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Knox Energy, LLC v. Gasco Drilling, Inc.

United States District Court, W.D. Virginia, Abingdon Division

June 28, 2017

KNOX ENERGY, LLC, Plaintiff,

          Guy M. Harbert, III, J. Scott Sexton, H. David Gibson, Michael J. Finney, Abigail E. Murchison, and Scott A. Stephenson, Gentry Locke Rakes & Moore, LLP, Roanoke, Virginia, for Plaintiff and Counterclaim Defendants;

          Daniel G. Bird, Kellogg, Hansen, Todd, Figel & Frederick, PLLC, Washington, D.C., and Thomas R. Scott, Jr., Benjamin A. Street, and Jason D. Gallagher, Street Law Firm, LLP, Grundy, Virginia, for Defendant and Counterclaim Plaintiff.


          James P. Jones, United States District Judge

         In this breach of contract action arising under Virginia law, a jury found for the plaintiff and counterclaim defendants, Knox Energy, LLC and Consol Energy, Inc., on the ground that there was no mutual assent to enter into the alleged contract. The defendant and counterclaim plaintiff, Gasco Drilling, Inc., has moved for a new trial pursuant to Rules 59(a) and 60(b)(3) of the Federal Rules of Civil Procedure. For the reasons that follow, I will deny the Motion for New Trial.

         I. Procedural History.

         Knox Energy, LLC (“Knox”), a natural gas producer, filed this action seeking a declaratory judgment that no contractual relationship existed between it and Gasco Drilling, Inc. (“Gasco”), a gas drilling company. Gasco in turn filed a Counterclaim against both Knox and an additional party, Consol Energy, Inc. (“Consol”).[1] In its Counterclaim, Gasco sought recovery of more than $14 million under an expired drilling contract that Gasco claimed had been resurrected by a form addendum that Consol sent to Gasco. Without objection, I ruled prior to trial that Gasco would be treated as a plaintiff and had the burden of proof as to the existence of an enforceable contract.

         This case was first tried in September 2014. At that trial, at the close of Gasco's case-in-chief, I granted judgment as a matter of law pursuant to Rule 50(a) in favor of Knox/Consol. Knox Energy, LLC v. Gasco Drilling, Inc., 54 F.Supp.3d 489, 501 (W.D. Va. 2014) (holding that no reasonable jury could find that there was mutual assent to the alleged contract). On appeal by Gasco, the court of appeals reversed, finding that, “[g]iven this mix in the evidence . . . without weighing the evidence or making credibility determinations, ” the issue of mutual assent to the alleged contract was a matter for the jury. Knox Energy, LLC v. Gasco Drilling, Inc., 637 F. App'x 735, 739 (4th Cir. 2016) (unpublished).

         In its opinion, the court of appeals recited the basic facts as follows:

In 2008, Consol, a natural gas producer, and Gasco, a drilling company, entered into a drilling agreement that lasted for two years, or until Gasco completed its work. Under the contract, Consol agreed to pay a “standby” rate of $10, 800 per day, per drilling rig, for time when Gasco was on site but not actively drilling. While drilling, Gasco received an even higher fee. Additionally, the 2008 agreement contained a special “take-or-pay” provision, which guaranteed that Gasco would make two rigs available for Consol whenever it requested work. Whether or not Gasco was on site, it provided that Consol would pay the standby rate for 328 days of each twelve-month period. In May 2010, the parties amended the agreement to release one of the rigs from the contract. The remaining rig completed its work, and the contract terminated, in July 2010.
The essential dispute in this case is whether Gasco and Consol reinstated that 2008 contract in 2011. On June 6, 2011, Consol emailed Gasco a document titled “Addendum to Contract Purchase Order.” Clyde Ratliff, Gasco's CEO, signed the Addendum and returned it on June 14, 2011. Consol returned the countersigned Addendum to Gasco on July 29, 2011. The Addendum stated that Gasco and Consol “agree to modify the ‘term' provision of the contract purchase order to read as follows:” that the new “term of this agreement shall be for one year from the date set forth above and shall be automatically extended for one year terms unless either party gives written notice” of termination at least thirty days before renewal. The Addendum was “effective” on June 13, 2011. The “contract purchase order” referenced in the Addendum was the 2008 drilling agreement, “PO No. 5600000439.” . . . .
For a year after signing this Addendum, Consol did not ask Gasco to drill, and neither party communicated about the Addendum. Then, in June 2012, Gasco sent Consol a $7, 084, 800 bill for 328 days of take-or-pay standby charges. Contending that it had mistakenly signed the Addendum, Consol refused to pay. Additionally, Consol filed this diversity action for declaratory relief. In response, Gasco sent Consol a second $7, 084, 800 invoice as liquidated damages for early termination, and counter-sued for breach of contract.

Id. at 736-37. The court of appeals held that “[i]f Gasco knew or should have known that Consol made a mistake, we agree there was no mutual assent. But Gasco presented sufficient evidence that, if credited, a reasonable jury could have found in its favor.” Id. at 738.

         The court of appeals affirmed several rulings I had made prior to the first trial. Id. at 739-40. These included my ruling, based on an addendum dated May 10, 2012, that Gasco's potential recovery was limited to standby charges associated with only one drilling rig. Op. & Order, Sept. 4, 2014, ECF No. 236. I had also declined to exclude parol evidence of Knox/Consol's mistake, which Gasco argued was irrelevant, confusing, and misleading. In affirming that ruling, the court of appeals found that “Consol had to present some evidence of a mistake in order to prove that its mistake was obvious to Gasco.” 637 F. App'x at 740. The court of appeals further noted that “both parties proposed essentially the same jury instructions, that ‘[i]f a person's words or actions warrant a reasonable person in believing that he intended real agreement, his contrary, but unexpressed, state of mind is immaterial.' Thus the jury would have been instructed that its decision on mutual assent must rest on the objective circumstances.” Id.

         After the second trial in this case, the jury found for Knox/Consol. The first question on the special verdict form read,

1. Has Gasco proved by a preponderance of the evidence that Gasco and Consol had a meeting of the minds - mutual assent - such that the expired 2008 drilling contract was reinstated by the Addendum, with a distinct and common intent and understanding by both parties as to all of its material terms?

         Verdict Form, ECF No. 409. The jury checked “No” and, in accordance with the form's instructions, did not answer the remaining questions.

         II. Trial Evidence.

         The following is a summary of the evidence presented at the second trial.

         In 2011, Clyde Beaver “Ben” Ratliff was the president and part owner of Gasco. Ben Ratliff's brother, Jerry Ratliff, and Ben's two sons, Chris and Brian Ratliff, were also part owners of the company. In early 2008, at its peak, Gasco employed about 180 people.

         Using an International Association of Drilling Contractors (“IADC”) contract form titled “Drilling Bid Proposal and Daywork Drilling Contract - U.S., ” Knox/Consol and Gasco entered into a drilling contract effective January 10, 2008. The contract covered natural gas horizontal wells in eastern Tennessee in the first quarter of 2008. A daywork drilling contract is different from a footage drilling contract, which the parties would have used for drilling vertical wells. The day rate stated in the January 2008 contract was $10, 800 per day without drill pipe and $11, 800 per day with drill pipe. The January 2008 contract also stated a standby rate of $10, 800 per day. The standby rate was to be paid even when Gasco was not performing any drilling. In the “Special Provisions” section of the contract form, the parties had stated certain additional terms, including that the vertical part of the well would be drilled at a footage rate of $21.50 per foot.

         The January 2008 contract had a term of one year, but the parties cancelled that contract before its term ended. In June 2008, Knox/Consol and Gasco entered into a take-or-pay contract because Knox/Consol wanted a guarantee that rigs would be available to drill anytime they were needed. “Take-or-pay” means that Knox/Consol agreed to pay Gasco to have rigs and personnel ready to drill for a specified number of days per year, regardless of whether any drilling actually took place. This new 2008 take-or-pay contract (“2008 Drilling Contract”) differed from the January 2008 contract it superseded in that the earlier contract did not entitle Gasco to any payment prior to when it was called to mobilize its equipment and go to the well site. The take-or-pay provision benefitted Gasco by guaranteeing that Gasco would receive payment for a specified number of days, but it disadvantaged Gasco by preventing it from using the dedicated rigs to perform other drilling work at higher rates.

         The 2008 Drilling Contract used the same IADC form that the parties had used for the earlier contract. The take-or-pay provision, written into the Special Provisions part of the form, reads:

         Operator shall pay for 328 days per 12-month period, at the following rates per day, per rig:

$ 13, 500.00/ with pipe
$ 12, 000.00/ without pipe
$ 10, 800.00/ standby
Contractor must have rig available to work or these rates will be adjusted for days rig is not available to work. The days that rig is drilling top hole on Footage Rate will be deducted from the 328 day total.

Gasco Trial Ex. 2 at 6, ECF No. 387-2.

         The 2008 Drilling Contract covered a larger geographical area than the earlier contract - eastern Tennessee, eastern Kentucky, Virginia, and southern West Virginia. Gasco drilled about five wells under the January 2008 contract, and about eight additional wells under the 2008 Drilling Contract during the rest of 2008.

         In February 2009, Knox/Consol and Gasco amended the 2008 Drilling Contract to reduce the standby rate from $10, 800 per day per rig to $6, 800 per day per rig. Gasco received nothing in exchange for reducing the rate. The amendment provided that when drilling recommenced, the standby rate would increase to $10, 800. Gasco resumed drilling in September 2009, but Ben Ratliff did not begin charging the higher standby rate because he forgot about the rate increase. Knox/Consol did not notify Gasco of the billing mistake and has never offered to pay the uncharged amounts.

         Gasco and Knox/Consol amended the 2008 Drilling Contract again in May 2009 to reduce the day rate from $12, 500 to $11, 500. The parties also changed the footage rate from $22.50 to $20.50. Gasco did not receive any consideration in exchange for reducing these rates. In May 2010, while the 2008 Drilling Contract was still in effect, the parties again amended the contract to require one of the drilling rigs to continue drilling until the five listed wells were completed, which occurred in August 2010. This May 2010 amendment had the effect of extending the term of the 2008 Drilling Contract for a little more than one month. Gasco did not submit a bid for this contract extension. The amendment also released the other drilling rig from the contract after the completion of a specified well, meaning that Knox/Consol would no longer have to pay the standby rate for that rig.

         While the 2008 Drilling Contract was in effect, Ben Ratliff prepared an invoice after Gasco finished drilling each well. His secretary would then contact Knox/Consol to obtain a purchase order number for the invoice. Knox/Consol sent a different purchase order number for each invoice, along with a lengthy list of terms and conditions that Ben Ratliff was required to sign before Knox/Consol would pay the invoice. All of the seventeen invoices Gasco issued under the 2008 Drilling Contract contained a unique purchase order number.

         In February 2009, Randy Albert and Kent Wright of Knox/Consol instructed Gasco to submit invoices monthly. Ben Ratliff testified that Gasco's normal practice was to bill for standby time at the end of the year and deduct any days in which the rigs had been used for drilling. In accordance with the instruction from Albert and Wright, Gasco submitted monthly invoices under the 2008 Drilling Contract.

         In late 2010, Knox/Consol invited Gasco to submit a bid for drilling in 2011. The person who sent the bid request, and the person to whom Gasco submitted a bid, was Cecil Sagraves, Contract Sourcing Specialist for Consol. The contract form that Knox/Consol sent to Gasco when soliciting the bid indicated that the contract would cover eastern Tennessee and eastern Kentucky. The bid solicitation sought bids on a footage basis. Knox/Consol instructed bidders to bid the project based on using a three-person crew, whereas the 2008 Drilling Contract had provided for a four-person crew. Knox/Consol also indicated that the new contract would not provide for a standby rate.

         Gasco submitted two bid proposals. In the first, Gasco proposed day rates of $11, 800 without pipe and $12, 300 with pipe, as well as a footage rate, for a four-person crew. The $12, 300 day rate was $200 less than the modified day rate under the just-completed 2008 Drilling Contract. Gasco's first proposed bid also included a standby rate of $10, 800, despite Knox/Consol's indication that this contract would not include a standby rate. Gasco's second proposal stated day rates of $12, 500 without pipe and $12, 850 with pipe; the size of the crew was not specified. The second proposal again included a standby rate of $10, 800. In its second proposal, Gasco stated that the term would be one year from January 2011 with no extensions or renewals. The proposal did not include an early termination penalty, nor did it include any take-or-pay provision. Ben Ratliff testified that because Knox/Consol did not request a take-or-pay provision, he knew he would likely be wasting his time by including one in the proposal, given the state of the natural gas market at the time.

         Gasco did not win the contract for 2011 drilling; the contract was instead awarded to Noah Horn Well Drilling (“Noah Horn”), one of Gasco's competitors. Gasco learned from Sagraves that the contract had been awarded to Noah Horn. In early 2011, Ben Ratliff heard a rumor that the Noah Horn rig that was performing drilling for Knox/Consol was experiencing mechanical problems.

         On June 6, 2011, Gasco received an email from Janet Fahrenhold at Knox/Consol with an attachment titled Addendum to Contract Purchase Order (“Addendum”). The email stated:

Attached is a [sic] Addendum to your current Contract Purchase Order No. 5600000439. The purpose of the Addendum is to revise the Term of the Contract Purchase Order to have it extend automatically from year to year unless either party gives the other party notice of intent not to extend at least thirty days before the end of the current one year term.
Also, because of changes in our SAP system we have to renumber our existing contracts. Please be advised that the number of your contract has been changed from 4600000856 to 5600000439 Please sign and return the attached addendums via email within 2 business days.

Gasco Trial Ex. 7 at 1, ECF No. 387-7. The attached form read as follows:

         Addendum to Contract Purchase Order

         This Addendum to contract purchase order (“Addendum”) is entered into effective this ___ day of ___, 20 ___, by and between Consol Energy, Inc. and its affiliates (“Company”) and ___ (“Contractor”).

         Whereas, Company and Contractor are parties to a contract purchase order (PO No. ___) (the “Contract Purchase Order”); and Whereas, Company and Contractor agree to modify the “Term” provision of the Contract Purchase Order as provided herein.

         Therefore, intending to be legally bound, Company and Contractor agree as follows.

         1. Company and Contractor agree to modify the “Term” provision of the Contract Purchase Order to read as follows:

Subject to Company's right to cancel this contract purchase order as set forth below, the term of this agreement shall be for one year from the date set forth above and shall be automatically extended for one year terms unless either party gives written notice to the other party of the termination of the agreement at least thirty (30) days before the end of the current one year term.

         2. Except for the modification of the “Term” provision as set forth in paragraph 1 of this Addendum, all other provisions of the Contract Purchase Order shall remain in full force and effect.

In witness whereof, the parties have caused their duly authorized representatives to execute this agreement intending it to be effective on the effective date.

Id. at 2.

         Gasco's office manager, Freda Rasnake, called Ben Ratliff to tell him about the email. Ben Ratliff testified that he did not understand the email, so he instructed Rasnake to respond to the email and request from Knox/Consol a copy of the contract to which the Addendum would apply. That afternoon, Rasnake wrote to Fahrenhold, “We have reviewed your email with the attached Addendum.

         Can you please forward a copy of Contract #4600000856.” Gasco Trial Ex. 8, ECF No. 387-8. Ben Ratliff did not know Fahrenhold.

         When Rasnake did not receive a response from Fahrenhold, she emailed again two days later to ask for the contract a second time. That day, Rasnake received an email from Erin Bywaters of Knox/Consol. The subject line of the email read, “FW: Contract 5600000439 - copy of contract, ” and the body of the email stated:

We would like to draw your attention to the attached contract: 5600000439 From ECC Contract: 4600000856.
Please contact Sourcing Specialist for questions related to the referenced contract.
Best regards,
Todd Shumaker 724-485-4349

         Gasco Trial Ex. 10 at 1, ECF No. 387-10. Attached to this email was the 2008 Drilling Contract and several related documents. The email identified Bywaters as a member of the Material and Supply Chain Management department. Ben Ratliff had seen Bywaters' name previously on a purchase order email sent by Knox/Consol. He testified that in 2009, Rex Cooper of Knox/Consol had told him that because of some restructuring, communications would be coming from the Material and Supply Chain Management department. A letter and email sent by Knox/Consol in February 2009 also indicated that the company was making certain changes in how it did business with suppliers and moving toward electronic procurement. Ben Ratliff testified that when he received the email from Fahrenhold with the 2008 Drilling Contract attached, it was clear to him that Knox/Consol wanted to reinstate that contract.

         Shortly after receiving the email from Bywaters, Rasnake received an email from Fahrenhold, which appears to have been a forwarded copy of the same email Bywaters had sent to Rasnake, with the original attachments plus an electronic commerce agreement and the Addendum form. Ben Ratliff was out of the office at the time Rasnake received these emails, but when he returned to the office a few days later, he received a paper copy of a lengthy list of terms and conditions from Knox/Consol. Todd Shumaker was identified in the terms and conditions document, which referred to him as General Manager, Contract and Project Management for Knox/Consol.

         One of the attachments to the emails from Bywaters and Fahrenhold referencing the 2008 Drilling Contract listed a validity start date of January 22, 2010. Ben Ratliff testified that he thought Knox/Consol wanted to backdate the reinstated contract to that date, which made him uncomfortable. He knew that if he backdated the document to January, he would already be entitled to a significant amount of standby time. The same attachment listed an end date of December 31, 9999. He understood the purpose to be to renew the contract for a one-year term with automatic renewal each year until termination notice was given.

         Ben Ratliff testified that it was not his usual practice to consult an attorney about drilling contracts unless he had a question or was uncomfortable about something. He met with attorney Randy Bolling regarding the Addendum on June 13, 2011.

         He ultimately “made the decision to use the current date that [he] signed the contract, ” filled in the blanks on the form, and executed the Addendum on June 13, 2011, the same day that he first met with Bolling. Trial Tr., Dec. 13, 2016, at 31, ECF No. 421. He signed the Addendum three days after he signed the accompanying electronic commerce agreement, but he could not explain why he had waited to sign the Addendum. He instructed Rasnake to email the signed Addendum to Knox/Consol, which she did on June 14, 2011. In the email, at Ben Ratliff's instruction, Rasnake typed, “Gasco is standing by and ready to perform work under this agreement at Consol's call.” Gasco Trial Ex. 12 at 1, ECF No. 397-5. The email did not mention drilling. Ben Ratliff testified that when he signed the Addendum, he believed “that I was committing myself to having two rigs, according to this contract, ready at their call.” Trial Tr., Dec. 13, 2016, at 34, ECF No. 421.

         On July 27, 2011, Fahrenhold sent an email to Rasnake requesting information about which personnel handled certain types of matters for Gasco. Two days later, on July 29, 2011, Fahrenhold sent an email to Rasnake with the subject line “100679 Gasco Drilling - Daywork Reference Only.” Gasco Trial Ex. 15 at 1, ECF No. 397-1. The body of the email read, “Please see the attached copies of the fully executed addendum and eCommerce forms. Thanks for your cooperation with this ...

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