Carbontek Trading v. Phibro Energy

Phibro Energy, Inc. (Phibro) (defendant) purchased coal from Carbontek Trading Company, Ltd. (Carbontek) (plaintiff) pursuant to a contract governed by New York law. Phibro contracted to sell the coal to Denmark-based Elkraft Power Company, Ltd. (Elkraft). On April 8, 1987, while inspecting the coal at the shipping dock, Phibro and Elkraft discovered that the coal was contaminated. Elkraft and Phibro thus rejected the coal. The coal nevertheless was loaded onto the ship, which sailed for Denmark on April 14. Phibro did not communicate with Carbontek at this time other than to encourage Carbontek to look for another buyer. On April 14, Elkraft agreed to buy the coal from Phibro for $192,000 less than the original price. This agreement was reflected in an April 15 telex in which Elkraft stated that it would deduct $192,000 as “full compensation” for the contamination. (An April 14 internal Phibro telex showed that $192,00 was derived by multiplying the coal’s weight by Elkraft’s lowered price.) On April 15, Carbontek sued Phibro, seeking payment of the full contract price. On April 21, Phibro notified Carbontek of its new arrangement with Elkraft. On April 23 and May 1, Phibro advised Carbontek that the coal would arrive in Denmark on May 2, which it did. On May 1 and May 4, Carbontek told Phibro about potential alternate buyers. Elkraft accepted the coal on May 5, paying Phibro the original contract price less $192,000. Phibro then paid Carbontek, deducting $192,000 and certain other claimed loading-and-delay expenses, plus an additional $10,000. After trial, the district court ruled that Carbontek breached its contract by delivering contaminated coal. However, the district court ruled that although New York’s Uniform Commercial Code (UCC) permitted Phibro to deduct the difference between the value of the coal that Carbontek was supposed to deliver and the coal that Carbontek actually delivered, $192,000 was too large a deduction. Per the district court, $50,000 was a more appropriate deduction because the court saw no evidence that $192,000 represented Phibro’s actual damage and because Carbontek received better offers. The district court also disallowed the delay-related expenses, ruling that Phibro caused them. Phibro appealed the damages award.