Face Challenges Confidently

459 Anadarko Petroleum Corp. v. Williams Alaska Petroleum, Inc.

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.
Anadarko Petroleum Corp. v. Williams Alaska Petroleum, Inc., 737 F.3d 966 (5th Cir. 2013) held that course of performance by the parties was part of a contract for the purchase and sale of oil under the U.C.C. and should be considered regardless of whether the contract was ambiguous.  Anadarko sold oil to Williams under two purchase agreements in 2000-2002.  Both of these agreements contained a provision that tied the contract price for crude oil to other factors, including a third-party accounting arrangement for quality adjustments by the TAPS Quality Bank for oil shipped through the pipeline.  The contract price between Anadarko and Williams would be adjusted on a monthly basis according to the anticipated adjustment by Quality Bank, but the actual adjustment would not be known until Williams actually received debits or credits from Quality Bank the following month.  The parties would then “true-up” the price, or bring it to the correct balance, in the following month’s invoice based on the actual Quality Bank credits or debits as received by Williams.  Several years after the contracts terminated, the Federal Energy Regulatory Commission (“FERC”) revised the methodology used to assess the quality of oil entering a pipeline and retroactively applied the change, effective as of February 1, 2000.  The change in methodology resulted in over a $9 million credit paid to Williams attributable to Anadarko’s oil.  In August 2007, Williams received the credit and refused to pay Anadarko.
The court held that under the Texas Uniform Commercial Code (“U.C.C.”), “a contract for the sale of oil is a contract for the sale of goods.”  Williams contended that, under the U.C.C., the court could not consider evidence of course of performance without first finding that the contracts were ambiguous.  The court disagreed and held that “‘[u]nless carefully negated,’” the course of performance becomes “‘an element of the meaning of the words used,’” and that “‘the course of actual performance by the parties is considered the best indication of what they intended the writing to mean.’”
The contract payment provision required that the payments from Williams to Anadarko must be timely, but there was no time limitation on Williams’ obligation to correct any errors in an adjustment found later.  In fact, under the parties’ course of performance, adjustments were constantly made to the amount of payment due after the contract payment date had passed to “true up” the amount due after the receipt of the adjustments from the Quality Bank.  The court held that, although the FERC’s methodology changes did not occur during the contract period, the parties had a history of not treating the payment provision’s monthly schedule as conclusive on the obligation to pay a final, correct purchase price.
The court also held that Williams’ obligation to pay the correct contract price survived the termination of the contracts.   Upon termination of a contract, all executory obligations are discharged, but “‘any right based on prior breach or performance survives.’”  An obligation is executory if both parties have an obligation yet to be performed.  The court held that Williams’ obligation to “remit Quality Bank credits . . . is tied to Anadarko’s prior tender of the crude oil.”  Therefore, the court concluded that “where Anadarko has already discharged its full performance under the contract by tendering the oil, Williams Alaska’s obligation to pay the correct contract price, including the Quality Bank credits, is no longer executory and thus survives the contract’s termination.”
Williams also contended that Anadarko’s claim was barred by the four-year statute of limitations.  The court disagreed and held that the contracts were breached at the time Williams received the adjustments and failed to remit them to Anadarko, which was in August of 2007.  Anadarko filed suit in March of 2011, which was within the limitations period.
The significance of this case is that in contracts governed by the U.C.C. (here, the sale of oil), course of performance is made part of the contract, admissible without a prior finding of ambiguity, and considered the best indication of what the parties intended by their agreement.  This can only be avoided if carefully negated in the written agreement.  Only executory obligations are discharged by contract termination.