Judge Johnston Holds Liquidated Damages Provision Enforceable but Denies Summary Judgment Regarding Defendants’ Obligations

February 16, 2017

Publication

In CRS Proppants LLC v. Preferred Resin Holding Company, LLC, C.A. No. N15C-08-111-MMJ-CCLD, Judge Johnston granted in part and denied in part the plaintiff’s motion for summary judgment, holding that the liquidated damages provision in the purchase and sale agreement (the “PSA”) between the parties was enforceable and that the defendant’s obligations under the PSA were not excused by commercial impracticability or frustration of purpose. However, Judge Johnston also concluded that certain conduct may nonetheless be excused due to an ambiguous term in the PSA.

Plaintiff CRS Proppants LLC (“CRS”) initiated a breach of contract action against defendant Preferred Resin Holding Company, LLC (“Preferred”) for Preferred’s failure to buy specific quantities of sand used for hydro fracking pursuant to the PSA. Although Preferred admitted that it did not buy sand from CRS for two consecutive quarters, the parties disputed whether the PSA’s liquidated damages provision was enforceable and whether Preferred had a valid defense excusing its failure to buy sand from CRS under the PSA.

The PSA set forth a buyer deficiency payment (“BDP”) that Preferred was required to pay if it defaulted on the contract and failed to purchase an agreed-upon quantity of sand from CRS on a quarterly basis. The parties agreed to a BDP of $25 per ton of unpurchased sand each quarter. While CRS argued that the BDP constituted a reasonable estimate of actual damages at the time of contracting, when the exact purchase price for future quarters was difficult to ascertain, Preferred argued that the BDP was established as a penalty for breach and was thus unenforceable as a liquidated damages provision.

Ultimately, the Court concluded that the BDP established an enforceable liquidated damages provision and the BDP “bear[s] a reasonable relationship to actual damages,” allowing damages to be calculated “on a sliding scale proportionate to the timing of the breach.” The PSA included reciprocal liquidated damages provisions to account for a breach by either party, and the parties engaged in extensive negotiations leading to the establishment of the BDP, including the consideration of a “macro-economic” shock provision that Preferred ultimately rejected.

Additionally, the parties disagreed on Preferred’s obligations under the PSA. Specifically, Preferred argued that its failure to purchase sand from CRS was excused for commercial impracticability and frustration of the contract’s purpose due to the downturn in the market for sand used for hydro fracking. Nonetheless, the Court held that neither defense applied, concluding that Preferred was aware of the possibility of a downturn in the market evidenced by similar economic downturns in the oil and gas industry in the past.

Preferred also pointed to a provision in the PSA establishing that its obligation to purchase sand for the second quarter was contingent on CRS’s completion of its Plant expansion by April 1, 2015. Preferred argued that the term “Plant” referred to both CRS’s dry and wet sand facilities, and that while the dry sand plant facility expansion was completed before April 1, 2015, the wet sand plant facility expansion was not completed by that date. Because the definition of “Plant” in the PSA did not differentiate between CRS’s wet and dry sand plants, Judge Johnston held that the term was ambiguous on its face. Accordingly, the Court held that a genuine issue of material fact existed regarding whether the Plant was completed by April 1, 2015 and whether Preferred properly reduced the second quarter quantity of sand under the PSA.

Analysis: As explained by the Delaware Supreme Court: “[p]arties have a right to enter into good and bad contracts, the law enforces both.” Nemec v. Shrader, 991 A.2d 1120 (Del. 2010). Accordingly, Delaware courts are inclined to hold contracting parties to their bargain. Liquidated damages provisions are commonly upheld if they represent a reasonable estimate of actual damages. With respect to other contract terms, the court will carefully scrutinize the provisions to determine whether they are reasonably susceptible to more than one meaning. If they are, the contract is ambiguous, precluding an award of summary judgment.