N19C-01-144 PRW CCLD
Del. Super. Ct.Jun 11, 2021Background
- Smart Sand, Inc. (seller) and US Well Services LLC (buyer) signed a Master Product Purchase Agreement (PPA) and a Railcar Usage Agreement (RUA); PPA required purchase of 2,000,000 tons over 4–7 years and imposed a $40/ton shortfall charge (Cumulative Shortfall Payment, CSP) for unmet minimums.
- PPA also included monthly non‑refundable Reservation Charges and annual True Up Payments; the RUA charged $650 per railcar per month (Smart Sand sought ~$5.85M for railcar fees).
- US Well stopped taking sand in fall 2018, purported to terminate the agreements in Jan. 2019, and the PPA expired April 30, 2020; Smart Sand invoiced a final CSP and related fees (final invoice listed CSP ≈ $48.27M and railway fees $5.85M).
- At trial the parties disputed (a) whether Section 1.5(c) of the PPA is an enforceable liquidated‑damages provision or an unenforceable penalty/alternative‑performance clause, (b) the proper interpretation/calculation of the CSP, and (c) damages under the RUA.
- The bench trial found Smart Sand received ~793,205 tons and the shortfall was ~1,206,795 tons; the Court enforced the PPA shortfall provisions, awarded Smart Sand the contract shortfall damages, denied RUA damages, granted prejudgment interest, and denied attorneys’ fees.
Issues
| Issue | Smart Sand's Argument | US Well's Argument | Held |
|---|---|---|---|
| Enforceability of PPA §1.5(c) (take‑or‑pay / CSP) | §1.5(c) is a valid liquidated damages clause agreed by the parties ($40/ton) | The clause is alternative performance or an unenforceable penalty, not liquidated damages | §1.5(c) is a valid liquidated damages provision and enforceable |
| Interpretation / calculation of the CSP (cumulative effect, offsets) | CSP is an accumulated single shortfall measure that incorporates prior shortfall invoices and deducts prior True Ups / unused reservation charges | CSP would double‑count unpaid invoices if read to add prior unpaid invoices on top of the CSP, producing an unconscionable windfall | Court reads CSP as cumulative (accrued shortfall payments), not double‑billing; calculation as contract specifies is enforceable |
| Damages under the RUA (railcar fees) | US Well breached RUA; Smart Sand entitled to monthly railcar payments (~$5.85M) | Smart Sand failed to prove breach damages with reasonable certainty | Smart Sand failed to prove RUA damages with required certainty; RUA claim denied |
| Attorneys’ fees and prejudgment interest | Contract entitles Smart Sand to attorneys’ fees and prejudgment interest | No specific contractual basis for attorneys’ fees; prejudgment interest not contested | Prejudgment interest awarded on PPA breach; attorneys’ fees denied (American rule) |
Key Cases Cited
- Brazen v. Bell Atlantic Corp., 695 A.2d 43 (Del. 1997) (defines liquidated damages and penalty analysis)
- Nemec v. Shrader, 991 A.2d 1120 (Del. 2010) (Delaware principle that courts enforce parties’ bargains; bad bargains are enforceable)
- Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d 1262 (Del. 2017) (principles of contract interpretation: read contract as a whole to effect mutual intent)
- Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153 (Del. 2010) (ambiguity standard: a term is ambiguous only if reasonably susceptible to more than one meaning)
- Dow Chem. Canada Inc. v. HRD Corp., 909 F. Supp. 2d 350 (D. Del. 2012) (discusses uncertainty of damages in complex, long‑term contracts)
- Donegal Mut. Ins. Co. v. Tri‑Plex Sec. Alarm Sys., 622 A.2d 1086 (Del. Super. Ct.) (addresses enforcement of liquidated damages provisions)