Hess Energy Inc v. Lightning Oil Co ( 2002 )

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
HESS ENERGY, INCORPORATED, 
Plaintiff-Appellant,
v.  No. 01-1582
LIGHTNING OIL COMPANY, LIMITED,
Defendant-Appellee.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
James C. Cacheris, Senior District Judge.
(CA-00-1347-A)
Argued: December 3, 2001
Decided: January 18, 2002
Before WILKINSON, Chief Judge, NIEMEYER, Circuit Judge,
and Joseph R. GOODWIN, United States District Judge for the
Southern District of West Virginia, sitting by designation.
Reversed and remanded by published opinion. Judge Niemeyer wrote
the opinion, in which Chief Judge Wilkinson and Judge Goodwin
joined.
COUNSEL
ARGUED: Daniel M. Joseph, AKIN, GUMP, STRAUSS, HAUER
& FELD, L.L.P., Washington, D.C., for Appellant. Joseph E. Alto-
mare, Titusville, Pennsylvania, for Appellee. ON BRIEF: Anthony
T. Pierce, Michael L. Converse, Kelly M. Skoloda, AKIN, GUMP,
2 HESS ENERGY, INC. v. LIGHTNING OIL CO.
STRAUSS, HAUER & FELD, L.L.P., Washington, D.C., for Appel-
lant.
OPINION
NIEMEYER, Circuit Judge:
Upon Hess Energy, Inc.’s complaint against Lightning Oil Com-
pany, Ltd., which demanded damages for breach of a natural gas sup-
ply contract, the district court granted summary judgment to
Lightning. The court found that Hess Energy, by assigning adminis-
trative responsibilities to its parent company, violated the supply con-
tract’s assignment-limitation provision, thereby justifying Lightning’s
nonperformance. We conclude that if an improper assignment of con-
tract obligations occurred, it was not material and therefore did not
justify Lightning’s nonperformance. Accordingly, we reverse and
remand for a determination of Hess Energy’s damages.
I
Lightning and Statoil Energy Services, Inc. entered into a Master
Natural Gas Purchase Agreement ("Master Agreement") on Novem-
ber 1, 1999, under which Lightning agreed to supply natural gas to
Statoil. The amounts and prices for particular deliveries of natural gas
were established by negotiated individual confirmation contracts
entered into in accordance with the Master Agreement. The arrange-
ment was to last one year, after which it was to continue from month
to month until terminated by either party after 30-days’ notice. But
the Master Agreement could not be terminated "before the expiration
of any existing Confirmation [contract]."
Between November 16, 1999, and March 7, 2000, Statoil made
seven purchases under the Master Agreement, each of which was duly
governed by a confirmation contract stating the terms of the particular
transaction and signed by both parties. The confirmation contracts
obligated Lightning to supply natural gas to Statoil in specified vol-
umes and prices and over specified periods, the latest extending to
March 31, 2002.
HESS ENERGY, INC. v. LIGHTNING OIL CO. 3
On February 22, 2000, Statoil’s parent company consummated a
stock purchase agreement with Amerada Hess Corporation to sell the
stock of Statoil to Amerada Hess. Following this stock purchase, Sta-
toil’s corporate name was changed to Hess Energy, Inc., and Amerada
Hess became involved in the administration of Hess Energy’s pur-
chases of natural gas from Lightning under the Master Agreement.
For approximately three months, Lightning appeared to have no
problem with Amerada Hess’ involvement in the administration of the
confirmation contracts between Lightning and Hess Energy. On May
11, 2000, Lightning submitted its April invoice for the natural gas
delivered in April 2000 to "Amerada Hess" at the Pennsylvania
address designated in the Master Agreement for correspondence with
Statoil, and on May 24 Amerada Hess paid this invoice by wire trans-
fer. Thereafter, on May 25, 2000, Amerada Hess notified Lightning,
consistent with Article XIV of the Master Agreement, that Hess Ener-
gy’s correspondence address was changed to that of Amerada Hess’
Alexandria, Virginia office. After receiving that notice, Lightning
sent its invoices for the natural gas delivered in May and June 2000
to the Virginia address, and again Amerada Hess timely paid both
invoices.
At Lightning’s request, on May 31, 2000, Lightning met with
Amerada Hess to discuss terms for future natural gas purchases.
When the parties were unable to agree on prices, they openly consid-
ered the possibility of Lightning finding another customer for its natu-
ral gas. In response to this discussion, Amerada Hess faxed a letter
to Lightning that same day in which it stated that Amerada Hess and
Lightning "have mutually agreed to terminate the [Master Agreement]
effective October 31, 2000" but that existing confirmation contracts
would remain in effect. Lightning answered this fax by its own fax
on June 1, 2000, stating that there had been no agreement to terminate
the Master Agreement and expressing the belief that there "was some
misunderstanding" because there had merely been a "proposal" by
Amerada Hess to terminate the contract.
A few days later, however — on June 7, 2000 — Lightning signed
a contract with Natural Fuel Resources, Inc., an unrelated third party,
to sell the natural gas that it had previously committed to Hess
Energy. And on June 23, 2000, Lightning and Natural Fuel Resources
4 HESS ENERGY, INC. v. LIGHTNING OIL CO.
signed a Base Contract for Short Term Sale and Purchase of Natural
Gas, covering the period July 2000 to March 2002. Lightning
acknowledged that its purpose in signing this contract with Natural
Fuel Resources was to obtain a better price than it had obtained from
Hess Energy.
On July 26, 2000 (one week after Amerada Hess paid Lightning’s
July 11 invoice for natural gas delivered in June), Hess Energy
received a letter from Lightning (addressed to Statoil), stating that
Lightning was terminating the Master Agreement, effective June 30,
2000, because Statoil (Hess Energy) had improperly assigned its con-
tract obligations to Amerada Hess, its parent company, in violation of
the Master Agreement. Although this letter was dated June 7, 2000,
it was not postmarked until July 25.
Hess Energy then commenced this action against Lightning, seek-
ing a declaratory judgment that it was not in breach of any contract
with Lightning and demanding compensatory damages for Light-
ning’s nonperformance in breach of the confirmation contracts. In its
answer, Lightning stated that its termination of the Master Agreement
and confirmation contracts was justified because Hess Energy had
assigned some of its duties and obligations under the contract to
Amerada Hess, in violation of Article XI of the Master Agreement.
Article XI provides:
Neither Party shall assign this Agreement or any of its
rights, duties or obligations hereunder unless it shall have
first obtained the consent in writing of the other Party
hereto, which shall not be unreasonably withheld or delayed,
provided however that either Party may without the consent
of the other Party, . . . transfer or assign this Agreement to
any successor, representative or assignee which shall suc-
ceed by purchase, merger or consolidation to the properties,
substantially as an entirety, of Seller [Lightning] or Buyer
[Statoil], as the case may be.
Lightning asserted that Hess Energy’s breach of Article XI justified
its discontinuing delivery of natural gas under the confirmation con-
tracts.
HESS ENERGY, INC. v. LIGHTNING OIL CO. 5
After discovery, Hess Energy filed a motion for summary judg-
ment, arguing that Lightning had admitted the prima facie elements
for Hess Energy’s breach-of-contract claim and that Hess Energy had
made no assignment forbidden by the Master Agreement. In the alter-
native, Hess Energy argued that any alleged breach was not material.
In a cross-motion for summary judgment, Lightning claimed that
Amerada Hess’ purchase of Statoil’s stock and its subsequent admin-
istration of the Master Agreement evidenced an assignment in mate-
rial breach of Article XI (the assignment-limitation provision) of the
Master Agreement. The district court denied both motions, conclud-
ing that there was a dispute of material fact as to whether Hess
Energy had assigned the Master Agreement to Amerada Hess.
Several months later, Lightning renewed its motion for summary
judgment, claiming that the undisputed evidence showed that Hess
Energy had assigned its responsibility under the Master Agreement to
Amerada Hess. This time, the district court concluded that Hess
Energy had assigned its responsibilities to Amerada Hess, in violation
of Article XI of the Master Agreement, and granted summary judg-
ment to Lightning. The district court pointed to the facts that Amerada
Hess paid Hess Energy’s invoices; that Amerada Hess had dealt with
Lightning in the negotiation of confirmation contracts; and that
Amerada Hess, not Hess Energy, had proposed the termination of the
Master Agreement on May 31, 2000.
In a motion for reconsideration, Hess Energy argued that new evi-
dence, produced for the first time when Lightning filed its cross-
motion for summary judgment, demonstrated that Lightning had
waived its right to object to Amerada Hess’ involvement. This evi-
dence showed that Lightning had been content to deal with Amerada
Hess until it found another customer willing to pay a higher price for
its natural gas. Hess Energy argued that Lightning had knowingly
done business directly with Amerada Hess for many weeks before
suddenly asserting that it objected to the "assignment." The district
court rejected Hess Energy’s arguments, mainly because they had not
been presented earlier.
This appeal followed.
6 HESS ENERGY, INC. v. LIGHTNING OIL CO.
II
Although Article XI of the Master Agreement forbids either party
from assigning "any of its rights, duties or obligations" under the
Master Agreement without the other party’s consent, there is no pro-
vision in the agreement making such an assignment an automatic
ground for immediate termination of either the Master Agreement or
of the confirmation contracts under it. To the contrary, an assignment
under certain circumstances is authorized, and any assignment could
be made with Lightning’s consent, which could not be unreasonably
withheld. Accordingly, even if Lightning could establish that there
was an improper assignment, termination would be justified only if
the assignment resulted in a breach that was material. See, e.g., Neely
v. White, 14 S.E.2d 337, 341 (Va. 1941) ("Before partial failure of
performance of one party will excuse the other from performing his
contract or give him a right of rescission, the act failed to be per-
formed must go to the root of the contract").
Lightning contends that Hess Energy’s alleged assignment "goes to
the root of the contract" because it constitutes a breach of Hess Ener-
gy’s promise "not [to] foist a stranger upon Lightning without its con-
sent." Lightning suggests that any assignment is material "because it
vitiates the very assent which is necessary to sustain a contract" and
takes away Lightning’s opportunity "to select and determine with
whom [it] will contract." See generally Arkansas Valley Smelting Co.
v. Belden Mining Co., 127 U.S. 379 (1888).
But Lightning’s basis for arguing that it can choose with whom to
contract loses any support value when viewed in the context of this
case. As both parties concede, the Master Agreement is no longer in
force and no further confirmation contracts can be negotiated under
it. All that remains are Hess Energy’s damage claims for breach of the
seven confirmation contracts. Indeed, several of these confirmation
contracts were negotiated and signed, without objection, by a repre-
sentative of Amerada Hess, who was also an officer of Statoil/Hess
Energy. These contracts have been fully negotiated and executed by
the parties, and the only performance now required by Hess Energy
is the payment of invoices as submitted by Lightning. Amerada Hess
has already paid several invoices submitted to Hess Energy without
objection from Lightning, and Lightning has not suggested how the
HESS ENERGY, INC. v. LIGHTNING OIL CO. 7
continuation of payment by Amerada Hess on behalf of Hess Energy
is material to Hess Energy’s performance of the confirmation con-
tracts.
A test for materiality of the alleged breach at issue here is provided
by the assignment-limitation clause itself. That clause prohibits only
assignments made without Lightning’s consent, which consent "shall
not be unreasonably withheld." This contractual test of materiality
therefore rests on the assignment’s reasonableness. Because consent
is required unless there is a legitimate reason to withhold consent, it
follows that, where there is no legitimate reason to withhold consent,
skipping the step of asking for consent does not constitute a material
breach. And Lightning has offered no legitimate reason why it should
not accept payment from Amerada Hess rather than Hess Energy.
Indeed, Amerada Hess is a Fortune 500 company whose credit has not
been challenged by Lightning. Nor has its credit been placed in doubt
by its payment history in this case. Until the discussions in June about
whether Hess Energy was paying Lightning the best price, Lightning
was fully satisfied with Amerada Hess’ payment conduct.
Even if Lightning had doubts regarding the prospect of receiving
payment from Amerada Hess instead of from Hess Energy, terminat-
ing the confirmation contracts was not the appropriate remedy under
the Uniform Commercial Code, which has been adopted in Virginia.
The Code addresses the specific situation where a party’s expecta-
tions are impaired, as Lightning would have to claim:
A contract for sale imposes an obligation on each party that
the other’s expectation of receiving due performance will
not be impaired. When reasonable grounds for insecurity
arise with respect to the performance of either party the
other may in writing demand adequate assurance of due per-
formance and until he receives such assurance may if com-
mercially reasonable suspend any performance for which he
has not already received the agreed return.
Va. Code Ann. § 8.2-609(1). The official comment to this section
notes further that "[a] seller needs protection not merely against hav-
ing to deliver on credit to a shaky buyer, but also against having to
procure and manufacture the goods, perhaps turning down other cus-
8 HESS ENERGY, INC. v. LIGHTNING OIL CO.
tomers." Id. cmt. 1. Thus, Lightning’s only justification for becoming
concerned with Amerada Hess’ making payments in lieu of Hess
Energy’s making them would have to be based on its dealing with a
"shaky buyer," entitling Lightning to demand assurances and to sus-
pend performance until those assurances were provided.
In sum, neither the terms of the Master Agreement nor of the Uni-
form Commercial Code create grounds for Lightning to terminate the
confirmation contracts already negotiated and in force.
While our disposition of this case rests on the assumption, made for
discussion purposes, that Lightning could establish that there was an
improper assignment, it is not clear that this fact has been demon-
strated. The mere transfer of ownership of Statoil stock to Amerada
Hess did not constitute an assignment in violation of Article XI. See,
e.g., Baxter Healthcare Corp. v. O.R. Concepts, Inc., 69 F.3d 785,
788 (7th Cir. 1995) (holding that a transfer of stock ownership does
not change a corporation’s contractual obligations). Because Statoil
remained an independent company, the mere fact that its stock was
acquired by Amerada Hess did not change Statoil’s obligations under
the Master Agreement and under the confirmation contracts. In addi-
tion, the fact that Statoil changed its name to Hess Energy had no
bearing on its obligations to Lightning. Thus, we are left in search of
other actions by Amerada Hess and Hess Energy that might have indi-
cated an assignment.
There was no formal assignment of Hess Energy’s rights, obliga-
tions or duties to Amerada Hess. Accordingly, the district court’s rul-
ing could only have been made by finding, as a matter of fact, that
there was a constructive assignment. To this end, the district court
noted that Amerada Hess had taken on many of Hess Energy’s duties.
Amerada Hess, for instance, had apparently paid invoices and had
negotiated future contracts, including the possibility of terminating
the Master Agreement. But these facts are ambiguous. The individual
at Amerada Hess who was involved in these activities was also acting
as an officer of Hess Energy. Moreover, the record fails to establish
how Amerada Hess and Hess Energy accounted for payments and ser-
vices between themselves. In addition, there is no evidence to contra-
dict Hess Energy’s position that it remained liable on the Master
Agreement and confirmation contracts. Amerada Hess was merely
HESS ENERGY, INC. v. LIGHTNING OIL CO. 9
assisting with contract administration. Indeed, with a closer look, the
district court might well have been able to conclude that the facts nec-
essary for a constructive assignment had not been presented. But the
most it could conclude was that a factual question remained, preclud-
ing the entry of summary judgment.
Because we determine that any alleged assignment — considered
in the context of the existing, agreed-to confirmation contracts —
could not be a material breach of those contracts, we reverse the judg-
ment of the district court and remand for determination of Hess Ener-
gy’s damages under the confirmation contracts.
REVERSED AND REMANDED