122 El Paso Natural Gas Co. v. Minco Oil & Gas

Monday, September 7th, 2015

Richard F. Brown

The following is not a legal opinion. You should consult your attorney if the case may be of significance to you.
El Paso Natural Gas Co. v. Minco Oil & Gas, Inc., 8 S.W.3d 309 (Tex. 1999), is a take-or- pay case that turns on the good faith obligations imposed by the Uniform Commercial Code (“UCC”). During the bust of the mid-1980’s, El Paso, as purchaser, and Minco, as seller, entered into a series of settlement and termination agreements that not only terminated the take-or-pay contracts, but also contained a waiver or release as to El Paso for all past liabilities. To avoid the waiver or release, Minco asserted that the agreements were procured in violation of the UCC and a breach of the duty of good faith contained in the UCC.
Absent a special relationship between the parties, there is in Texas no common law duty to act in good faith. However, the buying and selling of oil and gas is a sale of goods covered by the UCC. There is a statutory duty of good faith imposed by the UCC, and whether El Paso had a statutory duty to act in good faith under the UCC was a question of law which the Texas Supreme Court reviewed as de novo. The UCC clearly imposes a duty of good faith in the performance and amendment of contracts, but the issue in this case was whether the duty of good faith extends to the formation of a contract, and as a necessary corollary, whether a release is a new contract or a modification of an existing contract.
Section 1.203 states that “[e]very contract or duty within this title imposes an obligation of good faith in its performance or enforcement.” Section 2.103 defines “good faith” in the case of a merchant as “honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” Section 1.201(19) defines “good faith” as honesty in fact in the conduct or transaction concerned. However, the Supreme Court held that this duty of good faith does not extend to the formation of a contract and a release is a contract. Section 1.203 imposes no good faith duty on El Paso because it applies to the performance and the enforcement of an existing contract and not to forming or procuring a contract, including a mutual release of liability.
Section 2.209(a) states that “[a]n agreement modifying a contract within this chapter needs no consideration to be binding.” Comment 2 to that section states that modifications made under Section 2.209(a):

[m]ust meet the test of good faith imposed by this Act. The effective use of bad faith to escape performance on the original contract is barred, and the extortion of a “modification” without legitimate commercial reason is ineffective as a violation of good faith.

The Supreme Court rejected the application of UCC § 2.209 because “[a] release of liability is not an agreement to modify a contract but is an agreement to completely relinquish the parties’ performance obligations to each other.”  Because the breach of duty of good faith was the only remaining basis for the judgment, the Supreme Court reversed and rendered judgment that the releases would be enforced.
The significance of the case is that the Supreme Court has essentially limited the good faith requirements of the UCC to the performance of an agreement. There is no “good faith” requirement applicable to contracts generally in Texas, and even in contracts for the purchase and sale of goods (oil and gas), the good faith requirement is limited to performance which does not include making or releasing contracts.