Energy Law

Fifth Circuit Recognizes Gas Purchaser's Right to Cancel Contract Due to Title Dispute

By Sarah Steward-Lindsey

In Flint Hill Resources, LP v. JAG Energy, Inc., No. 08-20152, ___ F.3d ___, 2009 WL 336129 (5th Cir. Feb. 12, 2009), a panel of the United State Court of Appeals for the Fifth Circuit heard an action arising from a contract to supply natural gas condensate in south Texas. Flint Hills, a crude oil refiner, agreed to purchase Mexican condensate from JAG. In 2006, Flint Hills received information that PMI/Pemex had been experiencing thefts of condensate. Fearing criminal liability if the condensate received from JAG was stolen from PMI/Pemex, Flint Hills informed JAG that they refused to accept further deliveries. Two days later, Flint Hills clarified that it was suspending payments until JAG could provide evidence that the condensate was purchased from PMI/Pemex at some downstream point. JAG identified two of its immediate suppliers and promised to forward documents showing that PMI/Pemex was the first link in its supplier chain, but never did so. Flint Hills cancelled the agreement and JAG brought a contract action alleging breach. The district court determined that Flint Hills had acted unreasonably in suspending payment and awarded JAG damages for breach of contract. Reversing the district court, the Fifth Circuit panel noted that Flint Hills could suspend payment under the terms of the agreement upon any “dispute or lack of information affecting” title. The right to suspend payment was not conditioned on the presence of an adverse claim or objective evidence of wrongdoing. In addition, the contract provided unconditionally that JAG agreed to furnish evidence of title to Flint Hills if requested. Because Flint Hills was entitled to request evidence of title and suspend payment until the lack of information was resolved to its satisfaction, the district court “improperly imposed extra-contractual requirements of commercial reasonableness and verifiable proof.” The verdict of the district court was reversed and a take nothing judgment rendered in favor of Flint Hills.

http://www.ca5.uscourts.gov/opinions%5Cpub%5C08/08-20152-CV0.wpd.pdf

Full post as published by The Energy Law Blog on February 17, 2009 (boomark / email).