10th Circuit upholds $60M breach of contract verdict in natural gas pricing dispute

Antero Resources Company entered an eight-year contract to sell natural gas from the Marcellus Shale formation to South Jersey Gas Company. They agreed that South Jersey would pay a price in accord with a gas price index published by a respected third party.

At some point, South Jersey came to believe that the composition of the index had changed, and tried to renegotiate the contract with Antero. South Jersey relied on a provision of the contract that allowed for renegotiation if the index was discontinued or unavailable, or if both parties agreed that a material change in the index had occurred.

Antero disagreed that renegotiation was required and South Jersey unilaterally started paying a lower price. Antero sued for breach of contract, and a jury awarded it $60 million.

In Antero Resources Corp. v. South Jersey Resources Group, LLC (opinion by Chief Judge Tymkovich), the Tenth Circuit upheld the verdict, holding that South Jersey’s interpretation of the contract turned on fact questions, which were for the jury to resolve. And sufficient evidence supported the jury’s resolution.

This case illustrates the problems that arise when parties to a contract agree to base a contractual term on an index or rules created by a third party. This can occur in a variety of contexts. For example, sometimes parties to a contract will agree to arbitrate any disputes before a third-party arbitrator, or in accord with arbitration rules created by a third-party organization. In many instances, however, the parties do not fully flesh out what will happen if the rules change in some way, or if the designated arbitrator decides it will no longer conduct arbitrations. This can lead to disputes about how to apply the contract in situations that the parties did not anticipate.

Here, while South Jersey’s contract contemplated that the index might change, its ability to renegotiate the contract depended on an agreement by both parties that a material change in the index had occurred. Here, Antero did not agree. This dispute might have been avoided if the contract had included language stating that renegotiation could occur if the index changed in some objectively-measurable way.

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