Denbury Onshore, LLC v. APMTG Helium LLC

476 P.3d 1098

DENBURY ONSHORE, LLC and Denbury Resources Inc. n/k/a Denbury Inc. Appellants (Defendants),

v.APMTG HELIUM LLC, Appellee (Plaintiff).

S-19-0172

Supreme Court of Wyoming.

December 4, 2020

Representing Appellant: Darin B. Scheer, James R. Belcher, and Casey R. Terrell of Crowley Fleck PLLP, Casper, Wyoming. Argument by Mr. Scheer.

Representing Appellee: Scott P. Klosterman and Amy M. Iberlin of Williams, Porter, Day, and Neville, P.C., Casper, Wyoming; Jason A. Neville of the Spence Law Firm, LLC, Casper, Wyoming. Argument by Mr. Neville.

Before DAVIS, C.J., and FOX, KAUTZ, GRAY, JJ, and FENN, DJ.

KAUTZ, Justice.

[¶1] Denbury Onshore, LLC (Denbury), a subsidiary of Denbury Resources Inc., agreed to deliver certain amounts of helium to APMTG Helium LLC (APMTG) each year. Denbury failed to deliver the agreed-upon amounts but claimed its nonperformance was excused by two force majeure events—the failure of its contractor to complete its natural gas processing plant and the ongoing failure of its supply wells due to sulfur deposition plugging the wellbores. After a bench trial, the district court found Denbury had failed to show its non-performance was excused by a force majeure event except for a period of 36 days. It awarded APMTG over $35 million in damages and interest. Denbury appealed. We affirm.

ISSUES

[¶2] We restate and reorder Denbury's issues as follows:

1. Did the district court err by denying Denbury's request to terminate the parties’ agreement under the doctrines of frustration of purpose and/or impossibility of performance?

2. Did the district court err in deciding Denbury had failed to prove its non-performance between April 23, 2013, and December 30, 2013, was excused by a force majeure event (Contractor Failure FM)?

3. Did the district court err in deciding Denbury had failed to prove its non-performance after mid-August of 2014 was excused by a force majeure event (Well Failure FM)?

FACTS

Original Helium Feedgas Agreement (HFA I)

[¶3] On January 30, 2009, APMTG, a joint venture between Air Products and Chemicals, Inc. (Air Products) and Matheson Tri-Gas, Inc. (Matheson), entered into a Helium Feedgas Agreement (HFA I) with Cimarex Energy Co. (Cimarex) and Riley Ridge, LLC (Riley Ridge). Under the agreement, Cimarex and Riley Ridge agreed to design, construct, and operate a natural gas processing plant (the Riley Ridge Plant or Plant) and to annually deliver specified quantities of helium to APMTG.¹ APMTG, in turn, agreed to design, construct and operate its own gas processing plant and to purchase the specified quantities of helium from Cimarex and Riley Ridge. The HFA I required Cimarex and Riley Ridge to deliver 200 million standard cubic feet (MMscf) of helium to APMTG the first and second years of the contract and 400 MMscf per year thereafter. Cimarex and Riley Ridge agreed to expand the Riley Ridge Plant on or before the start of the third year in order to meet their increased obligations. If they failed to deliver the required quantities in any given year, they were to pay APMTG liquidated damages pursuant to a designated formula. The liquidated damages were capped at $8 million per year, and total liquidated damages for the life of the contract could not exceed APMTG's final investment to construct its plant, which APMTG predicted would be $38.6-$42.9 million.

[¶4] The HFA I "estimated" that Cimarex and Riley Ridge would begin delivering helium to APMTG on December 1, 2010, but required delivery to begin no later than December 1, 2011, absent "delays caused by any Force Majeure" or unless the parties otherwise agreed in writing. The life of the agreement was 20 years.

[¶5] Section 17 of the HFA I excused a party's failure to perform its obligations under the agreement "to the extent that such failure is caused by Force Majeure." "Force Majeure" was defined in § 17.1 as

any event outside the reasonable control of a Party that could not have been avoided or overcome by that Party's exercise of reasonable care and due diligence and shall include without limitation the following: strike, lockout, concerted act of workers or other industrial disturbance; fire, explosion, flood, blizzard, extreme weather conditions or other natural catastrophe; epidemic or pandemic; civil disturbance, riot or armed conflict (whether declared or undeclared); acts of terrorism; curtailment, shortage, rationing or allocation of normal sources of supply of labor, materials, transportation, energy or utilities; accident; act of God; delay(s) or failure of performance of contractor(s) (of any tier) or vendor(s) ; sufferance of or voluntary compliance with act of government and government regulations and/or orders (whether or not valid); cancellation by the U.S. Bureau of Land Management, Department of the Interior, of the "Contract for Extraction and Sale of Federal Helium"; embargo; natural or mechanical supply well failure (in whole or in part) and machinery or equipment breakdown . Notwithstanding anything herein to the contrary, the following events shall not be considered Force Majeure events: the concentration of helium contained in the Helium Feedgas below that defined in Clause 9.1; and loss of markets for natural gas or Helium.

(Emphasis added). Section 17.3 of the HFA I required the party "whose performance under this Agreement is affected by Force Majeure [to] promptly Notify the other Party of the occurrence, and the effect and likely duration of the Force Majeure event, and ... keep the other Party informed of any changes to those circumstances." Section 17.4 required the party claiming force majeure to "as soon as practicable after the commencement of the Force Majeure, proceed with diligence and do all things reasonably practicable at its own cost to overcome and/or remedy the situation, and to recommence performance of its obligations, provided that ... neither Party shall be required to incur any extraordinary costs or make more than commercially reasonable investments."

Failure of Contractor Force Majeure

[¶6] Cimarex was the majority owner and operator of the Riley Ridge Plant project; Riley Ridge owned only a minority interest in the project. As operator, Cimarex made the day-to-day decisions about how to run the project. It hired BCCK Engineering Incorporated (BCCK) pursuant to a turn-key contract to engineer, design and construct the Riley Ridge Plant in Big Piney, Wyoming, and bring it to "mechanical completion," which was expected to occur by December 2011.

[¶7] In July 2010, Denbury purchased Riley Ridge's interests in the Riley Ridge Plant and assumed all of its rights and obligations under the HFA I. About a year later, in June 2011, Denbury acquired Cimarex's interests in the Plant and the HFA I, as well as Cimarex's rights and obligations under the construction contract with BCCK. Two months later, on August 1, 2011, Denbury officially took over as operator of the Riley Ridge Plant project from Cimarex, which meant it began making the day-to-day decisions about how to run the Plant and Cimarex's employees became Denbury's employees. At that time, BCCK had completed the engineering design of the Riley Ridge Plant and was in the process of constructing the Plant.

[¶8] The next month, Denbury notified APMTG it was "experiencing delays in the construction and commissioning of [the Riley Ridge Plant]" and estimated it would begin delivering helium on November 15, 2011. However, that did not occur. In January 2012, after discovering BCCK had not performed in accordance with industry standards, Denbury removed BCCK from the Riley Ridge Plant project and began using its own personnel and contractors to correct BCCK's deficiencies and complete the Plant.

[¶9] On November 12, 2012, Denbury sent a letter to APMTG declaring force majeure under Article 17 of the HFA I due to "delay(s) or failure of performance of contractor(s) (of any tier) or vendor(s)" (hereinafter referred to as Contractor Failure FM). Denbury explained:

Denbury has discovered through plant inspections by third party consultants who were hired to prepare for start-up and commissioning ... that there remained major uncompleted work at the plant. Whether caused by the contractor's construction mismanagement, or the failure to design equipment and controls properly, the deeper that Denbury investigated the circumstances, it became apparent to both Denbury and its third party consultants that the plant was not even close to being in a condition for operations that would satisfy not only operational safety considerations, but also the required regulatory compliance. As you are also very aware, this plant will be handling a production stream that contains corrosive and toxic, hazardous constituents that require not only high-grade equipment, but also particular alarm and emergency shut-down systems. Much of this work had not even been addressed by the previous contractor. As a result, and even before Denbury officially terminated the construction contract, third party experts undertook the work of redesigning, refurbishing and revising equipment, controls and systems to get the process up to ... standards for a safe processing operation in accordance with OSHA rules and regulations.

The work is continuing and, based upon the latest information we have with our fast-track work schedule, the plant construction should be complete and ready for start-up by July 1, 2013.

APMTG disagreed with Denbury's declaration of force majeure and sent Denbury an invoice for $8 million based on Denbury's failure to deliver the agreed-upon amounts of helium the first year of the HFA I.

MOU and the Amended and Restated Helium Feedgas Agreement (HFA II)

[¶10] After a series of negotiations, APMTG and Denbury entered into a "Memorandum of Understanding" (MOU) on April 25, 2013. Under the terms of the MOU, the parties agreed to execute an amended helium feedgas agreement, and Denbury agreed to pay APMTG an $8 million lump sum payment and $1.1 million for APMTG's...