The Houston [1st] Court of Appeals has wiped out a more than $20 million judgment against a midstream company in a case stemming from a contract dispute over the construction of a natural gas processing plant.
Arrow Field Services, LLC v. Linde Engineering North America, Inc. (No. 01-23-00023-CV; December 17, 2024) arose from a contract dispute between Arrow, a midstream company (and subsidiary of Crestwood Midstream Partners, LP) located in North Dakota, and Linde, an entity that provides construction, procurement, engineering, and project management services to oil and gas clients. In April 2018, Arrow and Linde executed a “Target Price Agreement for Engineering, Procurement, and Construction” (EPC Agreement) for an Arrow natural gas processing plant in Watford City, North Dakota. Linde served as general contractor for the project. The contract called for a fixed fee (subject to an incentive adjustment), plus base costs. Upon “satisfactory completion” of the work, Arrow agreed to pay approximately $9.5 million, inclusive of all profit, certain overhead costs, subcontractor mark-ups, and other costs. Arrow further agreed to reimburse certain invoiced costs paid by Arrow to subcontractors. The contract provided a “target base cost” of approximately $65.7 million. Linde warranted that it could perform the work at the target price of about $75.3 million on schedule. Arrow paid Linde’s monthly invoices through August 2019, but the deal fell apart, Arrow stopped paying Linde, and Linde stopped paying its subcontractors. Still, the plant became operational in August 2019.
Litigation ensured. Arrow sued Arrow for breach of contract, violation of the Prompt Payment Act (PPA), and quantum meruit, seeking more than $50 million in unpaid base costs. Arrow answered and counterclaimed for fraudulent inducement, civil conspiracy to commit fraudulent inducement, and breach of contract. During the litigation, Arrow paid Linde about $22.7 million as partial payment for unpaid base costs. After a five-week trial beginning in May 2022, the jury decided for Linde, determining that Arrow breached the EPC agreement by failing to pay Linde’s base costs and awarded $20 million. The jury found further that Arrow violated the PPA without excuse and that Arrow violated the EPC agreement by not paying certain safety incentives, to the tune of $729,379. The trial court concluded that the “mineral development and oilfield services exemption from the PPA did not apply and signed a final judgment in October 2022 ordering that Arrow take nothing from Linde and that Linde recover actual damages of about $20 million, interest under the PPA of $17.6 million, the $729,379 in unpaid safety incentives, attorney’s fees of $4.6 million, costs of $130,568, and pre- and post-judgment interest. Arrow moved for JNOV, a new trial, and to modify the judgment, all of which were overruled by operation of law. Arrow appealed.
In an opinion by Justice Guerra (at 73 pages, one of the longest we’ve ever reported on!), the court of appeals split the baby all kinds of ways, affirming in part, reversing in part, and reversing and remanding in part. First, the court addressed the applicability of the Prompt Payment Act (Chapter 28, Property Code). Arrow contended that the PPA did not apply by virtue of the mineral development and oilfield services exemption set out in § 28.010. Other pertinent sections of the PPA include § 28.004 (interest on overdue payments) and § 28.005 (costs and attorney’s fees). Conducting an analysis of the text of the statute, the court concluded that the exemption applied “because it constitutes a ‘written agreement to provide construction services to gather, store, or transport natural gas [or] natural gas liquids by pipeline or by a fixed, associated facility’” in accordance with §§ 28.010(a)(3) and (b)(1)(A). The court thus reversed that part of the trial court’s judgment and rendered a take-nothing judgment in favor of Arrow.
The court next considered Arrow’s argument that Linde failed to present legally sufficient evidence that Arrow was liable for base costs beyond the $124 million that it had already paid (well in excess of the target cost originally agreed to in the EPC agreement) because: (1) conclusive evidence established that Linde defaulted on its contractual obligations; (2) conclusive evidence established that Linde engaged subcontractors in violation of the EPC agreement; and (3) Linde offered no reliable, non-conclusory evidence that unpaid base costs were “reasonably and properly incurred for the sole purpose of carrying out the work.” More specifically, Linde defaulted because it stopped paying its contractors, allowing them to file liens on the property, abandoned the project, and repudiated its obligations, all in violation of the EPC agreement. After reviewing the evidence, the court concluded that there was some evidence that Arrow materially breached the EPC agreement by withholding payment before Linde stopped paying its subcontractors and triggering the liens, which excused Linde from further performance of the contract.
The dispute over whether Linde engaged subcontractors in violation of the EPC agreement came down to Arrow’s contention that Linde’s subontracts allowed subs to “blend their actual costs and profits,” making it impossible for Arrow to tell which costs were reimbursable and which were not. (At issue was one particular subcontract, the Westcon contract, which was the only one Linde submitted into evidence. Arrow contended that Westcon blocked an audit of the contract as well.) Unfortunately for Arrow, however, the only remedy for the evidentiary problem here was a new trial, which Arrow expressly waived. Oops. Arrow further argued that Linde’s experts (who were experienced project managers) were not qualified to testify as to whether Linde’s invoiced base costs “have been actually, reasonably, and properly incurred for the sole purpose of carrying out the work,” as required by the EPC agreement (this is also linked to Arrow’s conclusoriness argument). The court didn’t bite on this argument, holding that the experts testified based on their experience and that “the jury was entitled to weigh [their] testimony as it saw fit.”
Turning to the $17.6 million in prejudgment interest, the court held that because the PPA didn’t apply, Linde couldn’t recover it. As to the safety incentive award, the court ruled for Linde on the basis that it was up to the jury “to reject Arrow’s argument that Linde was required to invoice it for the Safety Incentive,” which the jury did. Simply put, the EPC agreement didn’t say anything about invoicing the safety incentive in any event. Finally, the court came to the attorney’s fees and costs, holding that the final judgment needed to be modified to delete the awards because they, too, were based on the PPA. The court remanded to the trial court to recalculate the prejudgment interest. After all was said done, Linde had only the $729,000 safety incentive, plus interest calculated on that amount, to show for its trouble.
