Cox Chemical, Inc. (OnJune 15, 2015, Mr. William Todd, director of purchasing of Cox Chemical Products, nc. of New Orleans, Louisiana, received an email from Puritan Chemicals of Knoxville, Tennessee, in which he was informed that the price at which Puritan was selling muriatic acid to Cox Chemicat’s Tulsa plant in Oklahoma was raised from $97.50 to $132.50 per net ton effective July 1, 2015. Although Mr. Todd had been aware of talk in trade circles about an expected sharp increase in demand for the chemical in the Tulsa region due to stepped up buying by steel mills, he considered the price change “unjustified, arbitrary, and unacceptable.” The director of purchasing observed: Puritan has been an important customer of Cox Chemical for some years. Frankly, we might have swallowed a price boost of say $10-15 per ton, but pushing it to $132.50 per ton is outrageous. We have no choice but to reject the increase completely and with determination. Cox Chemical’s Tulsa plant was depending on Puritan as the sole source of supply for the acid under an annual contract covering the year 2015. ‘Company Background Cox Chemical Products produced commodity chemicals, chemical intermediaries, and specialities. Over 95% of the company's 700 odd products were sold primarily to industrial markets both in the United States and abroad. Sales were over $1.2 billion in 2014 with net profits after taxes amounting to over $60 million, ‘Commodity chemicals, sold principally to other large chemical producers, such as Puritan, accounted for approximately 40% of sales in 2014. Products included alcohols, benzenes, chloroform, camphor, esters, ketones, purines, phenols, acetate and oxalic acids, caustic soda and potash, amines, and ammonia. In addition to other chemical companies, Cox Chemical’s customers for commodity chemicals intluded petroleum companies, food processors, pulp and paper manufacturers, textile companies, and steel mills. Muriatic Acid Cox Chemical’s Tulsa plant used muriatic acid, 20” Baue (31.45% HC1) for purification of NaCl brines fed to electrolytic cells. This application called for a low concentration of heavy metals, iron and other impurities. Strict and consistent adherence to specifications was important for the prevention ofimproper cell operation and also for storage in rubber lined equipment. The Tulsa plant preferred to purchase the material as “prime acid” rather than as a by-product of ethyl silicate, Cox Chemical—Puritan Relationships Cox Chemical and Puritan Chemicals had been buying from and selling to each other a variety of commodity chemicals for a number of years. Thus, for example, in 2010 Puritan had bought from Cox commodity chemicals amounting to $8.2 million, while Cox had placed orders with Puritan totaling $4.4 million. Between 2010 and 2014 this balance had changed as Cox doubled its purchases from Puritan to reach a total of $8.95 million, whereas the latter firm’s purchases from Cox had increased during the same period from $8.2 million to a total of $12.4 million by 2014. Of the two companies, Puritan was by far the larger one, with sales of $9 billion and net earnings after taxes of $394 million in 2014. Puritan employed approximately 74,000 persons in over 60 domestic and overseas plants. Procurement of Muriatic Acid ‘The need to purchase muriatic acid for Cox Chemical’s Tulsa plant had arisen in November 2013 when the 1plant discontinued its own production of the material because of an unfavorable cost structure. By the end of 2013 the company's director of purchasing had negotiated a contract for 2014 with Puritan for the supply of “the buyer's requirements of muriatic acid estimated at 4,000 tons and not to exceed this quantity without the seller’s consent at $97.50 per net ton delivered to the Tulsa plant. The contract specified that shipments were to be made from Puritan's plant in Springfield, Missouri or Dallas, Texas by tank truck. The terms and conditions under which Puritan accepted the contract stated, among other things, that rice ... may be revised as of the beginning of a new quarterly period commencing on the frst of January, April, uly, and October... by a written notice from the seller not less than 15 days prior to the date on which the new quarterly period is to commence...” Puritan had further stipulated that the buyer's written objection to a price revision served upon the seller prior to its effective date shall permit the buyer to purchase elsewhere quantities due during the ensuing quarterly period if the buyer is able to purchase from a responsible U.S. manufacturer and to furnish the seller with satisfactory written evidence of a bona fide cffer, and the seller shall have elected not to meet such offer in which event the seller shall be released from its obligation...."* Because of high transportation costs for the acid over long distances, Todd had been severely restricted in the choice of sources of supply. With the exception of Lee Chemical Company, a jobber in Nashville, Tennessee, that had solicited the plant’s muriatic acid business late in 2013, the director had been unable to locate other suppliers with plants sufficiently near Tulsa to sell to Cox Chemical at prices competitive with those of Puritan. Todd said: ‘The nearest supplier quoted us a price of $150 per ton delivered plant. Of course, the price we were paying to Puritan was very advantageous and in this sense the absence of ather suppliers was not considered to represent a particular problem at the time the contract was negotiated. In fact, when Lee Chemical solicited the business, | told them that we were very satisfied with our supplier. Normally a buyer doesn’t shop around for deals as long as he is convinced that the existing source of supply is excellent. Unloading facilities available at the Tulsa plant required that the acid be shipped by tank trucks. The material supplied by Puritan was pumped by the truck driver from the truck into storage. Tank cars, by contrast, would require additions to the existing railroad siding to reach the acid storage area and the use of the company yard crews. Plant engineers had estimated that the additional investment and labor required would add costs of up to $5 per ton of acid. The engineers had also noted that this cost figure presumed a full utilization of the facilities which could only be achieved by switching other incoming liquid chemicals from transport by tank truck to transport by tank car. The question of whether or not such switching would create other production problems had not been examined by the engineers. Developments Subsequent to Puritan’s Announced Price Increase Following the receipt of the email sent by Puritan, Todd telephoned the general sales manager of the Puritan chemical division producing the acid and expressed his deep dissatisfaction with the price increase. The director of purchasing commented: I told the man in no uncertain terms what | thought about the $132.50 price and that we refused to accept it. But | made little headway, and at the end of our conversation it was, " These and other terms and concitions were printed on the beck of Puritan's contract forms.perfectly clear that we couldn't just talk Puritan into rescinding the increase. On June 17, 2015, Mr. Todd, by letter, invited the Lee Chemical Company to submit a price quotation for muriatic acid and to indicate available tonnage, lead time and means of delivery. On June 21, Lee Chemical submitted a bid of $111 delivered Tulsa by tank car. The quotation indicated that Lee could deliver up to 3,500 tons per year and that the first shipment could arrive at Cox Chemical’s Tulsa plant within four days following the signing of a contract. in a cover letter accompanying the quotation, Lee’s president stated that a contract would have to be signed on a must-take basis for no less than 3,000 tons. The offered acid was a by-product from a chlorination process. In discussing Lee’s quotation with the general production manager of Cox's industrial chemical division and the production manager of the Tulsa plant, Todd encountered considerable skepticism. He observed: Because Lee was a jobber and the real source of supply was unknown, the production people were extremely wary of quality problems. The minimum-requirement and must- take features met with no enthusiasm, and delivery by rail was considered inadequate. There was no argument that the price was good. But we were all quite aware of the fact that disregarding the unreasonable price boost, Puritan was a top rate supplier. And no ‘one likes to dump an excellent supplier for some unknown outfit that might not be able to meet delivery schedules or adhere to specifications. [At Todd's request, Lee sent a one-quart sample of the acid to the Tulsa plant, which was analyzed and found to meet specifications. In an ensuing memorandum, the plant manager emphasized, however, that short of a trial run with a full tank truck, the production department remained unconvinced about Lee’s, material quality and that delivery by tank car as well as the minimum-requirement and must-take conditions were unsatisfactory (On June 22, Todd arranged for a meeting with Puritan representatives in which he reiterated in strong. language his company's unwillingness to accept the announced price increase. He disclosed to the Puritan representatives that as a result of Puritan’s action, he had sought and received a highly atttactive competitive offer for the supply of acid. He was careful, however, to avoid searching questions by the Puritan representatives regarding any details of the offer, and not to identify the source of supply. Todd gained the impression that the Puritan representatives seemed particularly anxious to ascertain information leading to an identification of the alternate source of supply. They pointed out that their company’s action was strictly within the bounds of the terms and conditions of the contract and reminded Todd that the contract called for the supply by Puritan of the Tulsa plant's entire muriatic acid requirement. The representatives stated their belief that this condition prevented Cox from using a second supplier during the term of the contract. They emphasized throughout the meeting that any serious consideration of an alternate source of supply for the acid by Cox was likely to have detrimental effects on the company’s relationships with Puritan. Todd commented: ‘There was no direct suggestion that we might lose some of Puritan's business, of course. | pointed out to them that we had made tremendous efforts since 2010 to increase our purchases from Puritan and would continue to do so. As far as the clause “buyer's requirements” was concerned, | took the position that this meant the Tulsa plant's requirements from Puritan rather than the plant's total requirements of the acid. | made it quite clear that we saw nothing in the contract that would compel us to stay with Puritan as the exclusive supplier from the Tulsa plant during 2014. Of course, | must admit that the term “buyer's requirements” was ambiguous and open to different interpretations. It was loose language that | should have caught at the signing of the contract. But, then, our relationships with the major chemical producers in the United States to whom we sell and from whom we buy are of a long-range nature, and the tiesare frequently quite closely knit so that the fine print on contract forms is not too important. At any rate, the meeting produced no results and Puritan stuck with the new price. On the following day, June 23, Todd contacted the president of Lee Chemical and informed him that although the small sample of acid submitted by Lee had been found satisfactory, the production department of the Tulsa plant had expressed considerable concern over the need for a consistent adherence to specifications, particularly since there was no knowledge of the producer of the acid. In addition, the director of purchasing pointed out that any price in excess of $95 per ton was unsatisfactory, that delivery by tank car was viewed with disfavor by the Tulsa plant, and that the minimum-requirements and must-take conditions attached to the quotation represented a significant obstacle to a serious consideration of the offer. Shortly after this conversation, Todd received a letter from the jobber offering a new price of $105 per ton delivered by truck. The letter pointed out, however, that the minimum requirements and must-take conditions could not be dropped in view of the favorable price. The letter furthermore suggested that Cox Chemical accept a full tank of acid for a trial run. After conf erring with the Tulsa plant manager, Todd ordered a tank truck from Lee for testing purposes, which arrived at the plant on June 28. On July 1, before the Tulsa plant had tested the trial shipment of acid, Todd received a letter from Puritan informing him that the announced price increase had been cancelled and that shipments of the acid would continue at $97.50 per ton. The letter reemphasized that under the existing contract Puritan was to supply all of the Tulsa plant's muriatic acid requirements. Todd communicated Puritan's price rescission to the Tulsa plant. In response, the plant manager suggested that Todd drop the jobber from further consideration in light of Puritan’s action and also in view of Lee's insistence on delivery of at least 3,000 tons of acid on a must-take basis. The plant manager pointed out to Todd that the total quantity offered by Lee was not sufficient to fill the plant’s needs, thus forcing Cox to rely on a second supplier even if a contract with Lee was signed. ¥ On July 9, the director of purchasing sent a memorandum to the Tulsa plant manager inquiring about the results of the trial run with the acid supplied by Lee. Todd concluded the memorandum with the following statement: In thinking about the present and also the future supply situation, with respect to muriatic, acid for your plant, | cannot help but think that ifit had not been for Lee’s offer, Puritan would now charge $132.50 per ton and this price would probably be the basis for the imminent negotiations for 2016. it was not until August 10 that Todd received a memorandum from the Tulsa plant manager stating that the results of the trial run had been satisfactory. The plant manager added that while he could not be absolutely certain, he had good reason to believe that the jobber was buying the acid from the National Chemical Corporation of St. Louis. This information was of interest to Todd since he knew that Puritan was allarge buyer of several commodity chemicals produced by National Chemical. Before Todd had come to a conclusion on how to proceed with the offer made by Lee, he received a phone call from Lee's president who was anxious to learn about the results of the trial run. Upon being informed by Todd that the results had been satisfactory, the Lee president expressed his desire to sign a contract, indicating that he would be prepared to take a partial-requirement contract of less than 3,000 tons and to drop the must-take condition. He reiterated that he considered a price of $102.50 per ton delivered tank truck to be a very competitive price and that he was also prepared to sell at $97.50 per ton delivered tank car. Early in September, while Todd was still undecided as to how to continue negotiations with Lee, Puritanrepresentatives informed him that their company was extremely anxious to sign a contract for 2016 in view of tightening supply. The representatives offered a price of $97.50 per ton and told Todd that they would allow him three days to accept the offer on an “entire-requirements basis.” They also informed him that Puritan was prepared to increase the dollar volume of purchases from Cox in 2016 by approximately $500,000 through the placement of orders for several chemical commodities not previously purchased from Cox.