Facts
- Resources Investment Corporation and related plaintiffs entered into 32 long-term natural-gas purchase contracts over roughly 18 years covering reserves in Texas, Oklahoma, and Kansas.
- Under the contracts’ “take-or-pay” terms, the buyers (Enron Corporation and Northern Natural Gas Company) agreed each year to take a specified quantity of gas or, if they took less, to pay for the shortfall.
- The contracts included a “make-up gas” feature: gas paid for but not taken in a given year could be taken in later years.
- Plaintiffs alleged that defendants failed, beginning in July 1980, to perform the take-or-pay payment obligations and related make-up provisions.
- Plaintiffs sued for breach of contract, seeking damages and a declaration that defendants must continue performing the gas-purchase agreements.
- Defendants asserted numerous affirmative defenses and counterclaims claiming that later events excused nonperformance, including foreign competition, unusually warm winters, economic recession, unexpected shifts in the gas market, and federal and state regulatory actions affecting the industry.
- Plaintiffs moved to dismiss all counterclaims and to strike most affirmative defenses.
Issues
- Whether take-or-pay obligations are unenforceable as contrary to public policy, including an asserted conflict with the Natural Gas Policy Act of 1978 (NGPA).
- Whether allegations of changed market conditions, weather, recession, and regulatory developments plausibly support defenses and counterclaims for impossibility, commercial impracticability, or frustration of purpose at the pleading stage.
- Whether defendants’ remaining counterclaims and affirmative defenses were adequately pleaded as independent claims or legally sufficient defenses, or instead should be dismissed/stricken as conclusory, duplicative, or unavailable as a matter of law.
Decision
- The court granted plaintiffs’ motion in part and denied it in part.
- The court dismissed the counterclaim and struck the defense asserting that the take-or-pay clauses were void on broad public-policy grounds, including the argument that the clauses conflicted with the NGPA.
- The court treated take-or-pay clauses as standard, negotiated contract terms between sophisticated parties and declined to invalidate them based on generalized allegations that enforcement would raise gas prices or harm consumers.
- The court rejected attempts to use general market downturns and reduced demand as a basis to excuse performance where the contracts placed demand risk on the buyer through take-or-pay commitments.
- The court allowed only those defenses and counterclaims that were tied to recognized contract doctrines and pleaded with enough factual specificity to require further development, while dismissing or striking those that merely recast business risks and market changes as legal excuses.
Legal Principles
- Take-or-pay provisions in long-term gas contracts are generally enforceable risk-allocation terms: the buyer assumes the risk that market demand may fall below the contract quantity.
- Courts do not invalidate negotiated commercial contracts on generalized public-interest assertions absent a clear statutory or regulatory rule barring the agreed terms.
- The NGPA’s regulatory scheme does not, by itself, render private take-or-pay bargains unenforceable.
- Impossibility, commercial impracticability, and frustration of purpose are narrow doctrines; they require more than a showing that performance became more expensive, less profitable, or undesirable due to ordinary business conditions.
- Where the contract assigns the risk of demand changes to the buyer, later shifts in the market commonly do not excuse the buyer’s payment duty.
- On a motion to dismiss or to strike, conclusory counterclaims and defenses may be removed, while fact-dependent theories that could fit recognized legal doctrines may proceed.
Conclusion
In this pretrial pleading decision, the court largely preserved enforcement of the parties’ take-or-pay gas contracts by dismissing broad public-policy attacks (including an NGPA-based theory) and limiting excuse doctrines based on general economic, weather, market, and regulatory changes, while permitting only narrowly and specifically pleaded defenses and counterclaims to continue.