Eastern Airlines, Inc. v. Gulf Oil Corp.

415 F.Supp. 429 (1975).

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Nature of the Case

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Facts

P and D entered into an agreement for D to furnish jet fuel to P at certain specific cities. This agreement supplemented an existing contract between Gulf and Eastern which, on June 27, 1972, had approximately one year remaining prior to its expiration. The contract is D's standard form aviation fuel contract. It is similar to contracts in general use in the aviation fuel trade. The contract was drafted by D after substantial arm's length negotiation between the parties. It was executed by the parties in June 1972, to expire January 31, 1977. The contract provided a reference to reflect changes in the price of the raw material from which jet fuel is processed, i.e., crude oil, in direct proportion to the cost per gallon of jet fuel. The previous P-D contracts contained a price index clause which operated to pass on to P only one-half of any increase in the price of crude oil. Both parties knew at the time of contract negotiations that increases in crude oil prices would be expected, were 'a way of life,' and intended that those increases be borne by P in a direct proportional relationship of crude oil cost per barrel to jet fuel cost per gallon. They selected an indicator West Texas Sour. From June 27, 1972, to the fall of 1973, there were in effect various forms of U.S. government imposed price controls which at once controlled the price of crude oil generally, West Texas Sour specifically, and hence the price of jet fuel. It was during late 1973 that the Mid-East exploded in another war, accompanied by an embargo by the Arab oil-producing nations against the United States and certain of its allies. World prices for oil and oil products increased. The United States government began a series of controls affecting the oil industry. Taking as the benchmark the number of barrels produced from a given well in May of 1972, that number of barrels is deemed 'old' oil. The price of 'old' oil then is frozen by the government at a fixed level. To the extent that the productivity of a given well can be increased over the May 1972, production, that increased production is deemed 'new' oil. For each barrel of 'new' oil produced, the government authorized the release from price controls of an equivalent number of barrels from those theretofore designated 'old' oil. The impact on oil prices was nominal, until the imposition of an embargo upon the exportation of crude oil by certain Arab countries in October 1973. OPEC increased the price of their crude to the world market some 400% between September 1973, and January 15, 1974. New and released oil (uncontrolled) soon reached parity with the price of foreign crude, moving from approximately $5 to $11 a barrel from September 1974 to January 15, 1974. D demanded that P pay more or it would cut off P's fuel supply within fifteen days. P sued D. D argued that the contract was not a binding requirements contract because it was not specific as to the quantity of oil that would be bought and sold. A preliminary injunction was issued to preserve the status quo. Under the court's restraining order, P has been paying for jet fuel from D on the basis of the price of 'old' West Texas Sour crude oil as fixed by government price control action, i.e., $5 a barrel. Approximately 40 gallons of finished jet fuel product can be refined from a barrel of crude.