Background and Business Context

Rainbow Energy Marketing Corporation, a natural gas trading company, entered into a firm transportation agreement with American Midstream (Alabama Intrastate), LLC for pipeline capacity. Rainbow sued American Midstream for breach of contract, repudiation, fraud, fraudulent inducement, and negligent misrepresentation after disputes arose concerning the pipeline owner's obligations under the agreement. Following a bench trial in Harris County's 157th District Court, Rainbow obtained a judgment for $6,145,215.89 in actual damages plus $449,097.42 in pre-judgment interest. The Houston Court of Appeals, First District, affirmed the trial court's judgment, prompting American Midstream to petition the Texas Supreme Court for review.

The Contract Interpretation Dispute

The central issue concerned interpretation of a provision in the firm transportation agreement that excused American Midstream's performance if either party "was requested or required by" the owner of a connected pipeline "to balance receipts and deliveries of gas." The trial court and Court of Appeals interpreted this provision to excuse performance only in the event of an imbalance between scheduled receipts and scheduled deliveries on the connected line. American Midstream argued this interpretation improperly added words—"scheduled" and "physical"—that the parties never included in their agreement. The provision's next sentence, which excused performance if the connected line owner "requested balance of receipts or deliveries of gas attributable to" Rainbow, referred to single-point imbalances and was interpreted as applicable to imbalances between scheduled quantities and physical deliveries.

The Supreme Court's Analysis

Justice Sullivan, writing for the Court, applied foundational principles of contract interpretation to reverse the lower courts. The Court emphasized that "[j]udges cannot write language into a contract that the parties did not include themselves" and that "[c]ourts may not rewrite agreements to insert provisions parties could have included or to imply restraints for which they have not bargained." The Court held that by adding the terms "scheduled" and "physical," the lower courts impermissibly conflated point-to-point imbalances and scheduled imbalances, disturbing the risk allocation to which the parties had agreed. The Court further noted that "[p]lain language of contract controls, not what one side or the other alleges they intended to say but did not."

Repudiation and Misrepresentation Claims

The Supreme Court also rejected Rainbow's repudiation claim, holding that American Midstream's characterization of the agreement as "interruptible" during a conference call did not constitute repudiation. The Court noted that American Midstream "expressed willingness to perform while taking position that mandate by owner of connected line would excuse performance under agreement" and "did no more than describe its obligations and work with company to prevent owner of connected line from limiting parties' use of the agreement." Applying the standard that repudiation requires "a distinct and unequivocal absolute refusal to perform without just excuse," the Court found American Midstream's conduct fell short of this threshold. Additionally, the Court held Rainbow could not justifiably rely on any oral promise by American Midstream concerning receipts and deliveries to the extent such representations conflicted with the written firm transportation agreement, defeating Rainbow's negligent misrepresentation claim.

Lost Profits Analysis

Perhaps most significantly for trading companies and their counsel, the Court held that Rainbow's business model—using the transportation agreement to fulfill forward sales contracts without corresponding forward supply—constituted "a speculative, untested venture and type of chancy business opportunity" for which lost profits could not be recovered. The Court emphasized that "[c]ourts may award lost-profits damages only if the claimant proves the fact and amount of damages with reasonable certainty" and that parties "may not recover profits which are largely speculative." Because a limit on imbalances by the connected pipeline owner excused American Midstream's performance under the properly interpreted contract, Rainbow's claimed lost profits from its unhedged trading strategy were too speculative to support an award.

Implications for Practitioners

This decision carries significant implications for midstream contract drafting and litigation. First, it reinforces Texas courts' strict adherence to the plain language of force majeure and excuse provisions, rejecting judicial attempts to add qualifying terms that parties did not negotiate. In-house counsel drafting firm transportation agreements should ensure that excuse provisions explicitly address the types of imbalances—whether point-to-point, single-point, scheduled versus physical, or otherwise—that will trigger performance excuses. Second, the decision establishes a high bar for trading companies seeking lost profits damages based on speculative business models that depend on pipeline capacity without corresponding supply arrangements. General counsel at natural gas marketing companies should carefully evaluate whether their trading strategies create legally cognizable damages in the event of pipeline breach or whether such strategies will be deemed too speculative to support lost profits recovery. Finally, the repudiation analysis provides useful guidance on the difference between asserting contractual defenses and making an unequivocal refusal to perform.