Face Challenges Confidently

079 Lenape Resources Corp. v. Tennessee Gas Pipeline Co.,

Thursday, September 3rd, 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.
Lenape Resources Corp. v. Tennessee Gas Pipeline Co., 39 Tex. Sup. Ct. J. 496 (April 18, 1996) considers whether “85% of Seller’s delivery capacity” is a term sufficiently definite for a gas purchase contract to be enforceable. Tennessee as purchaser entered into a gas purchase contract with Lenape as seller. This was a take-or-pay contact in the good old days of the last boom. Lenape formed some units, drilled some more wells, and Tennessee’s gas purchase cost went up from $300,000 to $89,000,000. Tennessee claimed that “85% of delivery capacity” was too vague to be enforceable, but if it was enforceable, it was only because output and requirements contracts under §2.306. Other cases had clearly held that under §2.306 no quantity unreasonably disproportionate to prior output could be tendered.
Held: Tennessee had to take it or pay for it. Section 2.306 of the UCC is a “gap filler” provision that only applies if the parties themselves fail to address the quantity issue in their contract. Gas purchase contracts are contracts for the sale of goods and are governed by Article 2 of the UCC, but parties can vary the provisions of the UCC by agreement. The provision of UCC §2.306 were not applicable in this case because (1) the take-or-pay contract was not an “output” contract and (2) the parties expressly agreed on a quantity standard. The contract was not an “output” contract because (a) there were numerous factors which controlled the amount of gas which could be delivered which were not under Seller’s control, and (b) an agreement to take or pay for gas is not an agreement to take all of Seller’s entire production.
Moreover, the parties here chose the quantity standard of “85% of Seller’s delivery capacity.” Delivery capacity is readily ascertainable quantity, measured as often as once every three months through a delivery capacity test. The specific quantity of natural gas which Tennessee must take or for which it must pay is a simple mathematical calculation. A “gap filler” provision does not apply when there is no gap.
The significance of the case is that there are many contracts in the industry, still including many gas contracts, that establish quantity term by reference to delivery capacity. If sustained, Tennessee’s position would have rendered many of the contracts uncertain.