Bethlehem Steel Corp. v. Litton Indus., Inc. - 321 Pa. Super. 357, 468 A.2d 748 (1983)

Rule:

The inquiry into whether a contract exists begins at the ascertainment of the intention of the parties. If the parties intended no binding contract, a court cannot employ the various rules of interpretation and construction to establish one. It is only after a mutual intent to enter into a legally binding contract is found from the evidence that the court can proceed to determine the terms of the contract. If no such intent is found, the court's inquiry must end there.

Facts:

On or about April 25, 1968 Litton entered into an agreement with Bethlehem whereby Litton would construct and deliver and Bethlehem would purchase a one thousand foot self-unloading ore vessel. The vessel constructed under that agreement was delivered, accepted, and the price paid therefor. Litton extended to Bethlehem by letter dated April 25, 1968 "a written offer good until December 31, 1968 for the entry into an option agreement for five vessels." Bethlehem accepted the Litton's offer to enter into an option agreement under which Bethlehem was granted the right for a period of five years after the execution of the option agreement to obtain from Litton from one to five vessels for prices varying between $ 22,400,000.00 and $ 18,400,000.00 each. Bethlehem, pursuant to the option agreement, by letter dated November 16, 1973 exercised its option for two vessels and thereby ordered the first and second vessels in accordance with the option agreement. On December 26, 1973 Bethlehem, pursuant to the option agreement, exercised its option for an additional (third) vessel. Thereafter, Litton expressly and unequivocally refused to perform in accordance with its obligations under the option agreement. Litton also demanded the payment of a price for each vessel many millions of dollars in excess of the price provided for in the option agreement and indicated delivery dates substantially later than the delivery provided in the option agreement. Thus, on June 19, 1974 Bethlehem filed a complaint in assumpsit against Litton  and Erie Marine, Inc., a division of Litton, trading as Erie Marine division of Litton Industries. Damages were sought in a sum in excess of $ 95,000,000.00 together with interest and costs. The trial court awarded judgment to defendant, finding that plaintiff had not sustained its burden of proving that the parties intended to be contractually bound.

Issue:

Do the letters exchanged between Bethlehem and Litton and Erie constitute a contract?

Answer:

No.

Conclusion:

As indicated, the two letters, PX-4 and PX-1, address the items of greatest concern (in this case with exactly the same express language) that there had to be future agreement. Even if the Uniform Commercial Code is applicable, the Court must first find that there was intent to enter into a contract by the two letters (PX-4 and PX-1). The same criteria has to be used in this regard as is used in determining whether or not there is a contract at common law. Even if the Court had found that there was such an intent, there then arises the matter of ability of the Court to fill in the gaps because, if anything is clear in PX-4 and PX-1, it is that gaps exist which must be filled in. If a contract did exist, there are three general areas in which gaps appear which would require the Court's intervention to fill.

The first term obviously left open was the original escalation index which would be used to calculate the increase in cost per vessel over the time between PX-1 to the date of contract execution. The only aspect of this stage of escalation that the documents provided is that an index method of escalation shall be used for this portion of escalation, and that the index shall be mutually agreed upon, as evidenced by the language 'mutually agreed upon index such as . . .' Because the parties established the method of arriving at the index as mutual agreement, and because of the complexity of negotiations of escalation clauses in the shipbuilding industry, the Court cannot fill in such a gap in light of Code Section 2-305(4).

The second gap relates to 'second stage escalation' which PX-4 and PX-1 establishes as the escalation from the execution of the construction contract to the end of the escalation period: '. . . an appropriate contract clause will be included therein providing for quarterly escalation thereafter.' An escalation clause is a complex, detailed contractual provision negotiated between parties to provide a means necessary to calculate and pay escalation. It is an equitable concept that escalation clauses must be such as not to give the builder a windfall nor to have the builder suffer losses due to inflation. Because of inflation since the middle 1960's, the escalation clauses became one of the most critical provisions of a ship construction contract. There are many essential elements to be negotiated in an escalation clause, some of which are very critical, such as the indexes to be used, the escalatable amount, the amount escalatable each computation period, the duration of escalation, payment, and the method of computation. These elements can have numerous possible variations resulting from negotiations between the parties. One of the most critical elements and perhaps the heart of an escalation clause is the amount escalatable each computation period. This is called the 'apportionment' which can have an infinite number of possible variations and will vary from ship to ship depending upon the time of construction, the place of construction, needs and desires of the parties.

The third gap which the Court would have to fill if it found a contract otherwise existed, arises from the language indicated that the terms and conditions were to be in accordance with the sample contract and 'any other mutually agreed upon terms and conditions.' In view of the fact that the sample form of contract was for a fixed price contract, there must of necessity be changes required since the writings clearly indicate that the parties contemplated an escalation contract. Such a contract would require additional terms and conditions from those that appear in the sample form.

In addition, there are numerous other terms which might be expected to be in a ship construction contract of this magnitude. Evidence of this can be found in the contract (DX-12) proposed by the plaintiffs at the September 24, 1973meeting with defendants. This proposed contract varied substantially from the sample contract in at least twelve separate items. These altered or added terms strongly suggest that, at least in the mind of Bethlehem, there were many items left out of the sample contract, or left to be negotiated at a later time. 

The breadth of these gaps can only be appreciated in light of the nature of the vessel. The apportionment in quarterly escalation, if nothing else, must be one to be negotiated between the parties. Apportionment does not depend upon the actual use of labor or material in a particular quarter, but is an item negotiated between the parties depending upon what the parties are aiming at, either for the purpose of securing payments earlier during the construction period or for a later payment, but higher escalation. The extent of the escalation period can also vary, the payment of escalation amounts can vary, and a host of factors can move the parties to a variety of allocation of apportionment. All of the expert testimony indicated that such clauses could not be materialized from the air by the Court. Because of the nature of negotiations in shipbuilding and the extreme complexity of the undertaking, such a clause would require careful negotiations between the parties and would need to be custom tailored to fit the project. There is nothing in the record upon which the Court could extract such a clause.

Because of the nature of the gaps as has been discussed in this Option, it would appear that only the parties are the exclusive entities capable of filling in the gaps. Because these gaps are so wide, the Court cannot make a new contract for the parties. When all of the above elements and the fact that the parties involved here are two of the largest corporations in this country are considered, and PX-4 is only a two-page letter, the language of Mr. Justice Cohen in the case of Essner v. Shoemaker is most appropriate: “It is difficult to believe that the principals, experienced in real estate dealings as they were, would intend to . . .[assent unequivocally] to an oral agreement in a transaction involving more than a quarter of a million dollars, [and] complicated by assignments, mortgages and taxes . . .”