Tendeka, Inc. v. Nine Energy Service LLC ( 2019 )

Affirmed and Memorandum Opinion filed December 17, 2019.
In The
Fourteenth Court of Appeals
NO. 14-18-00018-CV
TENDEKA, INC., Appellant
V.
NINE ENERGY SERVICE LLC, Appellee
On Appeal from the 113th District Court
Harris County, Texas
Trial Court Cause No. 2014-52578
MEMORANDUM OPINION
In this breach of contract case Tendeka, Inc. appeals a judgment following a
bench trial. In two issues Tendeka argues (1) the trial court erred when it concluded
that Tendeka repudiated the contract between the parties; and in the alternative (2)
if the trial court correctly concluded Tendeka repudiated the contract, the trial court
erred in failing to conclude the repudiation was either excused or retracted.
Concluding there is sufficient evidence to support the trial court’s findings, we
affirm the trial court’s judgment.
BACKGROUND
Tendeka manufactures and sells a tool known as a swellable packer that is
used in horizontal oil wells. The packer swells when it comes into contact with water
but allows oil to flow by the packer. This tool is used to segment horizontal wells to
allow hydraulic fracturing in specific locations. A packer is made of metal and
rubber; the rubber has a limited shelf-life and begins to degrade over time. Nine
Energy focused on the completion phase of development once the well is drilled and
was a purchaser of packers.
Nine Energy operated as Northern States Completions (NSC) until February
2013. Sometime in 2012, Northern States began purchasing packers from Tendeka.
In February 2013 Northern States merged into Nine Energy. 1 On October 25, 2013,
Tendeka and Nine Energy entered into an agreement (“the October Agreement”) in
which “the parties agreed that, in return for [Tendeka]’s agreement to a $3,000.00
unit price, [Nine Energy] would assure the annual purchase of not fewer than 3,000
[packers].”2 Paul Butero, Chief Executive Officer of Nine Energy in 2013 and
Kenneth Miller, vice president of Tendeka in 2013, were the primary negotiators
involved in the agreement between the parties. Butero testified that there were three
components to the agreement between Nine Energy and Tendeka. Those
components included (1) a negotiated price, (2) consignment, and (3) payment terms.
With regard to consignment, Nine Energy purchased packers on consignment
from vendors; when a packer was placed in the well Nine Energy would notify the
vendor to invoice Nine Energy for the packer. The packers were being used in wells
located in North Dakota. The parties operated under this consignment arrangement
1
For purposes of this opinion we will refer to appellee as “Nine Energy.”
2
Before trial the trial court granted a partial summary judgment in which it interpreted the
agreement between the parties. Trial proceeded with this unchallenged interpretation.
2
before the date of the October Agreement and continued to operate under this
arrangement afterward.
With regard to pricing, before the October Agreement, price was negotiated
on a weekly and monthly basis. At that time Nine Energy was paying $3,700 per
packer. The October Agreement lowered the price to $3,000. Sometime between the
start of the October Agreement and June 9, 2014, Tendeka lowered the price of the
packers sold to Nine Energy to $2,800 each.
On June 9, 2014, almost eight months after entering into the October
Agreement, Miller sent a letter (“the June Letter”) to Butero stating as follows:
I have tried to contact you several times over the past weeks to discuss
this in person. It has come to the point in our relationship that we realize
Nine Energy has opted to utilize one vendor in North Dakota or at the
very least not Tendeka as a Swell Packer supplier. We are disappointed
that it has come to this despite having lowered our prices to a level that
we were told was competitive. This has not resulted in any additional
work to Tendeka and instead simply resulted in large levels of stock
manufactured for Nine Energy. Also it has created competitive intensity
with Nine Energy clients impacting market pricing which has done no
one any favors.
Currently we are supplying no packers to NSC and would like to make
a clean break from the past distribution model. Tendeka would like all
of the unused packers returned to us as to preserve their integrity to be
run in future wells (they are currently being stored outdoors).
We will be invoicing for packers not on hand as per what is returned to
us. In the future we will provide packers if needed for $3000 per packer
and they will be invoiced at the time of delivery to NSC.
Nine Energy considered the June Letter to be a refusal to abide by the pricing,
consignment, and payment terms of the October Agreement. Butero responded to
the June Letter by instructing Miller to “make arrangements to have your packers
picked up.” Tendeka picked up its packers after Butero’s instruction to do so.
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One month after sending the June Letter, on July 10, 2014, Miller sent another
letter to Butero “reminding” Butero of Nine Energy’s “minimum purchase
obligation” based on the October Agreement. The July Letter noted that Nine Energy
had purchased 1,923 packers as of the date of the letter. The letter further stated that
if the “guaranteed 3,000 volume” was not met, packers would be priced at $3,700
each rather than $3,000.
Miller testified that he and John Crooks were primarily responsible for
Tendeka’s relationship with Nine Energy. John Crooks worked at Tendeka as a
salesperson and was primarily responsible for day-to-day interactions with Nine
Energy. Before the October Agreement the price of packers fluctuated week to week
but was higher than $3,000 per packer, up to $3,700 per packer.
In late 2013, after the date of the October Agreement, Crooks offered to sell
packers for $2,800 per unit with no volume commitment. According to Miller
Crooks was authorized to make that offer. Miller called the June Letter the “breakup
letter” because, in his opinion, Nine Energy was not honoring its volume
commitment at that time. Miller admitted that at the time he sent the June Letter no
one at Nine Energy had told him they would not meet the volume commitment.
Miller testified that the June Letter changed the price of the packers, the consignment
terms, and when payment would be required. After Miller sent the June Letter
Tendeka began selling packers to Nine Energy’s customers.
Rory Barbot, co-founder of Norther States Completions, which became a
subsidiary of Nine Energy in 2013, testified that in Nine Energy’s dealings with
Tendeka they were shipped packers on consignment, agreed on a price in advance,
and re-negotiated the price from time to time. Barbot also testified that before the
October Agreement Nine Energy paid $3,700 per packer; after the October
Agreement Nine Energy paid $3,000 per packer. Barbot testified there was never a
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volume commitment tied to the $3,000 price.
In December 2013 Tendeka dropped the price to $2,800 per packer. Miller
testified that Crooks, Tendeka’s salesperson, initiated the lower price and was
authorized to do so. Barbot’s understanding of the June Letter was that Tendeka
wanted to cancel the consignment arrangement, change the price per packer, and
change the payment arrangements. The June Letter “fundamentally changed” the
way Nine Energy had been doing business with Tendeka. Barbot never told anyone
at Tendeka that they would not purchase more packers from Tendeka.
In reviewing the June Letter, Ann Fox, Nine Energy’s Chief Executive Officer
at the time of trial, testified that she interpreted the term “clean break” to mean that
Tendeka sought to end the consignment arrangement that was previously in place.
After receipt of the June Letter Nine Energy did not conduct further business with
Tendeka.
Pearson, Tendeka’s Chief Financial Officer, testified that Tendeka never
“terminate[d] the contract.” Pearson testified that the June Letter was intended to
end the consignment arrangement, not the entire contract. Tendeka wanted to end
the consignment arrangement because packers were being stored outside and were
being destroyed by the elements. Tendeka picked up the packers in North Dakota
and stored them at a facility a short distance away. Tendeka did not reduce its price
below $3,000 in exchange for any volume commitment from Nine Energy. Pearson
testified that Nine Energy did not breach the contract until October 24, 2014 because
they had until that date to purchase 3,000 packers. No representative of Nine Energy
ever communicated to Tendeka that Nine Energy would not buy any more packers
during the contract period. Pearson testified that the June Letter changed the
consignment terms and raised the price per packer by $200. At that time he testified
there was no reason to believe Nine Energy would not meet the volume commitment.
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On September 15, 2014, more than one month before the one-year contract
would have ended, Tendeka filed its original petition alleging breach of contract,
quantum valebant, and negligent misrepresentation. Tendeka alleged that it lowered
its price for packers from $3,700 to $3,000 in exchange for Nine Energy’s
commitment to purchase 3,000 packers over the course of a year. Tendeka alleged
that Nine Energy requested the further discount to $2,800 per unit to which Tendeka
agreed. Tendeka alleged that Nine Energy purchased and paid for 1,923 packers but
ceased using Tendeka’s packers on hand and ceased ordering more packers “by the
second quarter of 2014.” Tendeka further alleged that Nine Energy was storing
packers outside in harsh conditions in North Dakota. In its answer Nine Energy
asserted repudiation of the agreement as an affirmative defense.
After a bench trial, the trial court rendered judgment for Tendeka for $36,4003
in damages plus attorneys’ fees. The trial court also signed detailed findings of fact
and conclusions of law including the following findings pertinent to this appeal:
1. The parties reached an agreement on or about October 25, 2013 under
which Plaintiff agreed to sell “standard Bakken packers” to defendant
for a discounted price in return for Defendant’s agreement to purchase
not fewer than 3,000 units within one year from the date of the
agreement.
2. The parties initially agreed that Defendant’s price for a “standard
Bakken packer” would be $3,000.00.
3. The parties subsequently agreed that Defendant’s price for a
“standard Bakken packer” would be $2,800.00.
4. The parties did not agree that Defendant would purchase “ standard
Bakken packers” exclusively from Plaintiff.
*****
12. On or about June 9, 2014, Plaintiff repudiated the agreement
3
This damage amount reflects the trial court’s finding of the value of the packers that were
damaged while being stored outdoors in North Dakota. No party challenges that finding.
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between the parties.
The trial court also included the following conclusion of law:
11. Plaintiff’s repudiation relieved Defendant from further obligation
to purchase a minimum annual volume of “standard Bakken packers”
from Plaintiff during the remainder of the original term.
ANALYSIS
In its first issue on appeal Tendeka argues the trial court erred in finding that
Tendeka repudiated the contract. In its second issue Tendeka argues that if there was
sufficient evidence to support the trial court’s finding that Tendeka repudiated the
contract, the trial court erred in concluding that the repudiation was either excused
or retracted.
Standard of Review
In its issues on appeal Tendeka asserts the trial court erred in making certain
findings of fact and failing to find other facts. Following a bench trial, we treat these
issues as challenges to the legal and factual sufficiency of the evidence.
We review the trial court’s decision for legal and factual sufficiency of the
evidence using the same standards applied in reviewing the evidence supporting a
jury’s finding. Catalina v. Blasdel, 881 S.W.2d 295, 297 (Tex. 1994). We review
the evidence in the light most favorable to the challenged finding and indulge every
reasonable inference that would support it. City of Keller v. Wilson, 168 S.W.3d 802,
822 (Tex. 2005). We credit favorable evidence if a reasonable factfinder could and
disregard contrary evidence unless a reasonable factfinder could not. Id. at 827.
We sustain a legal sufficiency or “no evidence” challenge only when (1) the
record discloses a complete absence of evidence of a vital fact; (2) the court is barred
by rules of law or of evidence from giving weight to the only evidence offered to
prove a vital fact; (3) the evidence offered to prove a vital fact is no more than a
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mere scintilla; or (4) the evidence establishes conclusively the opposite of the vital
fact. Marathon Corp. v. Pitzner, 106 S.W.3d 724, 727 (Tex. 2003); Vast Constr.,
LLC v. CTC Contractors, LLC, 526 S.W.3d 709, 719 (Tex. App.—Houston [14th
Dist.] 2017, no pet.). A party attacking the legal sufficiency of an adverse finding on
an issue on which it had the burden of proof must show that the evidence
conclusively establishes all vital facts in support of the issue. Dow Chem. Co. v.
Francis, 46 S.W.3d 237, 241 (Tex. 2001). When a party challenges the legal
sufficiency of the evidence on a finding on which it did not bear the burden of proof,
the party must show that no evidence supports the finding. Exxon Corp. v. Emerald
Oil & Gas Co., L.C., 348 S.W.3d 194, 215 (Tex. 2011); Sloane v. Goldberg B’Nai
B’Rith Towers, 577 S.W.3d 608, 622 (Tex. App.—Houston [14th Dist.] 2019, no
pet.).
In reviewing factual sufficiency, we examine the entire record, considering
both the evidence in favor of and contrary to the challenged findings. Mar. Overseas
Corp. v. Ellis, 971 S.W.2d 402, 406–07 (Tex. 1998); 2900 Smith, Ltd. v.
Constellation NewEnergy, Inc., 301 S.W.3d 741, 746 (Tex. App.—Houston [14th
Dist.] 2009, no pet.). When a party attacks the factual sufficiency of an adverse
finding on which it bore the burden of proof, it must establish that the finding is
against the great weight and preponderance of the evidence. Dow Chem. Co., 46
S.W.3d at 242; Burton v. Prince, 577 S.W.3d 280, 285 (Tex. App.—Houston [14th
Dist.] 2019, no pet.). When a party challenges the factual sufficiency of the evidence
supporting a finding on which it did not have the burden of proof, we may set aside
the finding only if it is so contrary to the overwhelming weight of the evidence as to
be clearly wrong and unjust. Mar. Overseas Corp., 971 S.W.2d at 407; Safeco Ins.
Co. of Am. v. Clear Vision Windshield Repair, LLC, 564 S.W.3d 913, 919 (Tex.
App.—Houston [14th Dist.] 2018, no pet.).
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We apply these standards mindful that the factfinder is the sole judge of the
credibility of the witnesses and the weight to be given to their testimony, and we
indulge every reasonable inference in support of the factfinder’s findings. See City
of Keller, 168 S.W.3d at 819, 822; 2900 Smith, 301 S.W.3d at 745. When, as here,
there is a complete reporter’s record of the trial, the trial court’s findings of fact will
not be disturbed on appeal if there is any evidence of probative force to support them.
See Barrientos v. Nava, 94 S.W.3d 270, 288 (Tex. App.—Houston [14th Dist.] 2002,
no pet.).
Applicable Law
Texas Courts apply the Uniform Commercial Code to contracts for the sale of
goods even if the parties characterize the claim as a common law breach of contract
or breach of warranty case. Omni USA, Inc. v. Parker-Hannifin Corp., 964 F. Supp.
2d 805, 840 (S.D. Tex. 2013); see also Courey Int’l v. Designer Floors of Texas,
Inc., No. 03-09-00059-CV, 2010 WL 143420, *3 (Tex. App.—Austin Jan. 15, 2010,
no writ), citing Tex. Bus. & Com. Code Ann. § 2.102; Selectouch Corp. v. Perfect
Starch, Inc., 111 S.W.3d 830, 834 (Tex. App.—Dallas 2003, no pet.) (“Contracts
relating to the sale of goods are governed by article two of the [UCC], adopted in
Texas as chapter two of the business and commerce code.”). The agreement between
Tendeka and Nine Energy was a contract for the sale of goods governed by the UCC.
The essential elements of a breach of contract action are: (1) the existence of
a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach
of the contract by the defendant; and (4) damages sustained by the plaintiff as a result
of the breach. See Texas Black Iron, Inc. v. Arawak Energy Int’l Ltd., 566 S.W.3d
801, 814 (Tex. App.—Houston [14th Dist.] 2018, pet. denied). Because Nine Energy
asserted repudiation as an affirmative defense, Nine Energy had the burden of
proving that Tendeka unconditionally refused to perform the contract. See New York
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Party Shuttle, LLC v. Bilello, 414 S.W.3d 206, 216 (Tex. App.—Houston [1st Dist.]
2013, pet. denied).
I. The trial court did not err in determining that Tendeka repudiated the
agreement between the parties.
In its first issue Tendeka argues that the trial court erred in concluding that
Tendeka repudiated the contract. Tendeka argues the evidence does not support the
trial court’s finding that Tendeka refused to perform in June 2014.
We begin our analysis with the parties’ agreement as found by the trial court.
The trial court found that on October 25, 2013, Tendeka and Nine Energy entered
into an agreement in which “the parties agreed that, in return for [Tendeka]’s
agreement to a $3,000.00 unit price, [Nine Energy] would assure the annual purchase
of not fewer than 3,000 [packers].” Therefore, the existence of a valid contract was
established. No party challenged this finding on appeal.
Tendeka challenges the sufficiency of the evidence to support the trial court’s
finding of fact number twelve, in which the court found, “On or about June 9, 2014,
Plaintiff repudiated the agreement between the parties.” To constitute a repudiation,
a party to a contract must have absolutely and unconditionally refused to perform
the contract without just excuse. El Paso Prod. Co. v. Valence Operating Co., 112
S.W.3d 616, 621 (Tex. App.—Houston [1st Dist.] 2003, pet. denied). The refusal to
perform must be unconditional and the renunciation of the contract must be
complete. Id. Repudiation can result from action that reasonably indicates a rejection
of the continuing obligation. Tex. Bus. & Com. Code Ann. § 2.610. cmt. 2.
We review the record to determine if the evidence supports the trial court’s
finding that Tendeka rejected its continuing obligation under the contract. The record
reflects the contract between the parties had three main components: (1) price, (2)
consignment, and (3) payment terms. On its face, the June Letter changed the price
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of packers from $2,800 to $3,000, canceled the consignment terms, and required
immediate payment rather than invoicing when the packers were used. Miller,
Tendeka’s representative, testified that the June Letter changed the price of the
packers, the consignment terms and when payment would be required. Barbot, Nine
Energy’s representative, also testified that the June Letter changed each of these
components of the contract. Pearson and Fox maintained that the June Letter only
changed the consignment arrangement, not the price and payment terms of the
contract. That evidence, however, is contradicted by the June Letter and the
testimony of Miller and Barbot. As the fact finder the trial court resolved any
conflicting evidence in favor of a finding of repudiation by Tendeka.
Applying the appropriate standards of review of the trial court’s finding that
Tendeka repudiated the contract, we find sufficient evidence in the record that Nine
Energy met its burden to show the affirmative defense of repudiation. Furthermore,
the finding of repudiation is not so against the great weight and preponderance of
the evidence as to be manifestly unjust. We overrule Tendeka’s first issue.
II. The trial court did not err in failing to find that Tendeka’s repudiation
was excused.
In its second issue Tendeka argues that even if the June Letter represented a
repudiation, it was excused. The trial court did not make a finding that Tendeka’s
repudiation was excused. Because Tendeka bore the burden of proof on this issue, it
must establish on appeal that the evidence conclusively established all vital facts to
support excuse of Tendeka’s repudiation. See Dow Chem., 46 S.W.3d at 241.
Tendeka argues that its repudiation was justified by Nine Energy’s failure to
purchase 3,000 packers within the year term of the contract. In other words, Tendeka
argues that Nine Energy repudiated the contract by failing to abide by its volume
commitment.
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When a party repudiates a contract, the non-repudiating party is entitled to an
immediate rescission of the contract. See Griffith v. Porter, 817 S.W.2d 131, 135
(Tex. App.—Tyler 1991, no writ). Notice of intent not to perform under a contract,
however, does not of itself constitute an automatic rescission. Id. If the repudiation
is not accepted by the other party, the contract remains in effect for the benefit of
both parties. Townewest Homeowners Ass’n, Inc. v. Warner Communication Inc.,
826 S.W.2d 638, 640 (Tex. App.—Houston [14th Dist.] 1992, no writ).
Tendeka argues that Nine Energy repudiated the contract by failing to abide
by a volume commitment as early as November 2013 and that Nine Energy’s
repudiation excused Tendeka’s later repudiation. The record reflects, however, that
the parties continued to conduct business until June 2014. Nine Energy’s alleged
refusal to abide by a volume commitment did not show that Nine Energy rejected its
continuing obligation under the contract. See El Paso Prod. Co., 112 S.W.3d at 621.
Tendeka concedes that Nine Energy bought at least 1,923 packers in the first six
months of the contract. (6 RR 23) Not only does the record fail to reflect that Nine
Energy repudiated the contract, it does not reflect that Tendeka accepted the
repudiation at that time. In fact, Tendeka instead agreed to continue selling packers
to Nine Energy for the lower price of $2,800.
Because the evidence does not support Tendeka’s assertion that its repudiation
was excused Tendeka has failed to show excuse as a matter of law. See Dow Chem.
Co., 46 S.W.3d at 241. Furthermore, considering all of the evidence, Tendeka has
failed to show the trial court’s failure to find excuse was against the great weight and
preponderance of the evidence.
III. The trial court did not err in failing to find that Tendeka’s repudiation
was retracted.
Also in Tendeka’s second issue it argues that, assuming the June Letter
12
repudiated the October Agreement, Tendeka promptly issued a retraction. On July
10, 2014, Miller sent the following letter to Butero:
Thanks for your e-mail, a disappointing outcome to say the least,
nevertheless we wish you well in all future business. After inspecting
the packers returned from your Williston Facility there are 13 that are
damaged and cannot be utilized. We will be invoicing for those packers.
Also we would like to remind you of the minimum purchase obligation
based on your e-mail of October 25, 2013 accepting our offer of
$3000/packer for a minimum purchase of 3000 units based on your
RFQ October 3, 2013.
Nine Energy have [sic] currently purchased 1,923 packers to date at this
reduced pricing level. We thought it prudent to bring to your attention
that if the guaranteed 3,000 volume is not achieved the pricing on all
the packers purchased at the lower price point based on the volumes
indicated by Nine Energy will revert to the prior pricing of $3,700 and
we will invoice Nine Energy for this price differential on all packers
sold in that period.
Tendeka argues the above letter acted as a retraction of its June Letter repudiating
the contract.
Because the trial court did not make a finding of retraction, to prevail on this
issue, Tendeka must establish that the evidence conclusively established all vital
facts to support a finding of retraction. See Dow Chem. Co., 46 S.W.3d at 241. Under
Texas law, repudiation gives the non-repudiating party the option to treat the
repudiation as a breach or ignore it and await the agreed upon time of performance.
Ingersoll–Rand Co. v. Valero Energy Corp., 997 S.W.2d 203, 211 (Tex. 1999). The
non-repudiating party must do one or the other; it cannot do both. Bumb v.
InterComp Techs., L.L.C., 64 S.W.3d 123, 125 (Tex. App.—Houston [14th Dist.]
2001, no pet.). Until the repudiating party’s next performance is due it can retract
the repudiation unless the aggrieved party has since the repudiation cancelled,
materially changed its position, or otherwise indicated that it considers the
13
repudiation final. Tex. Bus. & Com. Code Ann. § 2.611. As long as the non-
repudiating party has not materially changed its position in reliance upon an earlier
notice of default, a prior repudiation may be retracted by notification of the non-
repudiating party that there will be performance. Griffith, 817 S.W.2d at 135.
The record in this case does not support a retraction of repudiation by
Tendeka. Butero testified that Nine Energy treated the June Letter as a repudiation
of the agreement and acted accordingly. Nine Energy materially changed its position
in reliance on Tendeka’s repudiation. Therefore, Tendeka could not retract its
repudiation. See id.
Because the evidence does not support Tendeka’s assertion that it retracted its
repudiation of the agreement Tendeka has failed to show retraction as a matter of
law. See Dow Chem. Co., 46 S.W.3d at 241. Furthermore, Tendeka has not
established that the trial court’s failure to find retraction was against the great weight
and preponderance of the evidence. We overrule Tendeka’s second issue.
CONCLUSION
Having overruled Tendeka’s issues on appeal we affirm the trial court’s
judgment.
/s/ Jerry Zimmerer
Justice
Panel consists of Justices Wise, Zimmerer, and Spain (J. Spain concurring without
opinion).
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