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

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.

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by Charles Miller

Charles Miller is a licensed attorney and a partner at Heygood, Orr & Pearson. Charles focuses his practice on areas of complex commercial litigation and personal injury litigation.