chess2The lessons in Craddick Partners Ltd. v. EnerSciences Holdings, LLC are three: Parties who have not signed an agreement to arbitrate have standing to compel arbitration; artful pleading to avoid arbitration won’t work; and Texas courts remain eager to send cases to arbitration.

EnerSciences’ two subsidiaries sell products in the oil field. Tom Craddick approached EnerSciences to sell products to Craddick’s Permian Basin clients. EnerSciences created PB Ventures as a subsidiary through which Craddick would sell their products.

A sales agreement between Craddick Partners and PB Ventures compelled arbitration of all disputes, excluding claims “brought by either party seeking injunctive, declaratory or preliminary relief”.

Pardon me while I digress

Some parties agree to litigate some claims and arbitrate others. Why? Don’t do it. It only complicates matters, potentially increasing the cost of the dispute by fighting it in two different places. And injunctive relief is addressed by the courts and the rules of the arbitration bodies.

The dispute

Craddick Partners sued PB Ventures, EnerSciences, and its two subs, asserting negligent misrepresentation, negligence, and tortious interference (all of which are torts), and seeking a declaration that the sales agreement had terminated.

The defendants, no doubt seeking to avoid a generous portion of hometown justice, sought arbitration, alleging that Craddick artfully pleaded tort actions to avoid arbitration and that the claims were really for breach of contract. Craddick said the EnerSciences parties were non-signatories to the sales agreement and thus lacked standing.

“Direct-benefits estoppel”?

The doctrine permits a non-signatory to compel arbitration of a signatory’s claim “if liability arises solely from the contract and must be determined by reference to it”.  Said the court, a “meddlesome stranger” cannot compel arbitration by merely pleading a claim that quotes someone else’s contract. A party can’t have it both ways:  on one hand seek to hold the non-signatory liable for duties imposed by an agreement with an arbitration provision, but on the other hand deny arbitration because a defendant did not sign it.

The court denied Craddick’s argument that its claims arose from general obligations imposed by law (the tort claims). All of Craddick’s claims depended on the existence of the sales agreement. The claims not only made reference to or presumed the existence of the agreement but relied upon it for viability. EnerSciences had no obligations to Craddick other than those arising out of the contract.

A factor in the tortious interference claim was that the non-signatories were so close to the contract that they were an integral component of it; they were affiliates, and not strangers to the agreement.  Craddick could not avoid arbitration by recasting its claims as tortious interference. That claim also relied on the sales agreement for viability.  If PB Ventures had not breached the sales agreement there would be no tortious interference.

Fancy pleading doesn’t help

The court concluded that the declaratory judgment request was merely an artfully pleaded breach of contract claim. To render a declaratory judgment the court would have had to determine whether PB Ventures breached the sales agreement.

To appreciate today’s musical interludes, consider what early 1950’s  mainstream radio sounded like. Along came Chess Records with Chester BurnettMcKinley Morganfield and plenty of others.

So, Phil Chess RIP.

FMVCo-Author Matthew Wheatley

In Texas, lost profits can’t be recovered as damages unless proven to a “reasonable certainty”.

Question 1: What does that mean?

Question 2: Does it matter if the deal is in Bulgaria?

Let’s get rid of the second one first. Bulgaria or no Bulgaria, it doesn’t matter as long as Texas law applies.  The Texas Supreme Court examined the first one.

The Transactions

CBM Energy had a concession to explore for coalbed methane. It offered Carlton Energy a 48% interest in exchange for funding. Carlton then offered Phillips a 10% interest for $8.5 million. After signing a contract, Phillips informed Carlton that he would be unable to reach an agreement, while at the same time secretly dealing with CBM to take over Carlton’s position.

Carlton sued Phillips and his companies for breach of contract and tortious interference with its CBM contract, claiming damages for its 38% interest in the project.

Phillips’ Bulgarian Two-Step

Phillips tortuously interfered with Carlton’s contract by influencing CBM to terminate their agreement. He told Carlton he had no interest in continuing the project, while at the same time moving forward with CMB to take over Carlton’s interest.

Calculating Fair Market Value

A property’s fair market value is what a willing buyer would pay a willing seller, neither acting under any compulsion. It can be determined by (among other methods) capitalizing net income–that is, profits. Lost profits can be recovered only when the amount is proved with reasonable certainty, which leads to Carleton’s dilemma.

What was the fair market value of Carlton’s 38% interest in the project?

  • Carlton’s engineer testified as to “a range” of the value of the reserves in the ground: $9 to $11 billion.
  • He also testified about the value of the concession if a certain number of wells were drilled: $12 to $38 million.
  • The amount Phillips agreed to pay Carlton for its interest in the project was $31.16 million.

The jury liked Phillips so much it awarded Carlton $66 million.  The trial court ordered a remittitur to $31.16 million.

Were the Damages Speculative?

Some were and some weren’t. Carlton’s lost profits on its 38% interest in the project was based on Phillips’ agreement to pay Carlton $8.5 million for a 10% interest (the third scenario). This was at least some evidence to prove lost profits with a reasonable certainty.

The alternatives were based on “sweeping assumptions” and “conjecture”; there was no basis for determining the reliability of volume predictions; certain assumptions were “demonstratively unrealistic”; the discount rate was arbitrary; he merely assumed that the gas, if produced, would have a market; and he did not characterize the range of values as fair market value.

Lesson

Even a “market of one” can determine fair market value. It’s real. If you’re betting the over-under on a damage award, don’t rely on guesses and unsupportable assumptions.

What if the Contract is Not Signed?

Philips denied there was an agreement with Carlton. But the parties behaved as if they had an agreement and they continued the project for some time as joint venturers.

If there is a mutual assent of the parties, signature and delivery are not essential to a contract unless signatures are explicitly required as a condition of mutual assent.

Did you Know? 

Bulgaria ranked 72nd in the world in 2011 world gas production.

A post mentioning the two step deserves a musical interlude.

Matthew Wheatley is a Gray Reed summer clerk and rising 3L at the University of Texas Law School.