Hess Energy, Incorporated v. Lightning Oil Company, Limited
338 F.3d 357, 2003 U.S. App. LEXIS 15284, 51 U.C.C. Rep. Serv. 2d (West) 1 (2003)
Rule of Law:
Under the Virginia Uniform Commercial Code (UCC) § 8.2-713, when a seller anticipatorily repudiates a contract for the sale of goods and the case comes to trial after the scheduled date for performance, the measure of a buyer's damages for non-delivery is the difference between the contract price and the market price at the time and place of delivery, not at the time the buyer learned of the repudiation.
Facts:
- On November 1, 1999, Lightning Oil Company, Ltd. (Lightning) and Statoil Energy Services, Inc. (Statoil) entered into a Master Natural Gas Purchase Agreement for the sale and purchase of natural gas.
- Between November 1999 and March 2000, Lightning and Statoil executed seven 'confirmations' under the Master Agreement, detailing specific future sales of fixed quantities of natural gas at fixed prices on specified future dates.
- In February 2000, Amerada Hess Corporation purchased Statoil's stock, changing its name to Hess Energy, Inc. (Hess), which continued to purchase natural gas from Lightning under the existing confirmations.
- In June 2000, Lightning located a buyer willing to pay a higher price than Hess had agreed to pay and entered into a contract with that buyer to sell the natural gas promised to Hess.
- In July 2000, Lightning notified Hess that it was terminating the Master Agreement, asserting that Statoil's stock ownership change and name change to Hess constituted an assignment of contractual obligations in material breach of the anti-assignment provision.
- Hess's business model involved purchasing natural gas from suppliers at fixed prices for future delivery and simultaneously entering into offsetting NYMEX futures contracts to sell the same quantity of natural gas on the same future dates for the same fixed price, thereby hedging against market price fluctuations.
- Lightning's anticipatory repudiation left Hess with 'naked' futures contracts to sell natural gas, exposing Hess to potential losses on these contracts, particularly as the market price for natural gas subsequently rose.
- Facing potential losses on the open futures contracts, Hess bought itself out of some of these contracts with closer settlement dates.
Procedural Posture:
- Hess Energy, Inc. (Hess) commenced an action in district court against Lightning Oil Company, Ltd. (Lightning) seeking a declaratory judgment that it had not breached the Master Agreement and demanding compensatory damages for Lightning's nonperformance.
- The case was initially appealed to the United States Court of Appeals for the Fourth Circuit, which determined that any alleged assignment of contractual obligations by Statoil to Hess 'could not be a material breach' of the Master Agreement.
- The Fourth Circuit, in Hess Energy, Inc. v. Lightning Oil Co., Ltd., 276 F.3d 646 (4th Cir.2002), remanded the case to the district court 'for determination of Hess Energy’s damages under the confirmation contracts.'
- At the subsequent jury trial on damages in the district court, the jury was instructed that the measure of damages was 'usually the difference between the contract price and the market price, at the time and place of delivery.'
- The jury returned a verdict in favor of Hess for $3,052,571, with interest beginning on June 1, 2001.
- From the district court's judgment entered on the jury’s verdict, Lightning filed this appeal to the United States Court of Appeals for the Fourth Circuit.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does Virginia Code § 8.2-713, governing a buyer's damages for a seller's non-delivery or repudiation, require calculating market price at the time the buyer learned of the repudiation, or at the scheduled time of performance (delivery), especially when the case comes to trial after the performance date?
Opinions:
Majority - Niemeyer, Circuit Judge
No, Virginia Code § 8.2-713 does not require calculating the market price at the time the buyer learned of the repudiation; rather, it requires calculation based on the market price at the scheduled time of performance (delivery) when the case comes to trial after that date. The court affirmed the district court's judgment, holding that the phrase 'time when the buyer learned of the breach' in § 8.2-713 refers to the scheduled date of performance (delivery) for purposes of calculating damages, not the date of anticipatory repudiation. The court reasoned that equating 'breach' with 'repudiation' would render several other Uniform Commercial Code (UCC) provisions meaningless or superfluous. Firstly, it would nullify a buyer's right under § 8.2-610(a) to await a 'commercially reasonable time' for the seller to retract a repudiation, as fixing damages at the repudiation date would penalize a buyer for exercising this right and risking post-repudiation market shifts. Secondly, it would make § 8.2-723(1) meaningless; this section specifically moves the damage calculation date to the time of repudiation only when an anticipatory repudiation action comes to trial before the time for performance. By implication, if the trial occurs after the performance date, as here, the general rule of § 8.2-713 applies, meaning market price at performance. Thirdly, this interpretation harmonizes the remedies available to aggrieved buyers and sellers under the UCC, as § 8.2-708 provides that a seller's damages for a buyer's repudiation are measured at the 'time and place for tender' (performance). Fourthly, the court noted consistency with pre-UCC common law, which generally measured damages at the time and place of delivery, and reasoned that a significant departure from such established doctrine would require explicit statutory language. Finally, the court emphasized that Lightning's interpretation would improperly shift market risks to Hess, penalizing an aggrieved buyer for inaction and undermining the very purpose of Hess's hedging strategy, whereas Lightning, as the repudiating seller, could have hedged its own risk. The court also found the NYMEX price to be a proper indicator of market price, supported by witness testimony from both parties, and clarified that the damages awarded were direct damages (market-contract differential), not consequential damages (which were prohibited by the Master Agreement).
Analysis:
This case significantly clarifies the interpretation of UCC § 8.2-713 regarding damages for anticipatory repudiation in Virginia, aligning it with a majority of jurisdictions and the principles of commercial reasonableness and risk allocation. By distinguishing 'breach' from 'repudiation,' the court ensures that aggrieved buyers are not unduly penalized for awaiting performance or forced into immediate cover, thereby preserving flexibility intended by other UCC provisions. The ruling reinforces the overarching goal of placing the aggrieved party in the position they would have been in had the contract been performed and protects the buyer from being forced to bear market risks that the seller originally contracted to carry. This precedent provides clarity for parties in commodity contracts, particularly those involving hedging, by confirming that the delivery date is the critical benchmark for damage calculation unless specific statutory exceptions (like trial before performance) apply.
