DAMAGES REDUCED IN TAKE OR PAY CASE

A federal appeals court in Bismarck, N.D., has sharply reduced the amount of damages awarded to a U.S. producer in a take or pay case against a gas buyer. A spokesman for the New York law firm that represented the buyer called the action "a landmark decision that is expected to have extraordinary impact on the energy industry." That's because the award was reduced to reflect the current market price of gas rather than the much higher last regulated wellhead price.

March 29, 1993

3 min read

A federal appeals court in Bismarck, N.D., has sharply reduced the amount of damages awarded to a U.S. producer in a take or pay case against a gas buyer.

A spokesman for the New York law firm that represented the buyer called the action "a landmark decision that is expected to have extraordinary impact on the energy industry."

That's because the award was reduced to reflect the current market price of gas rather than the much higher last regulated wellhead price.

THE CASE

The ruling came from North Dakota's 8th Circuit Court of Appeals in a case originally filed in 1987 by Koch Hydrocarbon Co., a unit of Koch Industries Inc., Wichita, against gas distributor MDU Resources and its wholly owned Williston Basin Interstate Pipeline Co. (WBI), both of Bismarck.

The court reduced to $32 million damages that under otherwise prevailing law could have been as high as $700 million, said MDU-WBI's law firm, Reid & Priest.

Louis H. Willenken, head of Reid Priest's litigation department, said, "This marks a significant victory for an industry that has seen numerous pipeline companies financially devastated as a result of huge damage awards in hundreds of lawsuits."

Since 1985, damages in comparable cases between sellers and pipeline companies have been valued based on the last regulated price of natural gas.

The award was decreased by the court's "unprecedented ruling" that MDU was liable only for losses incurred by Koch, the producer with whom MDU signed a gas purchase contract, rather than for losses asserted, in effect, by Koch for gas of other producers whose production was sold under the Koch-MDU contract.

The court also limited Koch's ability to increase its damages by allocating gas not taken by MDU to the highest priced and the largest contract Koch held with MDU, Reid & Priest said.

Because MDU did not dispute that it was liable for breach of its contract with Koch, the key issue in the suit was the amount of damages to be awarded. The law firm said its approach in MDU's defense represented a new strategy, custom tailored to the facts of the case "and one that was far more successful than strategies attempted by other pipeline companies in scores of other cases."

Willenken said, "The decision is particularly important because a new round of contract disputes is beginning as pipeline companies start to withdraw completely from the business of buying and selling gas and because the electric utility industry is confronting similar issues as it undertakes its own responses to deregulation resulting from the Energy Policy Act of 1992."