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IN THE SUPERIOR COURT OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY

STATOIL MARKETING & TRADING (U.S.) INC. Plaintiff, v. WESTERN REFINING YORKTOWN, INC. Defendant. C.A. No. 08C-03-170 RRC

Submitted: December 3, 2009 Decided: December 15, 2009 On Plaintiff's Motion to Dismiss Defendant's Fourth, Fifth, and Sixth Counterclaims DENIED. MEMORANDUM OPINION Peter J. Walsh, Esquire, Brian C. Ralston, Esquire, and Abigail M. LeGrow, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Attorneys for Plaintiff. David Langlois, Esquire, Sutherland Asbill & Brennan LLP, New York, New York; Gail L. Westover, Esquire, Carter L. Williams, Esquire, Matthew O. Gatewood, Esquire, and Benjamin Norris, IV, Esquire, Sutherland Asbill & Brennan LLP, Washington, D.C., Attorneys pro hac vice for Plaintiff. Gregory V. Varallo, Esquire, Robert W. Whetzel, Esquire, C. Malcolm Cochran, IV, Esquire, Kelly E. Farnan, Esquire, and Todd A. Coomes, Esquire, Richards Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Defendant.

I. INTRODUCTION This non-jury case arises from a multi-million dollar purchase/sale agreement of 66 million barrels of Grane crude oil between Plaintiff Statoil Marketing & Trading (US) Inc. ("Statoil") and Defendant Western Refining Yorktown, Inc. ("Western"). While the case is largely a case of competing breach of contract claims, Western has asserted three additional counterclaims, two of which sound in products liability and the third in negligent misrepresentation. These three counterclaims stem from Western's allegation that Statoil failed to warn Western about certain hazardous properties of the Grane crude oil, and, as a consequence of that failure, Western suffered substantial damage to its refinery. The issues raised by Statoil's motion to dismiss these counterclaims are (1) whether crude oil can be a "product" for purposes of products liability law, (2) whether Statoil had a duty to warn Western about the alleged hazardous properties of Grane crude oil, and (3) whether Statoil had a duty to disclose all material facts about the corrosive properties of Grane to Western despite the fact that the contract entered into by the parties was an arms-length business transaction between two sophisticated parties.

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Because the Court finds that further discovery is needed to resolve all of these issues, the Court denies Statoil's motion to dismiss and will allow the parties to take discovery on these claims.

II. FACTUAL AND PROCEDURAL HISTORY In February 2004, Western's predecessor 1 and Statoil entered into an agreement whereby Statoil was to supply Western's refinery in Yorktown, Virginia with 66 million barrels of Grane crude oil (the "Agreement"). Apparently, no refinery had ever commercially refined Grane, 2 which is a high acid crude oil. 3 During negotiations of the Agreement, Statoil provided Western with an assay setting forth the acidity of Grane (the "Preproduction Assay"). The Agreement, however, provided that the quality of Grane may vary from the Preproduction Assay. Specifically, the assay stated:
Both parties recognize that the quality of Grane may vary from the quality of Grane defined in the Preproduction Assay and as included as Appendix II. A significant variation in the quality of Grane from the Preproduction Assay to subsequent assays will result in an adjustment of the price as set out in Appendix I. 4

For purposes of this motion, the Court will refer to both Western Refining Yorktown, Inc. and its predecessor Giant Yorktown, Inc. as "Western." 2 Def. Ans. Brief, at 4. 3 The acidity of crude oil is indicated by its "TAN" or total acid number. According to Statoil, "Grane is sometimes referred to as an `opportunity crude' because it can be purchased for a lower price than lower-TAN, or otherwise easier-to-refine, `benchmark crudes.'" Pl. Mot. to Dismiss, at 3-4. 4 Exhibit 1 of Pl. Mot to Dismiss (the "Agreement"), at Art. 3.2. 3

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The Agreement further provided that "[t]he Oil to be supplied under this Agreement shall be Grane crude oil of normal export quality." 5 The warranty section of the Agreement stated in part that:
Seller warrants good title to the Oil sold under this Agreement and warrants it conforms to the quality specifications set forth in Article 3 and shall be free from all royalties, taxes, liens, claims and other charges and encumbrances. HOWEVER, SELLER MAKES NO WARRANTY AGAINST INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT. FURTHER, EXCEPT AS PROVIDED HEREIN, SELLER MAKES NO OTHER REPRESENTATION OR WARRANTY, WRITTEN OR ORAL, EXPRESS OR IMPLIED, INLCUDING BUT NOT LIMITED TO, ANY REPRESENTATION OR WARRANTY THAT THE OIL SOLD TO BUYER WILL BE MERCHANTABLE OR FIT FOR A PARTICULAR PURPOSE, OR WILL CONFORM TO MODELS OR SAMPLES, OR THAT IT WILL MEET SPECIFICATIONS OTHER THAN THOSE EXPRESSLY PROVIDED HEREIN. 6

In addition, Section 32.4 provided that "no representations or warranties shall be implied or provisions added in the absence of a written agreement to such effect between the Parties" and that "[n]o promise, representation or inducement has been made by any party that is not embodied in this Agreement . . . ." 7 In order for Western's refinery to be able to accommodate Grane crude oil, Western upgraded the refinery. However, a 2007 inspection of a crude oil processing tower allegedly revealed extensive corrosion. Consequently, Western began to reduce the amount of Grane crude oil
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Id. at Art. 3.1. Id. at Art. 26. 7 Id. at Art. 32.4. 4

processed on a daily basis, 8 and ultimately declared "Force Majeure" on January 29, 2008. Force Majeure is defined under the Agreement as "any cause or event reasonably beyond the control of a Party . . . whether or not foreseeable." 9 The Agreement further provided that "[n]either Party shall be liable to the other if it is rendered unable by an event of Force Majeure to perform in whole or in party any obligation or condition of this Agreement." 10 In March 2008, Statoil filed a breach of contract complaint against Western in this Court seeking damages in excess of $100,000,000. The complaint alleges that Western repudiated the Agreement and improperly declared Force Majeure. In May 2008, Western filed an answer denying Statoil's claims and asserting claims for declaratory relief and breach of contract. In September 2009, Western amended its answer in order to add

its fourth, fifth, and sixth counterclaims--(4) failure to warn (strict liability); (5) failure to warn (negligence); and (6) negligent misrepresentation. Statoil has moved to dismiss these three counterclaims.

Under the Agreement, the delivery of Grane was at the initial rate of 20,000 barrels per day, which was then increased to 40,000 barrels per day following Western's upgrades to the refinery. Agreement, at Art. 4.2. 9 Id. at 2.1. 10 Id. at 7.3. 5

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III. THE CONTENTIONS The parties agree that the legal issues in this motion are governed by the law of New York, as provided in the Agreement.

A. Plaintiff's contentions Statoil argues that the Court should dismiss Western's fourth and fifth counterclaims, which are products liability claims, because crude oil is not a "product" for purposes of products liability law. In support of this argument, Statoil relies on Black's Law Dictionary, which defines "product" as something that is "usually . . . the result of fabrication or processing." 11 Citing to a U.S. Department of Energy website, Statoil contends that:
Crude oil is a mixture of liquid hydrocarbons found in natural underground reservoirs that is commonly understood to have been formed from the remains of plants and animals that lived hundreds of millions of years ago. With no human intervention, this material was gradually covered with layers of sediment, and with extreme pressure and high temperatures over hundreds of millions of years, transformed into the mix of liquid hydrocarbons known today as crude oil. 12

Therefore, Statoil asserts that because crude oil is a not the result of "fabrication or processing," 13 crude oil is not a product. Statoil further

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BLACK'S LAW DICTIONARY 1125 (7th ed. 1999). Pl. Mot. to Dismiss, at 2-3 (citing "Where Our Gasoline Comes From." Energy Information Administration, publically available at http://www.eia.doe.gov/bookshelf/brochures/gasoline/index.html). Statoil contends that the Court may take judicial notice of this website. 13 Id. at 9. 6

contends that the public policy underlying products liability law would not be served by permitting Western's fourth and fifth counterclaims to go forward in this case because crude oil is not sold to members of the public. In the alternative, Statoil claims that even if crude oil is deemed a product, Statoil had no duty to warn Western about its properties because crude oil poses "obvious risks" such as the "potential corrosive effect . . . on refining equipment." 14 Therefore, Statoil contends that "a warning about the corrosive nature of Grane would have provided no benefit to [Western] because as a refiner it was clearly aware of the obvious corrosion risks posed by processing crude oil." 15 Moreover, Statoil contends that it had no duty to warn Western of the dangers of Grane because Western had actual knowledge of the hazards associated with refining Grane. Statoil claims that the Preproduction Assay it provided to Western before entering into the Agreement "plainly shows that Grane is highly acidic." 16 Statoil further asserts that Western's "metallurgical upgrades to various equipment and units of the Yorktown

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Id. at 14. Id. 16 Id. at 16 7

refinery" demonstrate that Western knew of the high acid content as well as the potential corrosive affect of Grane. 17 Finally, Statoil contends that Western's sixth counterclaim, which alleges negligent misrepresentation, must be dismissed because Statoil had no duty to disclose all of the material facts about the corrosive properties of Grane. Specifically, Statoil asserts that "none of the limited situations in which a New York court would recognize a duty to disclose between parties to an arms-length business transaction applies." 18

B. Defendant's contentions Western alleges that crude oil is a product pursuant to the Restatement (Third) of Torts, which provides that "[m]ost courts treat raw materials as products for the purposes of strict products liability in tort, provided that the injury resulted from an identifiable defect in the raw material." 19 Western further contends that even if the Court were to accept the Black's Law Dictionary of the word "product," crude oil does undergo some amount of "processing" before it reaches the refinery, and thus should be considered a "product."

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Id. at 18 Id. at 19. 19 RESTATEMENT (THIRD) OF TORTS: Prod. Liab.

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