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Tendeka, Inc. v. Nine Energy Service LLC

Court of Appeals of Texas, Fourteenth District

December 17, 2019

TENDEKA, INC., Appellant

          On Appeal from the 113th District Court Harris County, Texas Trial Court Cause No. 2014-52578

          Panel consists of Justices Wise, Zimmerer, and Spain (J. Spain concurring without opinion).


          Jerry Zimmerer, Justice.

         In this breach of contract case Tendeka, Inc. appeals a judgment following a bench trial. In two issues Tendeka argues (1) the trial court erred when it concluded that Tendeka repudiated the contract between the parties; and in the alternative (2) if the trial court correctly concluded Tendeka repudiated the contract, the trial court erred in failing to conclude the repudiation was either excused or retracted. Concluding there is sufficient evidence to support the trial court's findings, we affirm the trial court's judgment.


         Tendeka manufactures and sells a tool known as a swellable packer that is used in horizontal oil wells. The packer swells when it comes into contact with water but allows oil to flow by the packer. This tool is used to segment horizontal wells to allow hydraulic fracturing in specific locations. A packer is made of metal and rubber; the rubber has a limited shelf-life and begins to degrade over time. Nine Energy focused on the completion phase of development once the well is drilled and was a purchaser of packers.

         Nine Energy operated as Northern States Completions (NSC) until February 2013. Sometime in 2012, Northern States began purchasing packers from Tendeka. In February 2013 Northern States merged into Nine Energy.[1] On October 25, 2013, Tendeka and Nine Energy entered into an agreement ("the October Agreement") in which "the parties agreed that, in return for [Tendeka]'s agreement to a $3, 000.00 unit price, [Nine Energy] would assure the annual purchase of not fewer than 3, 000 [packers]."[2] Paul Butero, Chief Executive Officer of Nine Energy in 2013 and Kenneth Miller, vice president of Tendeka in 2013, were the primary negotiators involved in the agreement between the parties. Butero testified that there were three components to the agreement between Nine Energy and Tendeka. Those components included (1) a negotiated price, (2) consignment, and (3) payment terms.

         With regard to consignment, Nine Energy purchased packers on consignment from vendors; when a packer was placed in the well Nine Energy would notify the vendor to invoice Nine Energy for the packer. The packers were being used in wells located in North Dakota. The parties operated under this consignment arrangement before the date of the October Agreement and continued to operate under this arrangement afterward.

         With regard to pricing, before the October Agreement, price was negotiated on a weekly and monthly basis. At that time Nine Energy was paying $3, 700 per packer. The October Agreement lowered the price to $3, 000. Sometime between the start of the October Agreement and June 9, 2014, Tendeka lowered the price of the packers sold to Nine Energy to $2, 800 each.

         On June 9, 2014, almost eight months after entering into the October Agreement, Miller sent a letter ("the June Letter") to Butero stating as follows:

I have tried to contact you several times over the past weeks to discuss this in person. It has come to the point in our relationship that we realize Nine Energy has opted to utilize one vendor in North Dakota or at the very least not Tendeka as a Swell Packer supplier. We are disappointed that it has come to this despite having lowered our prices to a level that we were told was competitive. This has not resulted in any additional work to Tendeka and instead simply resulted in large levels of stock manufactured for Nine Energy. Also it has created competitive intensity with Nine Energy clients impacting market pricing which has done no one any favors.
Currently we are supplying no packers to NSC and would like to make a clean break from the past distribution model. Tendeka would like all of the unused packers returned to us as to preserve their integrity to be run in future wells (they are currently being stored outdoors).
We will be invoicing for packers not on hand as per what is returned to us. In the future we will provide packers if needed for $3000 per packer and they will be invoiced at the time of delivery to NSC.

         Nine Energy considered the June Letter to be a refusal to abide by the pricing, consignment, and payment terms of the October Agreement. Butero responded to the June Letter by instructing Miller to "make arrangements to have your packers picked up." Tendeka picked up its packers after Butero's instruction to do so.

         One month after sending the June Letter, on July 10, 2014, Miller sent another letter to Butero "reminding" Butero of Nine Energy's "minimum purchase obligation" based on the October Agreement. The July Letter noted that Nine Energy had purchased 1, 923 packers as of the date of the letter. The letter further stated that if the "guaranteed 3, 000 volume" was not met, packers would be priced at $3, 700 each rather than $3, 000.

         Miller testified that he and John Crooks were primarily responsible for Tendeka's relationship with Nine Energy. John Crooks worked at Tendeka as a salesperson and was primarily responsible for day-to-day interactions with Nine Energy. Before the October Agreement the price of packers fluctuated week to week but was higher than $3, 000 per packer, up to $3, 700 per packer.

         In late 2013, after the date of the October Agreement, Crooks offered to sell packers for $2, 800 per unit with no volume commitment. According to Miller Crooks was authorized to make that offer. Miller called the June Letter the "breakup letter" because, in his opinion, Nine Energy was not honoring its volume commitment at that time. Miller admitted that at the time he sent the June Letter no one at Nine Energy had told him they would not meet the volume commitment. Miller testified that the June Letter changed the price of the packers, the consignment terms, and when payment would be required. After Miller sent the June Letter Tendeka began selling packers to Nine Energy's customers.

         Rory Barbot, co-founder of Norther States Completions, which became a subsidiary of Nine Energy in 2013, testified that in Nine Energy's dealings with Tendeka they were shipped packers on consignment, agreed on a price in advance, and re-negotiated the price from time to time. Barbot also testified that before the October Agreement Nine Energy paid $3, 700 per packer; after the October Agreement Nine Energy paid $3, 000 per packer. Barbot testified there was never a volume commitment tied to the $3, 000 price.

         In December 2013 Tendeka dropped the price to $2, 800 per packer. Miller testified that Crooks, Tendeka's salesperson, initiated the lower price and was authorized to do so. Barbot's understanding of the June Letter was that Tendeka wanted to cancel the consignment arrangement, change the price per packer, and change the payment arrangements. The June Letter "fundamentally changed" the way Nine Energy had been doing business with Tendeka. Barbot never told anyone at Tendeka that they would not purchase more packers from Tendeka.

         In reviewing the June Letter, Ann Fox, Nine Energy's Chief Executive Officer at the time of trial, testified that she interpreted the term "clean break" to mean that Tendeka sought to end the consignment arrangement that was previously in place. After receipt of the ...

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