Commercial litigation update: Fifth Circuit reverses district court, awards more than $9 million to Anadarko for breach of contract claim

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by Charles Miller

Anadarko produces crude oil on the Alaskan North Slope, and Williams Alaska operates a refinery in Alaska. The two parties entered into two purchase agreements under which Anadarko agreed to sell crude oil to Williams Alaska.

Under both agreements, the parties tied the contract price for crude oil to several factors, including an independent quality assessment performed by the TAPS Quality Bank. The TAPS Quality Bank is a third-party accounting arrangement designed to ensure that pipeline users are appropriately compensated for the value of the crude oil they ship through the common-carrier pipeline. The Quality Bank is a “zero sum” operation: shippers of lower-quality crude oil pay into the Quality Bank, while shippers of higher-quality crude oil receive payments from the Quality Bank. Both are known as “Quality Bank adjustments.”

During the contractual relationship, the exact amounts of the prevailing Quality Bank adjustments were not known at the time Anadarko invoiced Williams Alaska for the crude oil delivered the prior month. The contract price was determined using the other known factors and by estimating the amounts for the Quality Bank adjustments. The parties would then “true-up” the price, or bring it to the correct balance, the following month based on the actual Quality Bank credits or debits received by Williams Alaska.

Several years after the termination of the contracts, the Federal Energy Regulatory Commission (“FERC”) determined that the methodology for assessing the quality of oil entering the pipeline was inaccurate. FERC changed the methodology and applied the change retroactively to February 1, 2000. The new methodology resulted in a substantial credit—over $9 million—issued to Williams Alaska by the Quality Bank, based on the crude oil that was produced by Anadarko and sold under the agreements.

Anadarko alleged that Williams Alaska ignored the agreements to pass through shipping credits on purchased oil, thus denying Anadarko more than $9 million due under the contract. The district court ruled against Anadarko. The contract’s pricing provision states that “if Quality Bank for Alpine crude oil is a credit, Price will be increased by the amount of the credit.” The payment provision in the Agreements provided that: “Payment will be made by wire transfer of immediately available funds on or before the 20th day of the month following the month of delivery.” The district court concluded that the agreements called for “contemporaneous” payments and thus did not entitle Anadarko to the benefit of Quality Bank credits that were not determined until years after the agreements had terminated.

The Fifth Circuit has now reversed and rendered judgment in favor of Anadarko, ruling it is entitled to more than $9 million under the contract. Anadarko Petroleum Corp. v. Williams Alaska Petroleum, Inc., No. 12-20716 (5th Cir. July 10, 2013).

The Fifth Circuit found that nothing in the provision for timely payments—or in the remainder of the agreements—indicates that if Williams Alaska’s payments were later determined to be inaccurate, the parties would let the error stand. The plain language of the price provision clearly states that if Quality Bank adjustments are a credit, “Price will be increased by the amount of the credit.” The court of appeals determined that the price provision contains no encumbering terms to indicate that there is a time limitation on Williams Alaska’s obligation to pay following receipt of the credit.

In addition, the Fifth Circuit found that undisputed evidence shows that the parties’ course of performance indicates that they consistently made adjustments to the amount of payment due at a time after the contract payment date, in order to “true-up” the actual Quality Bank adjustments from the estimated amounts. Although the terms of a written agreement may not be contradicted by contemporaneous or antecedent evidence, terms may be explained by course of dealing or course of performance.

Even though the parties had not been previously confronted with FERC-ordered retroactive Quality Bank adjustments, the Fifth Circuit felt that the parties’ course of performance showed that through their “true-up” arrangement, they did not treat the payment provision’s monthly schedule as conclusive on Williams Alaska’s obligation to pay the correct purchase price. The court of appeals thus held that the agreements require Williams Alaska to remit any Quality Bank credits it receives for the crude oil purchased under the contract, including the more than $9 million at issue.

The court also rejected Williams Alaska’s contention that the obligation to remit the credits expired upon the termination of the agreement. The court found that Williams Alaska’s obligation to remit Quality Bank credits was tied to Anadarko’s prior tender of the crude oil. Again, the court of appeals looked to evidence of the parties’ conduct: Williams Alaska had made “true-up” payments in early 2003, after termination, based on crude oil sold in the months prior.

Commercial Litigation at Heygood, Orr & Pearson

At Heygood, Orr & Pearson, our attorneys have handled literally dozens of commercial litigation cases ranging in value from tens of thousands of dollars to tens of millions. We have successfully represented businesses of all sizes, from small “mom and pop” businesses to some of the largest corporations in the world.

Whether we are representing a huge, multi-national corporation or a small local business, we understand that clients want their legal representation to be not only excellent but cost-effective and efficient. For that reason, we will often offer our clients flexible fee structures such as contingent fees, flat fees, reduced hourly fees with a bonus payment contingent on success and reverse contingent fees.

At Heygood, Orr & Pearson, our success stems from the fact that our attorneys are trial attorneys in the truest sense and have tried hundreds of cases to verdict. Among our team are numerous attorneys who are board certified* and who have been voted by their peers as Super Lawyers in the state of Texas for several years in a row.** Our firm is AV-rated, the highest legal and ethical rating available from the leading law firm rating service.

As a result of their experience, expertise and trial ability, our attorneys have obtained dozens of significant verdicts and settlements for our commercial clients. Among the more notable are the following:

  • Obtained an $18 million verdict in favor of a European entrepreneur in a lawsuit against a subsidiary of a Fortune 500 company involving the sale and distribution of computer products in Europe.
  • Successfully defended an international businessman in a $200 million fraud and breach of contract case arising out of the discovery of the world’s largest nickel deposit in Labrador.
  • Obtained a $16 million settlement on behalf of a Fortune 500 company involved in a construction dispute relating to a parking garage.

Regardless of the type of claim, the size of the client or the complexity of the dispute, Heygood, Orr & Pearson has the legal ability, financial wherewithal and level of commitment necessary to successfully represent the interests of any commercial client. If you or your company is in need of representation in a commercial dispute, contact us for a free consultation by calling toll-free at 1-877-446-9001, or by filling out our free case evaluation form located on this page.

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Michael Heygood, James Craig Orr, Jr. and Eric Pearson are all Board Certified in Personal Injury Trial Law — Texas Board of Legal Specialization.

** Michael Heygood, James Craig Orr, Jr. and Eric Pearson were selected to the Super Lawyers List, a Thomson Reuters publication, for the years 2003 through 2013.