SMART SAND, INC., Plaintiff, v. US WELL SERVICES LLC, Defendant.
C.A. No. N19C-01-144 PRW CCLD
IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
Submitted: May 7, 2021; Decided: June 1, 2021; Issued: June 11, 2021*
WALLACE, J.
Neal J. Levitsky, Esquire, Seth A. Niederman, Esquire, FOX ROTHSCHILD LLP, Wilmington, Delaware; Steven J. Daroci, Esquire, FOX ROTHSCHILD LLP, Lawrenceville, New Jersey, Attorneys for Plaintiff Smart Sand, Inc. Richard P. Rollo, Esquire, Travis S. Hunter, Esquire, Alexandra M. Ewing, Esquire, RICHARDS LAYTON & FINGER, P.A., Wilmington, Delaware; Stephen H. Lee, Esquire, Mary Anna H. Rutledge, Esquire, PORTER LEDGES LLP, Houston, Texas, Attorneys for Defendant US Well Services LLC.
WALLACE, J.
On Smart Sand‘s earlier motion, the Court dismissed US Well‘s breach of the implied covenant and tortious interference claims, leaving US Well‘s breach-of-contract and declaratory judgment counterclaims.3
Smart Sand then filed its First Amended and Supplemental Complaint, adding claims for additional amounts due under the PPA.4 When the Agreements expired in April 2020, Smart Sand filed its Second Amended and Supplemental Complaint, adding a claim for US Well‘s non-payment of Smart Sand‘s final invoice.5
After myriad discovery disputes, fact and expert discovery closed in late 2020.6
The Court then heard, and subsequently denied, the parties’ Cross Motions for Summary Judgment and Motions in Limine.7 Finally, in mid-December 2020, a trial commenced on the remaining factual issues.8
I. THE TRIAL
The Court heard testimony during a five-day bench trial. Thereafter, the parties submitted post-trial briefings and motions. The respective cases were deemed fully submitted for decision in February 2021.
During trial, the Court heard from and considered the testimony of the following witnesses:
| Lee Beckelman | Joel Broussard (by deposition) |
| William John Young | Kyle O‘Neill (by deposition) |
| Ronald Wheelan | Brian Stewart (by deposition) |
| Stephen L. Becker | Nathan Houston |
| Christopher LaBarte (by deposition) | Brian Savisky |
| Matthew Bernard (by deposition) | Dana M. Trexler |
The parties also submitted an extensive number of exhibits, most of which were admitted without objection and are cited herein by their designations as joint exhibits.
II. FINDINGS OF FACT
It is difficult at times in the trial of certain actions to fully and cleanly segregate findings of fact from conclusions of law. To the extent any one of the Court‘s findings of fact here might be more appropriately viewed as a conclusion of law, that finding of fact may be considered the Court‘s conclusion of law on that point.9
A. THE PARTIES
Smart Sand is a Delaware corporation with its principal place of business in The Woodlands, Texas.10 Smart Sand is a domestic producer and supplier of frac sand, a mineral product commonly used in the oil and gas industry.11 US Well is a Delaware limited liability company with its principal place of business in Houston,
B. THE AGREEMENTS
On November 6, 2015, Smart Sand and US Well entered into a Master Product Purchase Agreement through which Smart Sand supplied frac sand to US Well.14 The PPA required US Well to pay a monthly non-refundable capacity reservation charge, regardless of whether US Well actually purchased and took any frac sand for the given month (the “Reservation Charge“).15
The PPA required US Well to purchase a total of two million tons of sand over a four-to-seven-year period at prices that fluctuated based on various factors.16 If US Well failed to purchase the required amount of sand in any contract year, it was required to pay an annual “True Up Payment” equal to $40 multiplied by the
At the same time, the parties also entered into a Railcar Usage Agreement (“RUA“).18 Under the RUA, US Well “borrowed” railcars from Smart Sand for the delivery of sand purchased under the PPA in exchange for a monthly fee of $650 per railcar.19 The RUA‘s term continued until the termination or expiration of the PPA.20
Upon the expiration of the four-to-seven-year term, US Well was required, under PPA Section 1.5(c), to pay a Cumulative Shortfall Payment (“CSP“) “equal to $40 multiplied by the difference between the aggregate [MTPY] during the Term (i.e. 2,000,000 tons)” and the actual tons of sand purchased by US Well during the term, reduced by the amount of any prior True Up Payments and Unused Reservation Charges.21
In the fall of 2018, US Well stopped purchasing sand from Smart Sand, and ceased meeting its payment obligations.22 In January 2019, US Well purported to
From the time of US Well‘s purported termination of the Agreements to the time Smart Sand calculated the earliest possible PPA expiration, Smart Sand sent US Well multiple invoices for amounts it deemed due under the PPA.26 On May 4, 2020, Smart Sand sent US Well a final invoice setting forth all amounts Smart Sand claimed were due and payable under the Agreements.27 The final invoice included the CSP of $48,272,941.20 and Railway Fees of $5,850,000. According to Smart Sand, that CSP calculation “represents the total shortfall obligation of [US Well] under the PPA for the tons it failed to purchase at the $40-per-ton rate and is inclusive of prior Reservation Charges and shortfall/deferred tonnage invoicing that [US Well] failed to pay.”28
C. CERTAIN KEY TRIAL TESTIMONY
The trial began on December 14, 2020, with Lee Beckelman, Smart Sand‘s Chief Financial Officer, as the first witness.29 Mr. Beckelman testified to his
Mr. Beckelman explained that long-term take-or-pay contracts are used in the industry to foster stability and consistency in what is an unstable market.31 Mr. Beckelman pointed to the Producer Price Index (“PPI“) and the various bands32 used in the contract as an indication of that instability:
PPI is basically trying to represent what inflation is and so it represents a kind of general inflation number that may be in the economy or related to a particular activity. So PPI is a Producer Price Index and so it‘s activity that basically – what the inflation of increasing in pricing is over time and it‘s an index that is calculated and published . . . periodically.33
And, Mr. Beckelman testified, between 2010 and 2016, the price of oil—
Concerning the CSP, Mr. Beckelman told the Court that it represented the accumulation of the separate shortfall payments, and as such Smart Sand is not pursuing the previously unpaid invoices “[b]ecause they are not included in the cumulative final shortfall payment[.]”37 According to Mr. Beckelman, the PPA was intended to provide US Well with two million tons of sand, and the various provisions within the PPA simply provided US Well with mechanisms to defer when that volume‘s transfer would be complete.38
Next, John Young, Smart Sand‘s Chief Operating Officer, testified as to how
Ronald Wheelan, Smart Sand‘s Executive Vice President of Sales, then explained how Smart Sand established its pricing. Mr. Wheelan testified that after US Well stopped taking sand from Smart Sand, the parties attempted to renegotiate but failed to come to agreement.42
Then, Smart Sand‘s expert witness Stephen Becker, founding partner of Applied Economics Consulting Group, was called.43 Dr. Becker, as an expert in damage quantification, testified to the amount and type of sand US Well took under the PPA, based on the invoices.44 Dr. Becker calculated that a total of 793,205 tons
The Court also heard, through video depositions, the testimony of Christopher LaBarte, Matthew Bernard, Joel Broussard, and Kyle O‘Neill.46
In addition, the Court heard both the video deposition and live testimony of US Well‘s former Chief Executive Officer Brian Stewart, US Well‘s Rule 30(b)(6) witness.47
Mr. Stewart testified that in the original contract, the shortfall payment was the full purchase price.48 During later negotiations aimed at amending that original contract, Mr. Stewart admitted that he proposed a reduction of the shortfall to the $40/ton figure and that was ultimately accepted by both sides.49 Mr. Stewart said that while he did not know how much money Smart Sand would save by not mining and delivering the sand to US Well, he knew it was below the full purchase price.50 Further, Mr. Stewart testified that US Well itself performed no analysis of whether the $40/ton figure was representative of Smart Sand‘s potential damages if US Well
At bottom, Mr. Stewart confirmed that $40/ton shortfall figure was “a reasonable compromise based on the information that [US Well] had at the time.”52
Next, Nathan Houston, US Well‘s former Chief Operating Officer and Chief Executive Officer testified about his efforts to renegotiate the amended PPA with Smart Sand to “lower the sand and the price point [to] where [US Well] could be competitive with it, reduce volumes, come up with some alternative . . . solutions to running the sand.”53
US Well then called its expert Brian Savisky, principal research analyst at IHS Markit, to present his historic and forecasted market projections for the price of frac sand.54 Mr. Savisky confirmed that the “average pricing for northern white sand post-October 2018 [did not] reach $40 per ton[.]”55
US Well called a second expert witness, Dana Trexler, managing director at Stout.56 According to Ms. Trexler, Smart Sand‘s reasonably foreseeable lost profits
Ms. Trexler testified that Smart Sand‘s retained product had value and calculated the value of that sand at different points in time.60 Additionally, in Ms. Trexler‘s view, the $40/ton “fee does not approximate estimable lost profits at the time of entering into the contract.”61
Finally, Dr. Becker was recalled by Smart Sand to rebut Ms. Trexler‘s opinions on “the reasonableness of the contractual liquidated damages under the PPA, calculating lost profit damages under the PPA and RUA, and/or analysis of
III. GENERAL LEGAL PRINCIPLES
Though the Court sits without a jury, it has applied the same principles of law in its deliberations and consideration of each individual claim and counterclaim that it would have more formally instructed a jury to follow. The Court may highlight here some of those that are most applicable to this particular case. But the fact that some particular point or concept may be mentioned here should not be regarded as any indication that the Court did not—during its deliberations—consider all legal principles applicable to this case and the parties’ claims and counterclaims.
In reaching its verdict, the Court has examined the joint exhibits submitted and considered the testimony of all witnesses, both on direct and cross. The Court has also considered the applicable Delaware case law that has defined the legal precepts applicable here. The Court has applied the Delaware Rules of Evidence to the testimony and exhibits and only used for its deliberation that which would be allowed under those rules—consistent with the Court‘s knowledge of those rules and the specific rulings that may have been made and articulated both pre-trial, during the trial proceedings, and post-trial. And, of course, the Court has considered each party‘s respective arguments on the weight to be accorded the testimony and evidence.
The Court then reviewed and applied the very instructions that it would give a jury in these circumstances.63
In this particular case, Smart Sand carries the burden of proof by a preponderance of the evidence64 on Counts IV and V of its Complaint.
IV. FINDINGS AND VERDICT
At trial there were three central issues to be resolved: (1) whether PPA Section 1.5‘s take-or-pay provision is enforceable, (2) whether Smart Sand is entitled to damages based on US Well‘s breach of the RUA, and (3) whether either party is entitled to attorneys’ fees or prejudgment interest.65 In its post-trial briefing, US Well stated that it is no longer pursuing its single remaining counterclaim (Breach of the PPA confidentiality provision) (Counterclaim I).66
So the only claims left for the Court to resolve are Smart Sand‘s breach-of-contract claims aimed at US Well‘s non-payment of the final invoice and railcar usage fees (Counts IV and V).
A. THE PPA‘S TAKE-OR-PAY PROVISION SETS OUT VALID LIQUIDATED DAMAGES AND IS, THEREFORE, ENFORCEABLE.
PPA Section 1.5(c) states:
Buyer shall pay to Smart Sand on or before the date that is thirty (30) days following the end of the Term an amount (the “Cumulative Shortfall Payment”) equal to $40 multiplied by the difference between the aggregate Minimum Tons per Year during the Term (i.e. 2,000,000 tons) and the actual tons of Products (including any tonnages of substituted 60/ 140 (aka 100 mesh) at the ratio and proportion set forth in Section 1.1 and Appendix B) purchased by the Buyer during the Term (“Cumulative Purchased Tons”) plus tons of Replacement Products (the resulting amount, the “Cumulative Net Tons”) minus any True Up Payment paid during the Term minus any Unused Reservation Charge for the final Contract Year of the Terns (i.e. (i) Cumulative Net Tons = 2,000,000 - (Cumulative Purchased Tons + tons of Replacement Products), and (ii) Cumulative Shortfall Payment = (Cumulative Net Tons * $40) - prior True Up Payments - Unused Reservation Charge for the final Contract Year of the Term. If the Cumulative Net Tons is equal to or less than 0, then the Cumulative Shortfall Payment shall be $0.67
US Well says that PPA Section 1.5(c)‘s take-or-pay provision is not a (valid) liquidated damages clause, but instead simply constitutes choices of alternative performance—or, ultimately, an unenforceable penalty.68 Smart Sand maintains that Section 1.5(c) is a valid liquidated damages clause.69
US Well carries the burden of demonstrating that this questioned provision is
First, US Well turns to section 8:32 of White & Summers‘s Treatise on the Uniform Commercial Code‘s discussion of take-or-pay contracts to the effect that a majority of courts have found the “pay” provision in take-or-pay contracts to be only a form of alternative performance a party might choose.71 Yet White & Summers continue that “it is often difficult to distinguish between a provision for alternative performance and an agreed remedy.”72
So, US Well cites to S.H. Deliveries, Inc. v. TriState Courier & Carriage, Inc.73 and Brazen v. Bell Atlantic Corp.,74 to propose that for a provision to constitute liquidated damages, it must be specifically stated.75 And US Well suggests the
US Well also cites White & Summers to suggest that a material-breach-remedy provision elsewhere in a contract suggests that a take-or-pay provision is not a recognizable liquidated damages clause.78 US Well points to PPA Section 7.4 as the remedy for a material breach, but to little avail.79
Both parties turn to other courts to support their preferred interpretation of the PPA‘s take-or-pay clause. US Well cites Roye Realty & Developing, Inc. v. Arkla, Inc., where the Oklahoma Supreme Court found that a contested take-or-pay contract
1. PPA Section 1.5 is a Valid Liquidated Damages Provision.
US Well insists that PPA Section 1.5(c) is not a valid liquidated damages provision.83 Smart Sand says it is.84 Again, as liquidated damages are presumed valid, US Well, the party contesting the provision, has the burden of proof.85
“[L]iquidated damages, by definition, are damages paid in the event of a
Delaware courts engage a two-step examination to determine whether a liquidated damages provision is valid, or whether it represents a penalty and is thus void.90 The first inquiry is whether “damages were uncertain” at the time of
If the contract-defined liquidated damages are found to be valid, the party enforcing the liquidated damages provision need not establish its actual damages.94 And contrary to what US Well may think, any liquidated damages Smart Sand is entitled to under the contract need not be offset by any potential value of any retained sand.95
US Well says that potential damages occasioned by any breach could be reasonably determined at the time the PPA was signed.96
Smart Sand disagrees97 and points to the PPI table in Appendix C, Section 2 of the PPA to show that the quarterly pricing of frac sand was dependent on the price of oil, which itself is volatile.98 Additionally, because US Well could choose the sand grades and make substitutions, there were more variables to consider, and thus greater uncertainty.99 According to Smart Sand, oil prices and PPI could never be predicted with requisite certainty.100
Smart Sand cites to CRS Proppants LLC v. Preferred Resin Holding Company LLC, where this Court found a valid liquidated damages clause, in part, because the damages there were so difficult to ascertain.101 In CRS Proppants, the Court found
US Well relies on this Court’s earlier decision in First State Homes, Inc. v. McCann, to suggest that “only a reasonable estimate or forecast [of anticipatable damages] is required” to find a liquidated damages clause invalid.105 US Well then suggests that Dr. Becker and Dr. Trexler’s testimony that a “reasonable estimation” of damages at the time of contracting was possible.106
But US Well, as it must, heavily stresses the wording “reasonable estimate” while largely ignoring the specifics of McCann (or other cases) in which that phrase
The purpose of the four-to-seven-year PPA was to create certainty in what was an emergent and booming frac sand market.109 But even with the limited certainty that long-term contract might foster, both parties acknowledged the sundry variables and global pieces that affected the price and utility of this specialty product. In doing so, they created a PPI table that was, in part, reliant on oil prices. As such, the parties mitigated uncertainty as best they could, but the very existence of the PPI
b. The damages required by PPA Section 1.5(c) are reasonable.
When addressing the second consideration—reasonableness—that informs whether a contracted-for sum is a penalty or allowable liquidated damages, the Court evaluates whether the subject damages are (i) unconscionable, or (ii) not rationally related to a measure of damages.111
i. The Cumulative Shortfall Payment isn’t unconscionable.
Both Smart Sand and US Well agree that the language of Section 1.5(c) is unambiguous.112 Each, however, urges a different interpretation of that same language. Not unusual. And the Court need not suspect that contract language might indeed be ambiguous merely because the parties dispute what it means.113
US Well suggests that “the only reasonable interpretation of [Section 1.5(c)]
Smart Sand argues that while not defined in the PPA, the ordinary meaning of “cumulative” is such that the CSP would accumulate unpaid invoices for required sand purchases into a single sum, not add some additional cumulative sum to those previously unpaid invoices.117 Too, says Smart Sand, because the “cumulative” nature of the CSP incorporates the unpaid invoices for all shortfall-related obligations, it follows that the “paid invoices for shortfall-related obligations are expressly deducted by the CSP.”118
(i) Cumulative Net Tons = 2,000,000 - (Cumulative Purchased Tons + tons of Replacement Products), and (ii) Cumulative Shortfall Payment = (Cumulative Net Tons * $40) - prior True Up Payments - Unused Reservation Charge for the final Contract Year of the Term. If the Cumulative Net Tons is equal to or less than 0, then the Cumulative Shortfall Payment shall be $0.
Read Smart Sand’s way, the Section 1.5(c) damages aren’t unconscionable; given US Well’s read—with double-billing for reserved tons that were both untaken and unpaid-for—the Section 1.5(c) damages are.
Under Delaware law, “[t]he proper construction of any contract is purely a question of law.”119 “The objective [of interpretation] is to give full effect to the parties’ mutual intent at the time of contracting.”120 In respecting that mutual intent, the Court “read[s] a contract as a whole and . . . give[s] each provision and term [purpose], so as not to render any part of the contract” superfluous.121 And “[w]hen the contract is clear and unambiguous,” the Court “give[s] full effect to the
Of course, there is good reason for US Well to now press its extreme reading of Section 1.5(c) with duplicate counting of shortfalls and a resulting nine-figure damage total—the Court might be far more likely to find that unconscionable and just relieve US Well of any shortfall obligation. But it is simply beyond belief that that these sophisticated parties would consent to such a severe consequence.
The Court finds that the Cumulative Shortfall Payment is unambiguous: it constitutes the accrued shortfall payments due during the life of the contract. So it is not unconscionable.
ii. The damages are rationally related to a measure of damages.
US Well’s main contention here is that the parties never tried to “estimate SSI’s damages from a USW Breach[,]” and that the $40/ton figure wasn’t resultant
The credible evidence is that US Well’s then-CEO Brian Stewart offered the $40/ton shortfall payment in a November 2015 email during negotiations aimed at amending the parties’ Master Product Purchase Agreement, and that Smart Sand eventually accepted it.126 The fact that Smart Sand did not counter that shortfall payment offer, “did not consider whether the amount was enforceable[,]” and reportedly “never rejected a proposed [ ] make-whole fee as too high” is of little moment.127 At bottom, US Well made an offer, Smart Sand accepted that offer, and consideration to both parties supported their respective obligations thereunder.
Mr. Stewart did tell the Court that “he was simply trying to lower US Well’s exposure from full purchase price to some less number, and he had no insight into Smart Sand’s internal costs and never performed any analysis of what Smart Sand’s actual damages might be in the event of breach.”128 But according to Mr. Stewart’s own email, he knew the $40/ton shortfall rate would appease his Board.129 And whatever his reason for landing on that figure, Mr. Stewart’s post hoc claim of
US Well points to contemporaneous contracts (Weatherford, [REDACTED]/ton; Rice, [REDACTED]/ton; Liberty, [REDACTED]/ton), to suggest that the $40/ton number was irrationally high.130 US Well says that “variability alone (with zero explanation from SSI) shows $40-per-ton is unreasonable.”131 But again, Mr. Stewart proposed it—a number that, if nothing else, appeased US Well’s board—and Smart Sand accepted it.
One final point, that $40/ton shortfall price was almost smack in the middle of the pricing grid the parties used for sand products under the PPA.132
All in all, the estimate of damages at the time of contracting could be seen to derive from a number of reliable sources: (1) Purchaser US Well’s own assessment of worth as evidenced by the fact that value was first proposed by its then-CEO; (2) the fact that it represented a cost below the approximately $45/ton price for delivered sand that was being invoiced to US Well when the amended PPA was executed;133 and (3) the fact that $40 falls roughly in the mid-range of all potential per-ton pricing applicable to the May 2016 agreement.134 Hence, the $40 charge per
B. US WELL IS LIABLE FOR THE DAMAGES BARGAINED-FOR AND REQUIRED UNDER PPA SECTION 1.5.
No doubt, US Well came to regret its agreement to certain PPA pricing terms. But the Court “will not disturb a bargain because, in retrospect, it appears to have been a poor one.”135 “Parties have a right to enter into good and bad contracts, the law enforces both.”136 And when it comes to liquidated damages, there is a summer’s afternoon of daylight between bad and unconscionable.
In determining whether Section 1.5 of the PPA constitutes a valid liquidated damages provision, the Court has considered whether potential damages were uncertain at the time of contracting, and whether the liquidated damages were rationally related to any reasonable measure of damages or were unconscionable. Having found that the fluctuating price of sand made damages uncertain to determine at the time of contracting, and that the liquidated damages reflect a
As such, US Well is liable to Smart Sand for the cost of the 1,206,795 tons of frac sand US Well did not purchase and take from Smart Sand under the PPA.137
C. SMART SAND IS NOT ENTITLED TO DAMAGES BASED ON US WELL’S BREACH OF THE RUA.
Both Smart Sand and US Well have spent little time discussing the RUA. In the meager effort devoted to it, Smart Sand claims that, because of US Well’s breach, the total amount of the contract ($5.8 Million) is due.138 Specifically, Smart Sand states that the damages should reflect the ‘expected’ payment to Smart Sand had the contract been fulfilled.139
In Delaware, when awarding expectation damages, lost profits must be calculated with reasonable certainty.140 And a Delaware court “may not set damages based on mere speculation or conjecture where a plaintiff fails adequately to prove damages.”141
Not surprisingly, US Well contends that Smart Sand has not proven either a breach or damages due under the RUA, and so Smart Sand is entitled no damage award on this claim.143 The Court agrees.
At the very least, Smart Sand’s failure to prove damages resulting from the alleged RUA breach is fatal to its claim, and thus Smart Sand is not entitled to monetary damages on this claim.144
Smart Sand asks for attorneys’ fees and prejudgment interest citing Section 2 of the PPA.145 But Smart Sand fails to identify the specific PPA language requiring the payment of either attorneys’ fees or prejudgment interest. US Well opposes Smart Sand’s demand contending that Smart Sand has neither cited the contractual language nor offered support for awarding those fees and interest.146
As Smart Sand points to no specific PPA language calling for an award of attorneys’ fees, the Court will not deviate from the American rule.147 Concerning prejudgment interest, a non-breaching party is entitled to prejudgment interest as a matter of right, and that balance will not be disturbed.148
Thus, the Court awards Smart Sand prejudgment interest on Count IV (breach of the PPA), and both parties will pay their own attorneys’ fees.
V. CONCLUSION
While this judgment results in a substantial payment to Smart Sand, that is what the parties bargained for via the PPA. In the best of times, the deal could have resulted in a substantial profit for US Well as it used the product for its customers energy ventures. But the worst of times came, resulting in a substantial downturn in sand prices, and now, US Well’s substantial loss under the PPA. These were sophisticated (and represented) parties that realized the risks associated with such a purchase contract, yet still pursued it. The Court can’t now rescue one of those parties from the deal it penned when it foresaw significant gain simply because its hopes evaporated due to world and market forces.
- Count IV (Breach of Contract for Non-Payment of the Final Invoice): For Smart Sand
- Count V (Breach of Contract for Non-Payment of the RUA Invoice): For US Well
Additionally, Smart Sand is entitled to prejudgment interest on Count IV, but is not entitled to Attorneys’ Fees.
The parties shall confer and, within 15 days, submit to the Court a proposed form of Order of Final Judgment consistent with these findings and verdicts.
IT IS SO ORDERED.
Paul R. Wallace, Judge
Original to Prothonotary
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