Antero Resources Corp. v. South Jersey Resources Group

FILED
United States Court of Appeals
Tenth Circuit
PUBLISH August 6, 2019
Elisabeth A. Shumaker
UNITED STATES COURT OF APPEALS Clerk of Court
TENTH CIRCUIT
ANTERO RESOURCES
CORPORATION,
Plaintiff - Appellee,
v. No. 18-1163
SOUTH JERSEY RESOURCES
GROUP, LLC, and SOUTH JERSEY
GAS COMPANY,
Defendants - Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. NO. 1:15:CV-00656-REB-MEH)
William R. Peterson (John M. Deck with him on the briefs), Morgan, Lewis &
Bockius LLP, Houston, Texas, for Appellants.
Marie R. Yeates (James D. Thompson III and Phillip B. Dye, Jr., Vinson & Elkins
LLP, Houston, Texas, and Michael John Gallagher, Davis, Graham & Stubbs,
Denver, Colorado, with her on the brief), Vinson & Elkins LLP, Houston, Texas,
for Appellee.
Before TYMKOVICH, Chief Judge, MURPHY, and HARTZ, Circuit Judges.
TYMKOVICH, Chief Judge.
Antero Resources Company and South Jersey Gas Company entered into a
eight-year contract for Antero to deliver natural gas from the Marcellus Shale
formation to gas meters located on the Columbia Pipeline in West Virginia. The
parties tied gas pricing to the Columbia Appalachia Index—an index created by a
private publisher and widely used in the natural gas industry. During
performance of the contract, the price of natural gas linked to the Index increased.
South Jersey contested the higher prices, arguing that modifications to the Index
materially changed the pricing methodology, and that the Index should be
replaced with one that reflected the original agreement.
Antero disagreed. South Jersey then sued Antero in New Jersey state court
for failing to negotiate a replacement index, and began paying a lower price based
on a different index. Antero then sued South Jersey in federal district court in
Colorado, where its principal place of business is located, for breach of contract
for its failure to pay the Index price. The lawsuits were consolidated in the
District of Colorado and the case proceeded to trial. The jury rejected South
Jersey’s claims, finding South Jersey breached the contract and Antero was
entitled to $60 million damages.
South Jersey argues on appeal that the district court erred in denying its
motion for judgment in its favor as a matter of law, or, alternatively, that the
court erred in instructing the jury. We affirm the district court. We conclude
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South Jersey is not entitled to a judgment as a matter of law because a reasonable
jury could find South Jersey breached its contract with Antero because the Index
was not discontinued nor did it materially change. We further hold South Jersey
is not entitled to a new trial based on any defects in the jury instructions.
I. Background
The contract between Antero and South Jersey took effect in October 2011
and will end in October 2019. 1 The contract requires Antero to ship and deliver
natural gas to gas meters located in West Virginia, where South Jersey purchases
the gas and transports it to customers. South Jersey purchases the gas at a price
determined by the Columbia Appalachia Index. But pursuant to the contract, this
pricing term can be renegotiated under specific circumstances. Here, Antero
delivered natural gas to the agreed-upon gas meters, but South Jersey argues the
contract must be renegotiated and South Jersey is no longer bound to pay the price
listed by the Columbia Appalachia Index. The three terms of the contract that are
significant for purposes of this litigation are the delivery term, the pricing term,
and the renegotiation term.
1
Antero entered into two separate agreements to sell natural gas to two
related companies, South Jersey Resources Group and South Jersey Gas Company.
South Jersey Gas is a regulated public utility whereas South Jersey Resources is a
marketer of Marcellus Shale gas that moves the gas from the wellhead to the end
user. Because the terms in question are the same in each contract, we will refer to
these entities collectively as South Jersey.
-3-
We will address each of these components of the contract in turn.
A. The Delivery Term
The gas meters where Antero delivers the gas fall within the boundaries of
The Columbia Pipeline (or TCO Pipeline), which covers parts of Kentucky, Ohio,
Pennsylvania, West Virginia, New York, New Jersey, and Virginia. The
Columbia Gas Transmission Corporation, which oversees the transportation of gas
on The Columbia Pipeline, designated numerous pools, or natural gas storage
systems, along the pipeline. These pools allow sellers to aggregate their gas with
other sellers prior to sale of the gas.
In addition to physical storage pools, Columbia Gas created a so-called
“virtual aggregation pool” called the Interruptible Paper Pool (IPP). 2 Under the
Antero–South Jersey contract, Antero had to deliver the gas to physical meters
located in Doddridge County, West Virginia, where South Jersey would take
2
A virtual aggregation pool is an accounting technique to manage gas
transportation on gas pipelines, allowing sellers to aggregate their gas supply and
sell it to buyers. The pool is simply an administrative tool—it is used to
“aggregate the receipt of gas from multiple physical points in a specific
geographic area to simplify accounting.” Interstate Nat. Gas Ass’n v. Fed.
Energy Regulatory Comm’n, 285 F.3d 18, 42 (D.C. Cir. 2002). Without a pool, it
is difficult for buyers to purchase gas at a physical point—a large customer would
be purchasing its gas at thousands of physical points. Instead, Columbia Gas
monitors the gas as it goes into the pool, and the buyer can then go to any meter
within that pool and obtain the gas it needs on a particular date. In order to
maintain the pool balance, the supplier has to find someone to purchase the
natural gas once it is delivered to the pool. Thus, buyers and sellers enter into
contracts like the ones between Antero and South Jersey.
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possession. While Antero’s meters are part of The Columbia Pipeline, they are
outside the IPP pool, meaning the gas delivered by Antero to fulfill this particular
contract is not aggregated in the IPP pool.
Because Antero sold its gas to South Jersey outside the IPP pool, Antero
only had to deliver the gas to meters in West Virginia. The parties agreed to a
discount from the Index price because they recognized that South Jersey would
incur costs in transporting gas back into the IPP pool if it wanted to resell some
of its gas 3 or incur transportation costs to deliver gas to its customers in New
Jersey. Antero’s meters were located relatively close to the production site,
which made it advantageous for Antero to deliver the gas to the meters outside the
pool and for South Jersey to transport any gas it wanted to resell to the pool. At
the time the contract was executed, anyone could transport gas to the pool without
cost, so South Jersey did not have to pay to transport the gas to the pool.
B. The Pricing Term
Antero and South Jersey needed a way to establish pricing for the duration
of the eight-year contract. Like other market participants, they agreed to use a
gas price index published by Platts McGraw Hill Financial, an industry leader in
collecting and publishing average benchmark daily and monthly prices reflecting
3
South Jersey Resources was also a market player in buying and selling
gas. As a result, the South Jersey entities did not deliver all of its gas to utility
customers in New Jersey.
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market conditions. The benchmark prices allow industry participants to enter
long-term purchase agreements and are based on the average price of natural gas
trades in a given market. Buyers and sellers in the given market voluntarily share
price information with Platts, which then uses it to calculate the daily or monthly
index price. Platts’s methodologies evolve “to reflect changing market conditions
through time,” and Platts retains some level of editorial discretion over its Index.
App. 1736. The methodology statement for Platts was divided into seven parts
that explained the “entire process of producing price values for the specified
market period.” Id. For their contract, Antero and South Jersey agreed to use
Platts’s Columbia Appalachia Index minus the agreed upon discount. 4
At the time the contract was drafted and signed, any gas producer could
deliver gas to the IPP pool. But due to the success of hydraulic fracking, gas
production from the Marcellus Shale formation increased dramatically between
2011 and 2014. Reaching its capacity, The Columbia Pipeline, which previously
had accepted gas from all shippers, began limiting access to those shippers with
“firm transportation rights”—rights previously negotiated for a fee to guarantee
4
Using the Index, the parties would calculate prices at the first of the
month, with specified reductions off the Index’s base price: “For the first of the
month priced gas, Inside FERC Columbia Appalachia less 12 cents, and for daily
priced gas, Gas Daily Columbia Appalachia less 14 cents.” App. 1674 (quoting
the contract).
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access to the IPP Pool. These shippers 5 thus received a first right of access on the
pipeline to move their gas. As a result, the IPP pool became an exclusive club of
shippers with firm transportation rights. Because fewer shippers were able to
access the pipeline, more trades occurred outside the pool. South Jersey lacked
firm transportation rights for the gas purchased from Antero, so South Jersey was
unable to transport gas it purchased from Antero into the pool. In contrast,
Antero had purchased $15 billion worth of transportation rights and had full
access to the IPP pool for its other contracts.
All of this matters because South Jersey challenges the gas trades that are
included in Platts’s Index. If transactions outside the IPP pool are included, they
drive down the average price of the Index because gas without transportation
rights to the IPP pool is generally cheaper than gas with access to the IPP pool.
As we discuss below, the parties contest whether transactions outside the IPP pool
(non-IPP pool transactions) should have been included by Platts in calculating
Index prices. According to South Jersey, all non-IPP pool transactions should
have been included in calculating the Index. If non-IPP pool transactions were
included in the Index, South Jersey argues that the average Index price would go
down, and it would pay a cheaper price for gas purchased from Antero.
5
Antero and South Jersey are both shippers in the context of this contract.
Antero ships the natural gas to the gas meters, and South Jersey ships the natural
gas to the IPP pool.
-7-
Under the terms of the contract, South Jersey was required to pay the price
reflected by the IPP pool Index. In the fall of 2014, South Jersey complained to
Platts that non-IPP pool transactions should be included in the Index. Platts
informed South Jersey that while the Index covered all Appalachian gas, only
IPP-pool transactions were reported and included in the Index’s pricing
methodology. As reported in an internal South Jersey email, Platts took the
position that the “[non-IPP] trades are outliers and should not be included.” App.
1683. Because “[Platts] didn’t include them [in the past] . . . they didn’t want to
start now.” Id.Based in part on these inquiries from South Jersey, in November 2014,
Platts issued what it called a “clarification” of how Index prices were determined.
Platts announced to the industry that non-IPP pool transactions were not included
in the Index, stating that “gas restricted from using the IPP pool services will no
longer be included in the assessment process.” App. 1721. 6 The clarification
stated:
Please note that Platts clarifies its description for Columbia Gas,
Appalachia, to “Deliveries in Columbia Gas Transmission’s
Interruptible Paper Pool (IPP pool) from any source on Columbia Gas.
Deliveries in the IPP pool which is also known as the ‘TCO Pool’ can
originate from any source delivered into Columbia Gas’ system.”
6
In 2014, Platts included a non-IPP pool transaction in calculating the
Index. After a strong and negative reaction from the market, it sent its
clarification notices.
-8-
App. 1724. 7 Platts also later announced a new index would be created
specifically for non-IPP pool transactions because those trades reflected a
different market than the IPP pool market. As a result, the Index reflected higher
IPP pool transactions and the new Columbia Gas, Appalachia (Non-IPP) Index
generally reflected lower prices.
C. The Renegotiation Term
Having failed to convince Platts to modify the Index, South Jersey turned to
Antero, arguing the Index had materially changed its methodology to South
Jersey’s detriment. The contract envisioned several situations where the parties
could renegotiate the price provisions. Specifically, Section 14 of the contract
provided five different “market disruption events” that could trigger the need to
renegotiate a replacement price—two of which are at issue in this case, 14(c) and
14 (e):
7
The original description stated:
Deliveries into Columbia Gas Transmission in eastern Kentucky,
eastern Ohio, West Virginia, Pennsylvania, northern Virginia and
western New York. The Appalachian pool for deliveries into Columbia
begins downstream of the Leach, Ky., interconnection with Columbia
Gulf Transmission; deliveries at Leach are not included. Columbia Gas
operates supply pool and market-area storage facilities within this
northern Appalachia region, which also has local production. Prices
include deliveries systemwide at pools, interconnects and on-system
points.
App. 1782 (emphasis added).
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If a Market Disruption Event has occurred then the parties shall
negotiate in good faith to agree on a replacement price for the Floating
Price . . . . “Market Disruption Event” means, with respect to an index
specified for a transaction, any of the following events:
***
(c) the temporary or permanent discontinuance or unavailability of the
index;
***
(e) both parties agree that a material change in the formula for or the
method of determining the Floating Price has occurred. 8
App. 1658. The first market disruption event, “discontinuance or unavailability,”
might occur, for example, if Platts did not publish a price point because it lacked
enough data or discontinued the relied-on Index. The other market disruption
event, “material change in the formula,” allowed the parties to renegotiate the
pricing methodology if they agreed a material change in the Index had occurred.
If either event happened, the contract instructed the parties to renegotiate the
8
Section 14 provides more fully:
If a Market Disruption Event has occurred then the parties shall
negotiate in good faith to agree on a replacement price for the Floating
Price . . . . “Market Disruption Event” means, with respect to an index
specified for a transaction, any of the following events: (a) the failure
of the index to announce or publish information necessary for
determining the Floating Price; (b) the failure of trading to commence
or the permanent discontinuation or material suspension of trading on
the exchange or market acting as the index; (c) the temporary or
permanent discontinuance or unavailability of the index; (d) the
temporary or permanent closing of any exchange acting as the index; or
(e) both parties agree that a material change in the formula for or the
method of determining the Floating Price has occurred.
App. 1658.
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pricing term in good faith. See infra Section II.A.2.
South Jersey approached Antero about the difficulties South Jersey faced in
light of the market changes. Both parties knew Platts was discussing the
possibility of creating the new non-IPP pool index. South Jersey wanted to
preempt this decision by renegotiating with Antero immediately, whereas Antero
wanted to wait and see what Platts decided to do with the Index. Antero
ultimately determined the existing circumstances did not constitute a market
disruption event, but it offered to explore other long-term options with South
Jersey. Communications broke down and, pursuant to a remedies provision of the
contract, 9 South Jersey began paying what it deemed to be the correct amount.
South Jersey sued in New Jersey state court because it believed Antero
breached the contract by failing to renegotiate the pricing term. Antero then filed
a lawsuit in federal court in Colorado, claiming that neither a market disruption
9
Section 7.4 of the contract provides:
If the invoiced party, in good faith, disputes the amount of any such
invoice or any part thereof, such invoiced party will pay such amount
as it concedes to be correct provided, however, if the invoiced party
disputes the amount due, it must provide supporting documentation
acceptable in industry practice to support the amount paid or disputed
without undue delay. In the event the parties are unable to resolve
such dispute, either party may pursue any remedy available at law or
in equity to enforce its rights pursuant to this Section.
App. 1654.
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event nor a material change in the Index had occurred and that South Jersey was
required to pay the Index price. South Jersey counterclaimed.
The district court denied summary judgment for both parties and allowed
the claims and counterclaims to proceed to a jury trial. The jury found in favor of
Antero. South Jersey filed a motion for judgment as a matter of law, which the
district court denied. South Jersey appeals the district court’s ruling and also
alleges the jury instructions were erroneous, warranting a new trial.
II. Analysis
South Jersey contends the district court erred in denying its motion for
judgment as a matter of law. South Jersey argues the court erred in failing to find
as a matter of law that Antero breached the contract because a market disruption
event had occurred, requiring the renegotiation of the contract’s price terms. But
the district court concluded that whether a market disruption event had occurred
was indeed a question of fact and denied South Jersey’s post-trial motion. South
Jersey also argues the district court incorrectly instructed the jury on New Jersey
contract law.
We review each argument in turn.
A. Judgment as a Matter of Law
South Jersey makes two arguments for judgment in its favor as a matter of
law. It contends a market disruption event under Section 14 of the contract
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occurred because (1) the Index was temporarily or permanently discontinued or
unavailable after Platts created a new index for non-IPP pool trades; and (2) there
was a material change in the formula for or the method of determining gas prices.
Because South Jersey sees no fact issues, it argues the district court should
resolve the claims in its favor.
A judgment as a matter of law is permitted under Federal Rule of Civil
Procedure 50 after a party has been fully heard on an issue and before the case is
submitted to the jury. The party may renew the motion after the jury verdict.
“We review the district court’s denial of a motion for judgment as a matter of law
de novo, applying the same legal standard as the district court.” Brown v. Gray,
227 F.3d 1278, 1285 (10th Cir. 2000). We draw all inferences in favor of the
non-moving party, asking whether the “evidence points but one way and is
susceptible to no reasonable inferences supporting the party opposing the
motion.” Deters v. Equifax Credit Info. Servs., Inc., 202 F.3d 1262, 1268 (10th
Cir. 2000).
South Jersey argues the plain meaning of the contract and the changed
methodology behind the Platts Index compel the conclusion that a market
disruption event occurred.
1. Discontinued or Unavailable
The first question is whether the Index was unavailable or discontinued
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under Section 14(c) as a matter of contract interpretation. This type of market
disruption event was an easier hurdle for South Jersey to prove since it need not
establish the materiality requirement found in Section 14(e).
Under New Jersey law, the terms of the contract are interpreted according
to their “plain and ordinary meaning” to ascertain the objective manifestations of
the parties. M.J. Paquet, Inc. V. N.J. Dep’t of Transp., 794 A.2d 141, 152 (N.J.
2002). But “[t]rade terms, legal terms of art, numbers, common words of
accepted usage and terms of a similar nature should be interpreted in accord with
their specialized or accepted usage.” Mellon Bank v. Aetna Bus. Credit, Inc., 619
F.2d 1001, 1013 (3d Cir. 1980).
South Jersey contends the change in the description of the Index as well as
the creation of the new, non-IPP index rendered the Index discontinued or
unavailable under a proper reading of the contract. At the time the contract was
entered into Platts defined the Index as covering “deliveries systemwide at pools,
interconnects and on-system points:”
Deliveries into Columbia Gas Transmission in eastern Kentucky,
eastern Ohio, West Virginia, Pennsylvania, northern Virginia and
western New York. The Appalachian pool for deliveries into Columbia
begins downstream of the Leach, Ky., interconnection with Columbia
Gulf Transmission; deliveries at Leach are not included. Columbia Gas
operates supply pool and market-area storage facilities within this
northern Appalachia region, which also has local production. Prices
include deliveries systemwide at pools, interconnects and on-system
points.
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App. 1782 (emphasis added). But, according to Platts, the only reported
transactions on the TCO Pipeline were IPP pool transactions. As recounted
above, after the IPP pool reached capacity and transactions outside the pool
generated price points, South Jersey challenged Platts on this interpretation, and
Platts clarified that the Index only includes “[d]eliveries in the IPP pool.” App.
1724.
Soon thereafter, Platts began publishing the Columbia Gas, Appalachia
(Non-IPP) index. South Jersey sees this bifurcation between IPP pool and non-
IPP pool transactions as unassailable evidence that the Index to which they agreed
in the contract had been discontinued and replaced by two newer indexes. Antero
points out that the Index was based exclusively on IPP pool transactions because,
before the transportation restraints, everyone had access to the IPP pool and
everyone was making trades in the pool. Thus, the Index never changed.
We are convinced that the question of what transactions were reflected in
the Index is a question of fact for the jury. South Jersey’s argument is that Platts
changed the Index surreptitiously by not including non-IPP pool transactions that
should have been included. South Jersey asks us to find that, as a matter of law,
the Index was discontinued or unavailable. It contends the failure to include non-
IPP pool transactions was a material change to the Index’s methodology that
fundamentally “changed” the Index into something new and different.
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“Unavailable” means not “capable of use for the accomplishment of a
purpose.” Webster’s Third New International Dictionary (2002). “Discontinue”
means “to break off” or to “end the operations or existence of.” Id. These
definitions require that—for the Index to become unavailable or discontinued—
the original Index included or was required to include non-IPP pool transactions.
But we are unable to reach this conclusion. It is a factual rather than legal
question whether Platts intended to use non-IPP pool transactions to calculate the
Index or whether Antero and South Jersey had an understanding that non-IPP pool
prices would be included in the Index. Based on the language of the contract it is
not clear the exclusion of non-IPP transactions reached the level of
discontinuance or unavailability of the Index. Discontinuance or unavailability
depends on what transactions were being measured previously, the expectations of
the parties, and the natural gas industry customs. As a result of these factual
questions, it was appropriate for the district court to allow the jury to determine
whether the Index was discontinued or unavailable and, therefore, whether Antero
was required to renegotiate the contract.
The evidence viewed most favorably to Antero could support the jury’s
conclusion that the Index was not discontinued or unavailable. While Platts
created a second index specific to non-IPP pool sales, it did so because non-IPP
pool transactions created a new market. There was evidence that non-IPP pool
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transactions had not been included in the Index because, with free transportation
to the pool, all transactions were IPP pool transactions. Everyone had access to
the IPP pool, so everyone used the IPP pool. Even if the Index theoretically could
have included non-IPP pool transactions under the original description, the
evidence suggested the reality that non-IPP pool transactions were outliers and
therefore should be excluded. And, moreover, that practice was common
knowledge in the industry. One Antero official testified that industry participants
“knew the non-IPP deals aren’t included in the IPP pricing index.” App. 1040.
Other evidence supports this interpretation that non-IPP transactions were
excluded from the Index. A Platts witness testified that when a trading location is
“discontinued,” it means Platts “d[oes]n’t assess the point anymore.” Id. When
an index is “unavailable,” it typically means Platts “did not publish a price in a
given bid week for a location” because it lacked the requisite information. Id.Another witness testified that when Platts discontinued an index, it issued an
announcement that it was removing certain pricing locations. Id. at 1042. Platts
acknowledged that it was only “getting postings for the pool” and thus the pricing
only reflected IPP pool transactions. Id. at 1681. The jury heard testimony that
non-IPP pool sales “were not previously included in the [Index],” Id. at 1039, and
that “Platts was not including non-IPP trades on [the Index],” Id. at 1364.
These statements are not dispositive, but the jury was free to believe this
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testimony and conclude the contract’s use of the word “discontinued” mirrored
the Index’s definition of the word “discontinued.” See Harsco Corp. v. Renner,
475 F.3d 1179, 1185–86 (10th Cir. 2007) (“[The panel] will refuse to weigh the
evidence, pass on the credibility of the witnesses, or substitute [its] conclusions
for those of the jury.”). The jury could then reasonably conclude the Index was
not discontinued for purposes of the contract and South Jersey, rather than
Antero, breached the contract by underpaying the Index price.
In sum, the underlying content of the Index and its operation by Platts does
not compel a ruling in South Jersey’s favor as a matter of law. The jury was
entitled to determine whether the Index was unavailable or discontinued.
2. Material Change
Next, for mostly the same reasons, South Jersey argues the failure to
include non-IPP pool transactions in the Index was a material change in the Index
as a matter of law. The contract states a market disruption event occurs when
“both parties agree that a material change in the formula for or the method of
determining the [price] has occurred.” App. 1658. As a practical matter, this
argument is the mirror image of whether the Index was unavailable or
discontinued: Was the Index required to include non-IPP pool transactions and
did exclusion fundamentally alter the Index?
South Jersey argues that as a matter of law, the court should find that a
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material change occurred. It contends (1) under an objective standard, any
reasonable party would agree the condition was met, and (2) alternatively, it was
excused from satisfying this condition because of Antero’s bad faith conduct.
a. Objective Standard
South Jersey contends the material change provision should be analyzed
under an objective standard. That is, would a reasonable person agree a material
change occurred? As an initial matter, the terms of the contract do not require us
to analyze the agreement under an objective standard. See Silvestri v. Optus
Software, Inc., 814 A.2d 602, 609 (N.J. 2003) (holding that when a contract
contains a satisfaction clause, the contract must specify that an objective standard
controls or it will be evaluated under a subjective standard). South Jersey points
to Transworld Aggregate, LLC v. Western Logging Ltd., 2011 WL 4435090 (N.J.
Sept. 26, 2011) (unpublished), but that case involved a settlement agreement
where the parties agreed a subjective standard would not apply.
South Jersey also relies on Section 228 of the Restatement (Second) of
Contracts, which states that when an obligee’s performance is conditioned on an
obligor’s satisfaction, “an interpretation is preferred under which the condition
occurs if such a reasonable person in the position of the obligor would be
satisfied.” Restatement (Second) of Contracts § 228 (1981). But here, there is no
obligor or obligee with respect to the pricing term in the contract. Platts, a third
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party, determined the pricing index, and the Platts calculation did not depend on
performance by Antero or South Jersey. The contract only specified that both
parties had to agree a material change had occurred. Perhaps the Restatement
could be read to encompass this situation; but in any event, New Jersey law
controls.
Finally, South Jersey points to Dynamics Corporation of America v. United
States, 17 Ct. Cl. 60 (Ct. Cl. 1989), a case where the parties used a third-party
pricing index. There, the price adjustment clause was tied to an index published
by the Bureau of Labor Statistics, which provided that—in the event the method
to calculate the index was changed—appropriate adjustments would be made by
the parties. Id. at 61–62. Notably, the price adjustment clause specified that “[i]n
the event the BLS alters its method of calculating the index, appropriate
adjustments shall be made by the parties.” Id. at 61. There was no requirement to
agree the index had changed. Rather, the change to the index triggered the duty
of the parties to make appropriate adjustments. Here, in comparison, the contract
specifies the parties must agree that the method of calculating the Index
changed. 10
10
It is also worth noting that Dynamics was decided by the Court of
Federal Claims on a motion for partial summary judgment. The court concluded
there was a change in the method of calculating the index, so the parties were
required to make adjustments. 17 Cl. Ct. at 65. Here, however, the district court
(continued...)
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Even if we agreed an objective standard applies, it is unlikely South Jersey
could demonstrate a material change occurred. As we discussed above, fact
questions existed as to the composition of the Index. But based on all the
evidence presented at trial, a reasonable juror could conclude Platts never
included the non-IPP pool transactions, and therefore no material change
occurred. Based on this evidence, we would be unable to conclude that, as a
matter of law, a material change occurred. And it is likely that a jury would have
found no material change occurred. Thus, South Jersey would not likely prevail
regardless of whether we apply an objective standard.
b. Bad Faith
South Jersey’s second argument is that Antero acted in bad faith by failing
to agree a material change had occurred, thus excusing South Jersey from using
the Index. 11 There are several reasons why South Jersey’s argument fails.
10
(...continued)
determined there was enough evidence to proceed to the jury on the question of
whether the exclusion of certain data (non-IPP pool sales) caused a
discontinuance or unavailability of the index. Neither the jury nor the district
court needed to determine whether a material change occurred because the
contract explicitly conditioned that determination on the agreement of the parties.
11
This argument depends on the acceptance of South Jersey’s premise that
an objective standard governs the agreement requirement in the contract. South
Jersey argues the agreement is a condition subsequent, and Antero’s bad faith
prevented the condition that the parties agree to the material change from
occurring. Therefore, South Jersey argues, the court should treat Antero as
having agreed because, under the objective standard, a reasonable person would
(continued...)
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First, a reasonable person, specifically Antero, could find that no material
change occurred so South Jersey is not excused from performance. The jury
found South Jersey breached the contract and Antero did not. 12 To reach this
conclusion, the jury had to find that no market disruption event occurred. While
we cannot dissect this factual finding, we do know that the only way to reach this
conclusion was for the jury to find either (1) there was no discontinuance or
unavailability of the index, or (2) the parties did not agree that a material change
had occurred.
As discussed previously, evidence presented at trial showed the Index was
not discontinued or unavailable. Similarly, evidence showed there was no
material change to the Index. The jury heard testimony that non-IPP pool
transactions had previously been considered outliers and were never included in
the Index. The district court instructed the jury that “to prove a Market
Disruption Event under SECTION 14(e) of the Contracts, [South Jersey] ha[s] the
burden to prove by a preponderance of the evidence that plaintiff Antero breached
its implied duty of good faith and fair dealing by acting in bad faith.” App. 575.
11
(...continued)
have agreed.
12
The parties conceded that they did not agree. We only need to reach the
question of whether a material change occurred if we apply South Jersey’s
proposed objective standard. We are not applying this proposed objective
standard.
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Based on the evidence presented at trial and the jury instructions, a reasonable
jury could find that no material change occurred. If the jury found that no
material change occurred, then the jury would have to conclude South Jersey was
not excused from performance.
South Jersey’s second argument to excuse its performance is that Antero
did not act in good faith. It points to Wilson v. Amerada Hess Corp., 773 A.2d
1121 (N.J. 2001), arguing that the correct Uniform Commercial Code standard for
good faith includes both subjective and objective standards. Wilson says good
faith is “honesty in fact and the observance of reasonable commercial standards of
fair dealing in the trade.” Id. at 1126 (quoting N.J. Stat. § 12A:2-103(1)(b)).
“The observance of reasonable commercial standards of fair dealing is the
objective element.” Id. “Honesty in fact” is a subjective element. Id. But an
economically advantageous contract is not necessarily a dishonest one nor does it
necessarily violate commercial standards. To meet the good faith standard
espoused in Wilson, South Jersey must point to something more than just Antero’s
“windfall” gains under the contract. Aplt Br. 39.
We see two problems with this argument. First, in the district court, South
Jersey failed to provide evidence of a reasonable commercial standard. 13 No
13
During the jury charge conference, the district court expressed doubt that
South Jersey had presented any evidence of a reasonable commercial standard.
South Jersey does not dispute this on appeal but states, conclusively, that “the
(continued...)
-23-
witness explained what the industry standards were or what conduct would violate
them. Nor on appeal has South Jersey set forth the reasonable commercial
standard of fair dealing, let alone shown how Antero failed to meet this standard
as a matter of law. Without South Jersey showing that Antero was dishonest or
failed to act according to the commercial standard of fair dealing, we cannot
overturn the jury’s conclusions to the contrary. Accordingly, South Jersey has
failed to show it was excused from performance based on Antero acting in bad
faith.
Finally, even though South Jersey argues Antero breached the contract first
by failing to renegotiate—excusing South Jersey’s performance—South Jersey did
not follow the terms in the contract for renegotiating the price after a material
change or disputing the amount invoiced. Two important parts of the contract are
relevant. First, the contract specified the process for renegotiating a replacement
price—if the parties failed to agree on a replacement price, then each party would
submit two quotes, and the resulting price would be the average of the four
quotes. If one party failed to submit two quotes, then the parties would average
the two quotes provided by the complying party. Second, the contract also
specified that if the invoiced party (South Jersey) disputed the amount due, it
13
(...continued)
uncontroverted evidence established that Antero failed to follow ‘reasonable
commercial standards of fair dealing.’” Aplt. Br. 38.
-24-
could pay an amount it believed to be correct as long as it provided supporting
documentation.
We recognize the renegotiation process is only triggered after the parties
agree a material change has occurred. Even so, South Jersey did not even attempt
to comply with the two-quotes requirement or the invoice-dispute procedures, nor
did South Jersey provide supporting documentation for its lower payments.
Instead, when Antero refused to agree a material change had occurred, South
Jersey responded by paying a price outside the new non-IPP pool index altogether.
While the jury could have found this was sufficient performance, it was also free
to find South Jersey breached the contract first and was not excused from
performance.
* * *
In conclusion, we are persuaded the district court properly concluded that
the jury needed to resolve fact questions as to whether the contract was breached
and whether any circumstances excused performance.
B. Jury Instructions
South Jersey next argues it is entitled to a new trial based on erroneous jury
instructions. South Jersey points to three perceived problems in the jury
instructions: (1) the jury was not instructed to use an objective standard to review
the material change requirement; (2) the jury was not properly instructed on bad
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faith; and (3) the jury was given inconsistent instructions about the burden of
proof for showing bad faith.
We review the district court’s “decision about whether to give a particular
instruction for abuse of discretion.” Martinez v. Caterpillar, Inc. 572 F.3d 1129,
1132 (10th Cir. 2009). If a party fails to object to a particular instruction at trial,
we review for plain error. United States v. Willis, 476 F.3d 1121, 1127 (10th Cir.
2007). Under plain error review, “we will affirm unless the instructions were
patently, plainly erroneous and prejudicial.” Williams v. W.D. Sports, N.M., Inc.,
497 F.3d 1079, 1094 (10th Cir. 2007). But the court “review[s] de novo whether
a district court’s jury instructions correctly stated the governing law.” Pratt v.
Petelin, 733 F.3d 1006, 1009 (10th Cir. 2013).
1. Objective Standard
South Jersey’s first argument is that the district court should have
instructed the jury to use an objective standard to determine whether a material
change in the index occurred. Applying this standard, the jury would have been
required to consider whether a reasonable person would agree the Index
materially changed. Otherwise, the argument goes, the contractual term would be
“surplusage” since no party would ever agree there had been a material change if
the change favored its position. The district court rejected this argument,
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although it did include portions of the instruction requested by South Jersey. 14
As noted previously, the contract outlined several market disruption
contingencies that would be grounds for renegotiating the price methodology. We
14
South Jersey asked that the jury be instructed the contract contained an
implied covenant of good faith and fair dealing. The district court agreed. The
court provided this instruction:
The law provides that every contract includes an implied
covenant of good faith and fair dealing. Defendants SJRG and SJG
allege that, in refusing to agree that there has been a material change in
the formula for or method of determining the natural gas pricing index
as defined by SECTION 14(e) of the Contracts, plaintiff Antero
breached its implied duty of good faith and fair dealing by acting in bad
faith.
To find that a party acted in bad faith, you must decide whether
that party acted with bad faith to interfere with the other party’s rights
to receive the benefits of a contract. Proof of bad motive or intent is
essential to a claim that a party has acted in bad faith.
In considering what constitutes bad faith, you should consider a
number of factors, including the expectations of the parties and the
purposes for which the contract was made. You should consider also the
level of sophistication between the parties, whether the parties had
equal or unequal bargaining power, and whether a party’s action
involved the exercise of discretion. Keep in mind, however, that bad
faith is not established by simply showing that a party’s motive for its
actions did not consider the best interests of the other party. Contract
law does not require parties to behave thoughtfully, charitably, or
unselfishly toward each other. For a bad-faith claim to prevail, you must
specifically find that bad faith motivated a party’s actions. A party who
acts in good faith on an honest, but even mistaken, belief that its actions
were justified has not acted in bad faith.
In attempting to prove a Market Disruption Event under
SECTION 14(e) of the Contracts, defendants SJRG and SJG have the
burden to prove by a preponderance of the evidence that plaintiff
Antero breached its implied duty of good faith and fair dealing by
acting in bad faith.
App. 575 (emphasis added).
-27-
have already determined an objective standard did not apply to the agreement
requirement in the contract under New Jersey law. See supra Section II.A. But
even if the objective standard did apply, it is unlikely that South Jersey would
prevail.
The jury found no market disruption event occurred—the Index was not
discontinued or unavailable. In so concluding, the jury could have found, and
likely did find, that non-IPP pool transactions were never included in the Index
price. And this finding would be supported by evidence presented at trial. See
supra Section II.A.2. Accordingly, the jury would necessarily have found the
methodology or calculation of the Index did not change—that is, there was no
material change to the Index. Although the jury could have based its finding that
the Index was not discontinued or unavailable on other evidence, the
overwhelming evidence at trial suggests the jury found that non-IPP pool
transactions were never previously included in the Index. While it is not the role
of the appellate court to debate the basis for the jury’s findings, the record below
supports the conclusion that it is unlikely that South Jersey would prevail even if
the objective standard was applied.
2. Bad Faith
South Jersey’s second argument is that the jury was not properly instructed
on bad faith under New Jersey law. In particular, and similar to its arguments
-28-
above, South Jersey argues the jury was not instructed to take into account
commercial standards of reasonableness—an objective standard—when
determining whether Antero acted in bad faith. We noted previously that South
Jersey failed to present any evidence regarding commercial standards of
reasonableness, so the district court properly refused to instruct on that.
We agree the instruction does not explicitly tell the jury to consider
commercial standards of reasonableness or to use an objective standard. But it
instructs jurors to consider a variety of objective factors, like party sophistication
and party expectations, which indicate some indicia of objectivity. We do not
require the district court to use any magic words, and we find the bad faith
instruction properly told the jury it could consider a variety of objective factors. 15
3. Burden of Proof
Finally, South Jersey argues the district court erred by giving conflicting
15
We held above that an objective standard does not apply to the
agreement requirement in Section 14(e) because of the plain language of the
contract. See supra Sections II.A.2.A; II.B.1. Thus, we do not ask whether a
reasonable person would agree a material change occurred—we only ask whether
the parties in fact agreed. Separately, we recognized the New Jersey standard for
acting in good faith in contract dealings does have an objective component. See
Wilson, 773 A.2d at 1126. But these are separate questions. One focuses on
contract interpretation while the other focuses broadly on the parties’ good faith
in all aspects of the contract.
In examining the jury instructions, we focus on the latter question—the
New Jersey standard for good faith, which does include an objective component.
This is not the same question of whether the district court should have instructed
the jury on an objective standard. Instead, this is a broader question about what it
means to act in good faith in performing the contract.
-29-
instructions about the burden of proof. Specifically, it argues the court’s
inadequate instructions confused the jury about who had the burden of proof to
show bad faith.
In Instruction 16, the district court told the jury that South Jersey had the
burden to prove Antero breached its implied duty of good faith, which exists in
every contract as a matter of New Jersey law. But in Instruction 12, the jury was
instructed to consider whether Antero proved it “did what the contract required
[it] to do”—including act in good faith. App. 569–70. South Jersey argues these
conflicting instructions warrant a new trial.
South Jersey argues the district court could have avoided this error by
including an instruction that if Antero’s refusal to agree that a material change
occurred constituted bad faith, then the district court, as a matter of law, would
have to find that a market disruption event occurred. That is, but for Antero’s
bad faith, the parties would have agreed the Index materially changed and would
have renegotiated a new price. This would mean Antero could not successfully
show South Jersey breached the contract and South Jersey would succeed on its
counterclaims.
But South Jersey did not preserve this argument below and we must review
for plain error. During trial, South Jersey objected to the combination of
Instructions 12, 13, and 16, arguing that, as written, the combined instructions did
-30-
not explain to the jury that they could consider the breach of duty of good faith in
determining Antero’s breach of contract claim. It then proposed a solution,
asking the court to adopt the following instruction: “The law provides that every
contract contains an implied covenant of good faith and fair dealing.” App. 1535.
After the court agreed to amend the instructions accordingly, South Jersey
moved on to objecting to other instructions. At no point did South Jersey renew
its objection to Instruction 12, 13, and 16.
Objections are required to be “obvious, plain, or unmistakable.” Aspen
Highlands Skiing Corp. v. Aspen Skiing Co., 738 F.2d 1509, 1514 (10th Cir.
1984); see also Palmer v. Hoffman, 318 U.S. 109, 119 (1943) (“In fairness to the
trial court and to the parties, objections to a charge must be sufficiently specific
to bring into focus the precise nature of the alleged error.”); Cmty. Nat. Life Ins.
Co. v. Parker Square Sav. & Loan Ass’n, 406 F.2d 603, 606 (10th Cir. 1969)
(holding the objection to the instruction was “not sufficient because it was not
distinct in explaining the grounds for objection as required by Rule 51”). Based
on South Jersey’s objection made during the jury instruction conference, South
Jersey’s own proposed solution, and the amended instruction, it is not at all
obvious that South Jersey still objected to the combination of Instructions 12, 13,
and 16.
-31-
Because South Jersey failed to put “the district court on notice,” we review
for plain error. Reed v. Landstar Ligon, Inc., 314 F.3d 447, 453 (10th Cir. 2002).
We conclude the district court’s failure to instruct the jury about the relationship
between the finding of bad faith and the finding of a market disruption event was
not plainly erroneous.
South Jersey’s argument about Antero acting in bad faith is related to South
Jersey’s own breach-of-contract counterclaim rather than Antero’s breach-of-
contract claim. The jury was instructed in Instruction 14 that South Jersey must
show Antero breached the contract. Following the logic of South Jersey’s
argument, this instruction would be inconsistent with Instruction 12 that Antero
carries the burden of showing it did not breach the contract. This is the result of
two competing breach-of-contract claims. The jury was free to examine the
evidence and find that both parties breached the contract, neither party breached
the contract, or only one party breached the contract. Thus, there was no need to
instruct the jury that finding Antero acted in bad faith required a finding of a
market disruption event and therefore a finding of no breach of contract by South
Jersey. 16
16
Instructions 12 and 13 stated Antero had the burden of proof for claims
brought against South Jersey Gas Company and South Jersey Resources Group.
Instructions 14 and 15 stated South Jersey Gas Company and South Jersey
Resources had the burden of proof for the counterclaims brought against Antero.
These are not competing instructions but rather a result of the parties bringing
(continued...)
-32-
* * *
In sum, the district court did not commit reversible error in its instructions
to the jury.
III. Conclusion
This case presents close and difficult legal questions within a complex
factual framework. Ultimately, we are persuaded the district court did not err in
submitting the questions of fact to the jury, and did not err in instructing the jury.
We therefore affirm the judgment of the district court.
(...continued)
breach of contract claims against the other.
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