Texas Supreme Court Chides Trial Court for Rewriting a Natural Gas Contract
Rainbow Energy Marketing Corporation (Rainbow) had contracts to transport natural gas through the Transco and Magnolia pipelines. Under its original agreement with American Midstream (Alabama Intrastate), LLC (“AMID”), Rainbow was permitted to transport up to 25,000 MMBtu of gas daily through the Magnolia, and AMID would then schedule a corresponding amount of gas to flow into the connected Transco pipeline on Rainbow’s behalf. Thus, Rainbow had to put as much gas into the Magnolia as it took out. If it did not do so, a “single-point imbalance” would result, and Rainbow eventually sought the ability to create such imbalances. The parties’ 2015 MAG-0005 agreement enabled Rainbow to do so. While the MAG-0005 agreement permitted Rainbow to transport up to 20,000 MMBtu through the pipelines daily, Rainbow did not use it for that purpose. Rather, Rainbow used it to provide balancing services
The MAG-0005 agreement helped Rainbow maximize its revenue. Rainbow had to balance its inputs and outflows from the pipelines at the end of each month, but within the month it was permitted to sell extra gas when the price spiked and then replace it at a lower cost. An upstream or downstream party could demand that AMID require Rainbow to balance on any given day. A company called Transco played that role in this dispute. Such daily balancing might be necessary to protect the pipeline from ruptures or stoppages.
Things ran smoothly for the first year, but then AMID began notifying Rainbow that Transco was issuing Operational Flow Orders (OFOs) and that Rainbow might not be able to take full advantage of the 20,000 MMBtu of imbalances permitted under the MAG-0005. AMID soon clarified that Rainbow would not be granted the 20,000 MMBtu of imbalances. In 2017, Rainbow terminated the MAG-0005 and ceased making payments.
Rainbow then sued AMID, alleging breach of contract, repudiation, fraud, fraudulent inducement, and negligent misrepresentation, and seeking $6 million in lost profits on forward sales contracts. Rainbow could not enter into such contracts as planned when it learned that it could not rely on AMID to permit imbalances. The trial court found for Rainbow on all of its claims and awarded $6 million in damages. A divided appellate court affirmed.
In American Midstream (Alabama Intrastate), LLC v. Rainbow Energy Marketing Corporation, the Supreme Court of Texas reversed and remanded for trial. Like the dissenting appellate judge, the Supreme Court found that the trial court had disregarded Judge Cardozo’s command that a court is “not at liberty to revise while professing to construe.”
The trial court would have excused AMID from its obligations to allow imbalances only where “use of the MAG-0005 would create an imbalance between Rainbow’s scheduled receipts and scheduled deliveries on Transco;” or where Transco “requested or required AMID to balance scheduled quantities with physical deliveries of gas at the Magnolia-Transco Interconnect where Rainbow’s use of the MAG-0005 created an imbalance between scheduled quantities and physical deliveries at that point.” Only the first possibility was at issue in the case. In the Supreme Court’s view, the trial court added the italicized words to the parties’ agreement, limiting the situations in which AMID was excused from its obligations in a manner to which the parties did not agree.
As the Supreme Court explained,
A scheduled point-to-point imbalance occurs when a shipper nominates unequal amounts of gas to enter and exit the pipeline. A physical point-to-point imbalance occurs when a shipper withdraws gas from the pipeline without putting a corresponding amount of gas into it (or vice versa).
There never were imbalances between Rainbow’s scheduled receipts and scheduled deliveries. Limiting the first provision to scheduled imbalances rendered it meaningless.
As a consequence, the Supreme Court rendered judgment for AMID on all but the breach-of-contract claim. There was no repudiation. Rather, AMID offered a reasonable interpretation of the contract in the context of Transco’s new-found intolerance for imbalances. For similar reasons, the Court found that AMID had made no misrepresentations. It would not allow Rainbow to convert its breach-of-contract claims into tort claims to make up for its erroneous interpretation of MAG-0005.
The Court remanded the breach-of-contract claim for a trial to determine whether “on any day that AMID failed to provide balancing services, there was a Transco mandate that excused AMID’s performance.” However, in so doing, the Court also provided guidance to lower courts, reminding them that courts may not award damages for an untested venture and strongly suggesting that “using the MAG-0005 to fulfill forward sales contracts is the type of ‘chancy business opportunit[y]’ for which our precedent forbids recovery.” Given such “guidance,” Rainbow might search somewhere other than a new trial if it is seeking a pot of gold.