contract; second, by remaining silent or acquiescing in the contract for a period of time after he has the opportunity to avoid it; and third, by recognizing its validity ... by acting upon it, performing under it, or by affirmatively acknowledging it.’ ” In re Boston Shipyard Corp.,
The supply agreement was executed in January, 2001, and the first time AVX asserted duress was in July, 2002. The “burden of avoiding a contractual obligation on the ground of duress ‘necessarily increases proportionately with the delay in initiating suit.’ ” Ismert & Assocs., Inc. v. New England Mut. Life Ins. Co.,
The record viewed in its light most favorable to AVX leaves little doubt that whatever coercion AVX believed it was subject to during the last half of 2000, and the first half of 2001, it was fully capable of exercising its “free will and judgment” with regard to the contract by July, 2001, when it rejected modifications negotiated by its management and agreed to by Cabot. Coveney v. President & Trustees of the College of the Holy Cross,
Ratification is further evidenced by AVX’s performance under the contract. During 2001, while the market for electronic capacitors remained strong, AVX accepted the benefits afforded it under the terms of the supply contract, purchased Cabot’s tantalum products necessary to its manufacture of capacitors, and demanded that Cabot deliver those products in the quantities and in the time frames specified therein.
AVX contends, however, that the purchases it made in 2001 were pursuant to the preexisting letters of intent and not the supply contract. There is no evidence in the record to support this contention.
AVX finally argues that ratification of the supply contract was only possible once it formed an intent to ratify, an intent it claims it never formed. While an intention to ratify is “an essential element and is at the foundation of the doctrine of waiver or ratification,” it may be shown by “conduct inconsistent with any other hypothesis than that of approval.” Annot., Ratification of Contract Voidable for Duress,
AVX cannot simply accept the terms of a supply contract favorable to it, obtain the supply it needs, and claim it did not intend to ratify the contract because some terms were unfavorable to it. Stated otherwise, it cannot “wait[] to see how the arrangement works out and then decid[e] whether to seek to undo it.” VKK Corp. v. National Football League,
5. Conclusion. Summary judgment was properly granted for Cabot. The supply agreement is not voidable for economic duress. Consequently, the release it contains is enforceable. Cabot and AVX have released each other from “any and all claims and causes of action relating to, or arising under, the Prior Agreements.” Cabot is entitled to judgment as a matter of law.
Judgment affirmed.
Notes
Capacitors are passive components used in a wide range of modern electronic devices, including cellular telephones and personal computers. Tantalum is a preferred raw material for high performance electronic capad
A requirements contract is one that measures the quantity of goods to be purchased as “such actual . . . requirements as may occur in good faith.” G. L. c. 106, § 2-306 (1). There is no mention in the letters of intent that AVX to purchase its tantalum product “requirements" from Cabot.
The parties agree that a “take or pay” contract sets forth a mandatory amount of product to be purchased. Even if AVX does not take the product, it must pay for it.
The letters of intent for tantalum powder products set forth prices and amounts intended to be purchased through January 31, 2002; the letters of intent for tantalum wire products applied through January 31, 2001.
As evidence that Cabot was intentionally starving AVX of needed product, AVX points to a shipment of C606 it received in May, 2000, that was 1,200 kilograms short of the agreed amount. However, it is undisputed that Cabot was “shipping [C606] faster than AVX [was] consuming” it at that time. By August, 2000, shipments of C606 were current, while shipments of other powders were “backdue,” according to Cabot records.
The supply contract also provided for the sale of tantalum “scrap” from AVX to Cabot.
For example, under the supply agreement, AVX agreed to buy tantalum powder from Cabot at $500 per pound. In late 2000, AVX purchased tantalum powder from one of Cabot’s competitors for $500 per pound and agreed to purchase from another competitor at $1,000 per pound.
Although AVX argues that Cabot was intentionally delaying shipments in 2001 as an exercise of coercion, there is no evidence in the record that supports this contention.
It is not entirely clear why the proposed agreement was rejected. Notes in the possession of Cabot, regarding a conversation with AVX after the rejection, suggested that the AVX chief executive officer wanted the most favored customer provision included in the two-year contract extension period for
During the latter half of 2001, both Cabot and AVX sought and agreed to relief from some of the contract provisions that made little sense in a declining market. For example, in November, 2001, AVX was excused from a requirement that it purchase additional tantalum powder worth $2.5 million by the end of the year, for which it had “absolutely no use,” and which would result in “further degradation of our financial health.”
In an e-mail dated December 21, 2001, the president and chief executive officer responded to the vice-president’s recommendation, advising that the concessions were not sufficient over the long term, and that, “[i]f we now renegotiate and revalidate this contract then we have no possible relief . . . and the clauses in the new contract would further tie our hands ... we were in a better condition than we thought we were then ... we need to listen to the lawyer . . . and other avenues for redress before we sell our soul again to this devil.”
During the same period, AVX also sold tantalum scrap worth more than $5 million to Cabot at the prices stated in the supply contract.
The motion related to five of six counts; thus, the decision did not dispose of all claims and counterclaims. The parties then entered into a stipulation of dismissal without prejudice with respect to the unresolved claims and counterclaims, thereby permitting the entry of a final judgment in Cabot’s favor. See Mass. R. Civ. P. 58 (a), as amended,
Even if the language of the letters of intent could be viewed as ambiguous, the history of their use as evidenced in the record makes it far from unreasonable for Cabot to take the position, in good faith, that they were not binding. See Happ v. Corning, Inc.,
AVX also claims that Cabot engaged in a “pattern and practice that violated commercial norms of conduct” and points to deposition testimony by a representative of another tantalum products purchaser, to the effect that Cabot had forced it to accept a new contract to avoid suffering disastrous commercial consequences. But merely arguing that Cabot “intentionally gained market power with the purpose and intent of exercising leverage against its customers” does not show that Cabot’s conduct went beyond hard bargaining in a market that had turned favorable to Cabot. See Strickland Tower Maintenance, Inc. v. AT&T Communications, Inc.,
While we do not base our conclusion that AVX cannot reasonably expect to establish economic duress on the motion judge’s finding that there was no disproportionate exchange of value, that finding finds strong support in the record. Even though AVX may have preferred to order and buy tantalum products on a year-to-year basis, the supply contract provided it with a long-term supply of an exceedingly rare product (in an admittedly volatile market) necessary to its manufacturing business, at then market prices, with a most favored customer clause to protect it against its competitors.
The requirement of prompt disavowal is not unfair to the disadvantaged party who will ordinarily know (as AVX claims to have known) that it was forced to execute the contract under economic duress. With such knowledge, the party “will therefore be able to disclaim the instrument immediately if he was forced into it by economic duress and wishes to avoid its effect.” VKK Corp. v. National Football League,
To the contrary, for example, in a May, 2001, letter, one division of AVX complained of “accumulating tantalum powder inventory” because of reduced demand and the “take or pay” contract with Cabot. The 2000 letters of intent, however, included a take or pay provision for only one type of powder (C606), not the type identified in the May, 2001, letter.