Overview
Background and Executive Summary:
In mid‑February 2021, Winter Storm Uri brought sustained sub‑freezing temperatures across Texas, causing widespread wellhead freeze‑offs, power outages, and severe constraints throughout the natural‑gas and power systems. Demand spiked even as supply was curtailed, and daily index postings at several Texas and Midcontinent locations became extraordinarily volatile, with triple‑ and even quadruple‑digit spot prices at points closest to constrained demand centers. The dispute here arises from that period: the seller declared force majeure1and failed to deliver certain volumes; the buyer replaced the gas from its own storage and sought remedies under the NAESB Spot Price Standard the parties had selected in their contracts.
Judge Melissa Andrews of the Third Division of the Business Court of Texas, sitting by designation in the Eleventh Division, declined to invalidate the NAESB § 3.2 Spot Price liquidated-damages clause at the pretrial stage, but made clear that damages in this setting turn on proof. For a non-covering buyer in a transaction for the sale of goods, actual damages are measured under UCC § 2-713—market price at the time and place of breach minus the contract price—while the NAESB contract's defined "Spot Price" (the difference between the contract quantity and the actual quantity delivered, multiplied by the positive difference between the contract price and the gas daily midpoint price published for the delivery location and day) governs liquidated damages. The Court refused to equate the two concepts as a matter of law and expressly rejected the seller's historical cost-basis theory that valued substitute volumes at acquisition cost instead of market at breach.
The parties used a NAESB Base Contract and elected the Spot Price Standard in § 3.2 rather than a cover remedy, which would obligate the buyer of the gas to use commercially reasonable efforts to obtain replacement product and sets damages by cover price – contract price. After delivery shortfalls during Uri, the buyer invoiced for spot-price damages; the seller challenged enforceability and argued the buyer's actual damages should be limited to its stored-gas cost basis, which would have resulted in a negative number and no damages at all.
Parties' Disputes and Arguments
Mercuria argued it had no duty to cover and could calculate liquidated damages using the contract‑defined Spot Price rather than what it actually paid for the gas it had in storage. For actual damages, Mercuria contended that as a non‑covering buyer the UCC controls—market price at the time and place of breach minus the contract price—and that drawing from storage does not convert it into a covering buyer. Mercuria equated the "Market Price" from the UCC with the Spot Price calculation from the NAESB contract.
Marathon argued that the Spot Price was a penalty, asserting there was an "unbridgeable discrepancy" between Mercuria's Spot Price damages and its actual damages. It urged a cost‑basis model (historical acquisition cost of storage gas, net of the contract price), yielding no loss, and argued Mercuria's Spot Price math was inflated by using the wrong indices/locations and averaging methods. Marathon also argued that awarding large Spot Price damages when Mercuria did not cover would create a windfall. The Court rejected the cost‑basis theory for actual damages and left disputes over Spot Price inputs for trial.
While Mercuria argued that the NAESB Spot Price calculation and the UCC market price measure should yield the same result, the Court declined to equate the two as a matter of law. Instead, the Court held that the contract's Spot Price formula is not automatically a proxy for actual damages under the UCC; each must be proven with evidence. The Court left open the possibility that, depending on the facts, the Spot Price and market price could converge, but emphasized that this is a factual question for trial. Disputes remain over how to calculate the Spot Price—such as which index, location, and averaging method apply—and whether the evidence supports Mercuria's claimed market price at the time and place of breach. At trial, Mercuria will need to establish both the correct Spot Price under the contract and the actual market price for UCC damages, using reliable market data and expert testimony.
Court's Holding and Implications for Damages
The Court concluded that damages here are the UCC measure of damages, the market price versus the contract price. The Court recognized that the goal of damages here is to put the non-breaching party (here, Mercuria) in the economic position it would have been in had the contract been performed. Under the Uniform Commercial Code (UCC § 2-713), if the buyer does not "cover" (i.e., does not buy substitute goods after breach), actual damages are measured as the difference between the market price at the time and place of breach and the contract price. This reflects the value of what the buyer should have received versus what it actually received. Even if Mercuria used gas it already owned (rather than buying new gas), it still lost the opportunity to sell or use that gas at the higher market price. The damages reflect the value Mercuria lost due to the breach, not the cost it paid to acquire the gas in the past.
The Court therefore largely agreed with Mercuria's theory of damages, but the Court held that Mercuria failed to carry its evidentiary burden to establish what the actual market price for gas was at the time, which it may establish through the use of published price indices (such as Gas Daily or Inside FERC), broker quotes, contemporaneous transaction data at the relevant delivery point, or expert testimony that reliably reflects market conditions at the time and place of breach. The Court similarly held that Mercuria failed to establish the Spot Price under the contract, as the parties had not provided sufficient evidence regarding which index, location, or averaging methodology should apply to the contractually defined Spot Price for the relevant days, leaving both the market price and Spot Price calculations as unresolved factual issues for trial.
This case highlights an unusual tension: both the NAESB Spot Price formula and the UCC market price measure are central to the damages analysis, and in practice they may yield similar—or even identical—results. But the Court refused to collapse the two concepts, insisting that each must be separately proven and justified. As a result, both measures remain in play for trial, with the parties required to present evidence supporting the contractually defined Spot Price and the actual market price at breach, and then Marathon will have the burden to establish whether there is an "unbridgeable discrepancy" between the UCC measure of damages and the NAESB Spot Price liquidated damages provision. Whether these two approaches ultimately converge or diverge will depend on the factual record developed at trial.
Key Takeaways:
- Liquidated damages provisions are not self-executing: Despite the parties' election of the NAESB Spot Price, this opinion required that the parties show both the Spot Price damages and the actual damages to determine if there is an "unbridgeable discrepancy" between the two measures.
- Actual damages must still be proven: One of the purposes of liquidated damages—to provide certainty and promote efficiency by avoiding the burden of proving actual damages—was hindered here; Mercuria must present admissible evidence of market price at the time and place of breach in accordance with the UCC standards, and the Spot Price formula is not automatically accepted as a proxy. As applied in this case, the test for whether liquidated damages under the NAESB spot price formula requires the parties to prove both the Spot Price and actual damages.
- Spot Price and market price may be duplicative, but both remain in play: The Court refused to equate the two measures as a matter of law, meaning parties must separately prove both the contract-defined Spot Price and the UCC market price, even if they ultimately converge.
- For drafting purposes, parties to the NAESB might consider explicitly electing a specific price index (e.g., "Gas Daily Midpoint for [specific location]") in the contract, rather than relying on generic or ambiguous terms. Also consider clearly identifying the delivery point, using pipeline nomenclature or physical location, to avoid disputes over which index applies.
1Importantly, the Court did not decide whether force majeure excused Marathon's performance. Any damages calculation—actual or liquidated—will only be relevant if force majeure did not excuse the seller's delivery obligations. If force majeure were found to apply, Mercuria would not be entitled to damages.
