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Legal Watch: Volume 13

Prepared by William H. Bode
Bode & Grenier, LLP
1150 Connecticut Ave., NW
Washington, D.C. 20036
Telephone: 202-862-4300 | Email: wbode@bode.com

UNION OIL LIABLE FOR INJURIES FROM EXPLODING DRUM OF TOLUENE AT CUSTOMER’S BUSINESS SITE

Case Summary: A worker was seriously injured when he attempted to remove the lid from a fifty-five gallon drum with an acetylene torch. The torch ignited a small amount of toluene which remained in the drum, causing an explosion. Union Oil supplied the drum to the worker’s employer, a manufacturing company. The worker sued Union Oil claiming that Union Oil was negligent in not labeling the drum as dangerous, and not requiring its customer to observe reasonable safety practices. Union Oil in defense asserted the “bulk supplier doctrine” claiming that it was entitled to rely on its customer (an “intermediary”) to warn its workers about the hazards associated with toluene. A jury found Union Oil liable and awarded the injured worker $1,750,000 in damages. The award was sustained on appeal. In sustaining the jury verdict, the appeals court listed six criteria to determine whether a bulk supplier can reasonably rely on its customer to handle the product safely: (1) the dangerous condition of the product; (2) the purpose for which the product used; (3) the form of warning given; (4) the reliability of the third party (customer); (5) the magnitude of the risk involved; and (6) the burden on the supplier by requiring that he directly warn all users. The appeals court was persuaded by the fact that toluene is highly volatile and was delivered to the customer on at least one prior occasion by pumping it into unlabelled drums.

LESSON: A bulk terminal that supplies a customer with volatile petroleum products can be liable for injuries resulting from an explosion of that product. The terminal operator can protect itself by taking these precautions: (a) Always affix labels denoting the product as “Hazardous” and including all other warning labeling required by OSHA; (b) Include in the sales contract language requiring the customer to observe all state and federal regulations for the handling of hazardous materials and to indemnify the terminal operator from any injuries resulting from failure to follow such regulations; and (c) Sell only to reputable and responsible parties. (Timothy Tilton v. Union Oil Company of California, et al.)

TANK FARM OWNER CANNOT RECOVER FOR DEFECTIVE TANK -- TEXAS 15-YEAR REPOSE STATUTE BLOCKS LAW SUIT

Case Summary: Poole Chemical Company operated a tank farm where it blended fertilizers. On January 29, 2003, one of the tanks ruptured releasing several hundred thousand gallons onto Poole’s property and an adjacent railroad right-of-way owned by Burlington Northern & Santa Fe Railroad Company. The railroad company conducted an emergency clean-up and restoration of the right-of-way at a cost of $2.1 million. On March 24, 2004, the railroad sued Poole under CERCLA for the clean-up costs. Upon discovering it had no insurance, Poole sued Skinner Tank Company on April 19, 2004 alleging that Skinner sold it a defective tank. Skinner moved to dismiss the case alleging that, since the tank was sold on October 28, 1988, Texas’s 15-year “statute of repose” for products liability claims against manufacturers blocked the suit. The Fifth Circuit Court of Appeals agreed with the trial court that the case against Skinner should be dismissed. First, the appeals court noted that although the statute was effective September 1, 2003 –seven months after the spill – nevertheless, Poole still had one month and 28 days to file suit within the 15-year statute’s deadline. The appeals court thus reasoned that the retroactive application of the statute was not unconstitutional. Second, the appeals court held (contrary to courts in other states) that the federal CERCLA statute did not overcome the 15 year state statute of repose.

LESSON: Whenever a spill occurs, a terminal operator must make a timely analysis of its exposure and be sure to file suit against every conceivable responsible party in a timely manner. In Texas, however, a law suit alleging sale of a defective tank can not be brought more than 15-years after the date of sale. (Burlington Northern & Santa Fe Railway Company v. Poole Chemical Company)

BUYER WHO BACKS OUT OF PURCHASE OF PETROLEUM FACILITY MUST PAY $220,000 IN LIQUIDATED DAMAGES

Case Summary: RaceTrac Petroleum Inc. entered a contract with Joseph Chandy for the sale of a petroleum facility, including a retail service station for $2.2 million. When Chandy defaulted on his obligations under the Sales Contract, RaceTrac retained the “earnest money” in the amount of $220,000 pursuant to a liquidated damages clause in the contract. Chandry sued RaceTrac claiming the liquidated damages clause was an unenforceable penalty clause. The trial court granted summary judgment in favor of RaceTrac, and the appeals court affirmed. In affirming the judgment, the appeals court ruled that the Sales Agreement contained language making the liquidated damages clause enforceable. Specifically, the appeals court found that: (1) the injury from the breach was difficult to estimate; (2) the parties intended to provide for damages rather than a penalty; and (3) the sum was a reasonable pre-estimate of the probable loss.

LESSON: Liquidated damages clause should be inserted in a contract whenever it is difficult to estimate damages upon a breach. To be enforceable, however, the terminal operator should commission a cost analysis prior to signing the contract that identifies the nature and extent of possible damages. This analysis, that need not be elaborate, can include damages attributable to “lost opportunity costs.” (Joseph Chandry v. RaceTrac Petroleum, Inc.)

Please address any comments or questions to Mr. Bode at 202-862-4300 or wbode@bode.com.

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