PUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

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HESS ENERGY, INCORPORATED,

Plaintiff-Appellee,

          v.No. 02-2129

LIGHTNING OIL COMPANY, LIMITED,

Defendant-Appellant.

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Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
James C. Cacheris, Senior District Judge.
(CA-00-1347-A)

Argued: May 6, 2003

Decided: July 31, 2003

Before WILKINSON, NIEMEYER, and TRAXLER, Circuit Judges.

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Affirmed by published opinion. Judge Niemeyer wrote the opinion,

in which Judge Wilkinson and Judge Traxler joined.

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COUNSEL

ARGUED: Joseph E. Altomare, Titusville, Pennsylvania, for Appel-

lant. Daniel M. Joseph, AKIN, GUMP, STRAUSS, HAUER &

FELD, L.L.P., Washington, D.C., for Appellee. ON BRIEF: Anthony

T. Pierce, Michael L. Converse, Kelly M. Skoloda, AKIN, GUMP,

STRAUSS, HAUER & FELD, L.L.P., Washington, D.C., for Appel-

lee.

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OPINION

NIEMEYER, Circuit Judge:

After it was determined that Lightning Oil Company, Ltd., antici-

patorily repudiated its contract to sell natural gas to Hess Energy, Inc.,

see Hess Energy, Inc. v. Lightning Oil Co., Ltd., 276 F.3d 646 (4th

Cir. 2002), a jury trial was held to determine Hess' damages under the

Virginia Uniform Commercial Code. After having been instructed by

the district court that the measure of damages is "usually the differ-

ence between the contract price and the market price, at the time and

place of delivery," the jury returned a verdict in favor of Hess for

$3,052,571.

On appeal, Lightning contends that the jury was improperly

instructed and that damages should have been calculated using the

market price as of the date Hess learned that Lightning would not

perform rather than as of the date of delivery. For the reasons that fol-

low, we affirm the judgment of the district court.

I

Under a Master Natural Gas Purchase Agreement (the "Master

Agreement") dated November 1, 1999, Lightning agreed to sell and

Statoil Energy Services, Inc. agreed to buy natural gas. The Master

Agreement set forth the general terms of the parties' contractual rela-

tionship, and subject to these terms, the parties entered into a series

of specific natural gas purchase agreements, called "confirmations."

The confirmations detailed the purchase period, purchase price, pur-

chase volume, delivery point, and other relevant terms. Between

November 16, 1999, and March 7, 2000, Lightning and Statoil

entered into seven different confirmations under which Lightning

agreed to sell fixed quantities of natural gas to Statoil on specified

future dates at fixed prices.

In February 2000, Amerada Hess Corporation purchased the stock

of Statoil and changed Statoil's name to Hess Energy, Inc. ("Hess").

After the change in name, Hess continued to purchase natural gas

from Lightning under the confirmations, and Lightning continued to

honor its obligations, at least for a period of time.

2

In June 2000, Lightning located a buyer willing to pay Lightning

a better price than Hess had agreed to pay in its confirmations with

Lightning, and Lightning entered into a contract with that buyer to

sell the natural gas promised to Hess. Lightning then notified Hess in

July 2000 that it was terminating the Master Agreement, stating that

Statoil's stock ownership change and name change to Hess pursuant

to the stock purchase agreement was an assignment of Statoil's con-

tractual obligations in material breach of the anti-assignment provi-

sion of the Master Agreement.

Hess commenced this action seeking a declaratory judgment that it

had not breached the Master Agreement and demanding compensa-

tory damages for Lightning's nonperformance. We concluded, in an

earlier appeal, that even if Lightning could prove that there was an

assignment of contractual obligations in the case, any such assign-

ment "could not be a material breach" of the Master Agreement and

the confirmations entered into under that agreement. Hess Energy,

276 F.3d at 651. We remanded the case to the district court "for deter-

mination of Hess Energy's damages under the confirmation con-

tracts." Id.

At the trial on damages, Hess' Director of Energy Operations testi-

fied about Hess' method of doing business. He explained to the jury

that Hess' business was to purchase natural gas from entities like

Lightning through agreements such as the confirmation contracts and,

once it did so, to locate commercial customers to which it could sell

the natural gas. Hess' business was not to profit on speculation that

it could resell the purchased natural gas at higher prices based on

favorable market swings, but rather to profit on mark-ups attributable

to its transportation and other services provided to the end user of the

natural gas. Because Hess entered into gas purchase contracts often

at prices fixed well in advance of the execution date, it exposed itself

to the serious risk that the market price of natural gas on the agreed-

to purchase date would have fallen, leaving it in the position of hav-

ing to pay a higher price for the natural gas than it could sell the gas

for, even after its service-related mark-up. To hedge against this mar-

ket risk, at each time it agreed to purchase natural gas from a supplier

at a fixed price for delivery on a specific date, it also entered into a

NYMEX futures contract to sell the same quantity of natural gas on

the same date for the same fixed price. According to ordinary com-

3

modities trading practice, on the settlement date of the futures con-

tract, Hess would not actually sell the natural gas to the other party

to the futures contract but rather would simply pay any loss or receive

any gain on the contract in a cash settlement. In making this arrange-

ment, Hess made itself indifferent to fluctuations in the price of natu-

ral gas because settlement of the futures contract offset any favorable

or unfavorable swings in the market price of natural gas on the date

of delivery, allowing Hess to eliminate market risk and rest its profit-

ability solely on its transportation and delivery services. Indeed, the

sole purpose of advance purchase of natural gas in the first instance

was to lock in access to a supply of natural gas, which it could then

promise to deliver to its customers.

Focusing on the particular transactions in this case, Hess' Director

of Energy Operations testified that when Lightning anticipatorily

repudiated its agreements to supply natural gas to Hess at specified

prices, Hess was left with "naked" futures contracts. By repudiating

the Master Agreement and related confirmations, Lightning extin-

guished the supply contract against which the NYMEX futures con-

tract provided a hedge, exposing Hess to the one-sided risk of having

a futures sales contract that did not offset any corresponding supply

contract to purchase natural gas for delivery at a future date. Thus,

when the price of natural gas rose after Hess entered into both the

confirmations with Lightning and the offsetting futures contracts,

Hess was exposed, after Lightning's repudiation, to loss on the futures

contracts (because it would have to sell gas at a below-market price)

without the benefit of its bargain with Lightning, i.e., the ability to

purchase the same quantity of natural gas at the below-market price.

Facing losses on the open futures contracts, Hess bought itself out of

some of the futures contracts with closer settlement dates, fearing that

the market for natural gas would continue to go up with the effect of

increasing its losses on those contracts. As a result of having to buy

itself out of these futures contracts, Hess suffered out-of-pocket dam-

ages.

Hess' expert witness, Dr. Paul Carpenter, who was a specialist in

the valuation of natural gas, offered two methods for computing Hess'

damages: (1) the "lost opportunity method," which "simply com-

pare[d] the cost of gas that Hess would have paid to Lightning had

Lightning performed under the contract with the market value of the

4

gas at the time that that gas would have been delivered to Hess,"

where the difference between the values would be the measure of

damages, and (2) the "out-of-pocket costs" method, which measured

"the impact on Hess directly of the fact that Lightning failed to

deliver under the contract." Dr. Carpenter testified that these two

methods were really "driving at the same thing" and that he employed

both methods to give "more comfort as to what . . . the range" of dam-

ages was. The principal difference between the two methods was that

the out-of-pocket method accounted for the damages Hess suffered by

buying out its futures contracts, while the lost opportunity method

assumed that Hess did nothing to alter the hedges.

In calculating the contract-market differential under the lost oppor-

tunity method, Dr. Carpenter determined that the market value of the

contracts, calculated using the actual price at which natural gas traded

on the relevant dates of delivery on the NYMEX, was $8,106,332. He

stated that the NYMEX price was the best indicator of market price

because (1) "the parties themselves referred to the NYMEX exchange

when they established the contract themselves, so the parties recog-

nize the NYMEX price as a valid reference price for gas" and (2) "the

NYMEX price is probably the . . . most widely referenced and used

natural gas price in North America . . . [and] represents the best indi-

cator of a commodity price for natural gas." Because the contract

price of the natural gas that Hess had agreed to purchase from Light-

ning under the confirmations was $5,053,761, the resulting damage to

Hess under the "lost opportunity" method was $3,052,571. Dr. Car-

penter calculated damages under the out-of-pocket method as

$3,338,594.

Lightning offered no expert testimony and it did not offer a com-

peting method of calculating the damages. It also did not suggest any

damages figure to the jury. Rather, its position at closing argument

was that Hess should have gone out at the time of Lightning's repudi-

ation and replaced the confirmation contracts by entering into similar

contracts with other suppliers at sub-NYMEX prices. Lightning

argued that Hess "sat idly by during a period of time when they knew

the price [of natural gas] was going up, up, up, up, up, up" and that

Hess "could have in August of 2000 gone out and purchased the same

amount of gas that we . . . were supposed to supply them for that

future period at a much lower price." Lightning also argued that the

5

NYMEX price was not the relevant market price because that price

did not reflect the price at which a "producer" like Lightning would

sell to a "marketer" like Hess.

After closing arguments, the district judge instructed the jury on

the measure of damages as follows:

When a seller fails or refuses to deliver the contracted-for

goods, the measure of damages is usually the difference

between the contract price and the market price, at the time

and place of delivery, with interest, and the buyer for its

own protection has the right under the circumstances to buy

the goods in the open market, and charge the difference in

price to the seller's account. The remedy for a breach of

contract is intended to put the injured party in the same posi-

tion in which it would have been had the contract been per-

formed. In your verdict, you may provide for interest on any

principal sum awarded or any part thereof and fix a period

at which the interest shall commence.

The jury returned a verdict of $3,052,571, with interest beginning on

June 1, 2001. This amount was equal to Dr. Carpenter's calculation

under the lost opportunity method.

From the district court's judgment entered on the jury's verdict,

Lightning filed this appeal.

II

For its principal argument on appeal, Lightning contends that the

district court erred in instructing the jury that the proper measure of

damages under Virginia law was the difference between the contract

price and the market price at the time and place of delivery. Lightning

argues that under the Virginia Uniform Commercial Code § 8.2-713,

"[t]he proper measure of damages in this case is the difference

between the contract price and the market price at the time Hess

learned that Lightning would not perform." (Emphasis added).

In arguing that the district court correctly instructed the jury under

Virginia law, Hess argues that Lightning's interpretation of Virginia

6

Code § 8.2-713 "wrongly equates the term`learned of the breach'

with the time at which the innocent party `learned of the [wrongdo-

er's] repudiation'" and "renders meaningless other sections of the

[Uniform Commercial Code] including Va. Code § 8.2-723."

"[E]quating a contract's breach with its mere repudiation" is "bad pol-

icy," Hess argues, because it "would require the innocent party to

cover immediately . . . or risk being uncompensated for losses caused

by increased prices in the period following the repudiation."

It is undisputed in this case that the Master Agreement and the con-

firmations entered into under it were subject to the provisions of Vir-

ginia's Uniform Commercial Code, Va. Code § 8.1-101 et seq. The

core dispute between the parties concerns when the market price of

the undelivered natural gas should be measured for purposes of calcu-

lating damages and to what degree Hess' damages may be limited by

an asserted duty to cover. While this case presents an archetypal

anticipatory repudiation, see 1 James J. White & Robert S. Summers,

Uniform Commercial Code § 6-2, at 286 (4th ed. 1995) (noting that

the "clearest case" giving rise to an anticipatory repudiation is "when

one party - declaring the contract invalid or at an end - accuses the

other of materially breaching the contract, and states that he no longer

will do any business with the other party"), measuring a buyer's dam-

ages in such circumstances "presents one of the most impenetrable

interpretive problems in the entire [Uniform Commercial] Code." Id.

§ 6-7, at 337.

We begin the analysis by pointing out that the overarching princi-

ple given by the district court's instruction to the jury - "the remedy

for breach of contract is intended to put the injured party in the same

position in which it would have been had the contract been per-

formed" - conforms to the governing principle for damages under

the Virginia Uniform Commercial Code. See Va. Code § 8.1-106

(stating that the Code's remedies "shall be liberally administered to

the end that the aggrieved party may be put in as good a position as

if the other party had fully performed").

Under the specific provisions for damages, the Virginia Uniform

Commercial Code provides that when a seller repudiates a contract,

the buyer is given several alternatives, none of which operates to

penalize the buyer as a victim of the seller's repudiation. See Va.

7

Code § 8.2-610. One option provided by § 8.2-610 is for the buyer to

"resort to any remedy for breach (§ 8.2-703 or 8.2-711), even though

[the buyer] has notified the repudiating [seller] that he would await

the latter's performance and has urged retraction." Id. § 8.2-610(b).

Section 8.2-711, in turn, allows a buyer either to"`cover' and have

damages under the next section [§ 8.2-712] as to all the goods

affected" or to "recover damages for nondelivery as provided in this

title (§ 8.2 713)." In this case, Hess chose not to cover, opting instead

to recover damages for nondelivery under § 8.2-713.

Section 8.2-713 provides:

[T]he measure of damages for nondelivery or repudiation by

the seller is the difference between the market price at the

time when the buyer learned of the breach and the contract

price together with any incidental and consequential dam-

ages provided in this title (§ 8.2-715), but less expenses

saved in consequence of the seller's breach.

Va. Code § 8.2-713(1) (emphasis added). Lightning would have us

equate "the time when the buyer learned of the breach" with the time

when the buyer learned of the repudiation and require calculating

damages using the market price of the contracted-for natural gas at

the time Hess learned that Lightning would not perform. Hess con-

tends, on the other hand, that the time when it learned of the breach

for purposes of § 8.2-713 did not occur "until each time [Lightning]

failed to deliver natural gas as promised in its contract," rather than

at the time Lightning communicated its intent not to perform.

These diverse positions reduce to the core question of whether

"breach" as used in "when the buyer learned of the breach" means "re-

pudiation," or whether "breach" refers to the date of actual perfor-

mance when it could be determined that a breach occurred - in this

case, the date of delivery.

While § 8.2-713 might be susceptible to multiple interpretations,

see White & Summers, supra, § 6-7, at 337 (articulating at least three

possibilities), we conclude that the drafters of the Uniform Commer-

cial Code made a deliberate distinction between the terms "repudia-

tion" and "breach," and to blur these two words by equating them

8

would render several related provisions of the Uniform Commercial

Code meaningless. This is best illustrated by reference to § 8.2-610.

In that provision, an aggrieved buyer can wait "a commercially rea-

sonable time" after learning of the seller's repudiation to allow the

seller to change its mind and perform. Va. Code § 8.2-610(a). If

Lightning's interpretation of § 8.2-713 were the correct one - that

the damages should be calculated based on the market price on the

date of repudiation - then the buyer would be deprived of his right

under § 8.2-610 to await a reasonable time for seller's possible post-

repudiation performance. See White & Summers, supra, § 6-7, at 339

("[I]f the buyer's damages are to be measured at the time the buyer

learned of the repudiation, then it cannot do what 2-610(a) seems to

give it the right to do, namely await performance for a `commercially

reasonable time' - at least not without risking loss as a result of

postrepudiation market shifts").

In another example, if the date of the seller's repudiation is equated

with the time when the buyer learns of the seller's breach as used in

§ 8.2-713, then § 8.2-723(1) would become meaningless. Section 8.2-

723(1) provides:

If an action based on anticipatory repudiation comes to trial

before the time for performance with respect to some or all

of the goods, any damages based on market price (§ 8.2-708

or § 8.2-713) shall be determined according to the price of

such goods prevailing at the time when the aggrieved party

learned of the repudiation.

This section moves the date that the seller learned of the breach under

§ 8.2-713 to the date that the seller learned of the repudiation in cir-

cumstances where the case has come to trial before the performance

date. To give meaning to § 8.2-723(1), when the case does not come

to trial before the performance date, as here, damages are not mea-

sured when the aggrieved party learned of the repudiation. See White

& Summers, supra, § 6-7, at 341 (commenting that a reading that

equates the date of breach with the date of repudiation "makes the

portion of 2-723(1) which refers to 2-713 superfluous" and conclud-

ing that the drafters "must have thought `learned of the repudiation'

had a different meaning than `learned of the breach'").

9

Thus, we conclude that the better reading of § 8.2-713 is that an

aggrieved buyer's damages against a repudiating seller are based on

the market price on the date of performance - i.e., the date of deliv-

ery. This reading also harmonizes the remedies available to aggrieved

buyers and aggrieved sellers when faced with a repudiating counter-

part. Faced with a repudiating buyer, an aggrieved seller is entitled to

"recover damages for nonacceptance" under § 8.2-708. Va. Code

§ 8.2-703; id. § 8.2-610 (directing aggrieved seller to § 8.2-703).

Under § 8.2-708, "the measure of damages for nonacceptance or repu-

diation by the buyer is the difference between the market price at the

time and place for tender and the unpaid contract price together with

any incidental damages." Id. § 8.2-708 (emphasis added). There is

nothing in the Uniform Commercial Code to suggest that the remedies

available to aggrieved buyers and sellers in the anticipatory repudia-

tion context were meant to be asymmetrical. Indeed, the lead-in

clause to § 8.2-610, relating to anticipatory repudiation, addresses

both parties: "When either party repudiates the contract with respect

to a performance not yet due . . . ."

Because our interpretation of § 8.2-713 avoids rendering other sec-

tions of the Uniform Commercial Code meaningless or superfluous

and harmonizes the remedies available to buyers and sellers, we are

persuaded that in this case "the time when the buyer learned of the

breach" was the scheduled date of performance on the contract, i.e.,

the agreed-upon date for the delivery of the natural gas, not the date

that the seller informed the buyer that it was repudiating the contract.

This reading is also consistent with Virginia's pre-UCC general

common law rule that "the measure of damages is the difference

between the contract price and the market price at the time and place

of delivery." See Nottingham Coal & Ice Co. v. Preas, 47 S.E. 823,

824 (Va. 1904). The Virginia Comment to § 8.2-713 provides that

"[t]he prior Virginia cases are in accord with subsection 8.2-713(1)."

Va. Code § 8.2-713 Va. cmt. (citing Virginia cases). Although none

of the Virginia cases cited in the Virginia Comment addressed specifi-

cally the measure of a buyer's damages on a claim against a repudiat-

ing seller, White and Summers note that "[p]re-Code common law,

the Restatement (First) of Contracts, and the Uniform Sales Act all

permitted the buyer in an anticipatory repudiation case to recover the

contract-market differential at the date for performance." White &

10

Summers, supra, § 6-7, at 341. We agree that if the drafters of the

Uniform Commercial Code had meant to "upset such uniform and

firmly entrenched doctrine," the Code would contain explicit statutory

language making such a departure clear. Id.

In reaching this conclusion, we point out that Lightning's view

would unacceptably shift the risks undertaken by the parties in their

contract. Under Lightning's view, an aggrieved buyer facing a repudi-

ating seller has two choices: (1) to cover within a commercially rea-

sonable time and receive damages based on the cover price or (2) to

forgo the opportunity to cover and simply await the date of perfor-

mance. Lightning contends that if the buyer opts for the second option

and the market price then falls, the buyer's savings must be shared

with the seller. "[B]ut if it rises, the aggrieved party cannot recover

the higher amount that resulted from his voluntarily undertaking of

that risk." This policy argument would penalize an aggrieved buyer

for inaction and therefore cannot be valid, particularly when the repu-

diating seller is in a position to fix his damages on the contract by

entering into hedge transactions on the date of his repudiation. As one

well-respected commentary explains:

When the seller of goods has promised delivery at a future

time and prior thereto repudiates his contract, the buyer is

not required to go into the market at once and make another

contract for future delivery merely because there is reason

to expect a rise in the market price. If his forecast is incor-

rect and the price falls, his second contract on a high market

increases the loss. If his forecast is correct and the price

rises, his second contract avoids a loss and operates as a sav-

ing to the repudiator. But the risk of this rise or fall is

exactly the risk that the repudiating seller contracted to

carry. If at the time of repudiation he thinks that the price

will rise, so that his performance will become more costly,

he can make his own second contract transferring the risk to

a third party and thus hedge against his first risky contract.

11 Arthur Linton Corbin, Corbin on Contracts § 1053, at 273 (Interim

ed. 2002). Thus, if Lightning wished to avoid the risk that it under-

took in entering into the contract and fix its damages on the date of

repudiation, it could have done so by entering into hedge transactions

11

in the futures market. But its repudiation of the contract cannot shift

to Hess the very market risk that Hess had sought to avoid by entering

into contracts for the future delivery of gas in the first place.

At bottom, we conclude that the district court complied with Vir-

ginia Code § 8.2-713 when it instructed the jury in this case that it

could calculate damages using the market price on the date of perfor-

mance, in this case the date of delivery of the natural gas.

III

The remaining issues that Lightning raises do not merit extensive

discussion. First, Lightning argues that the NYMEX price upon which

damages were calculated does not supply the "price for goods . . . in

the same branch of trade," the legal standard that the parties agree is

required by Virginia Code § 8.2-713. See Va. Code § 8.2-713 official

cmt. 2. Lightning's argument, however, fails to account for the fact

that its own witnesses testified that they used the NYMEX price as

a reference and that they would not enter into any contract on any

given day to sell natural gas below the applicable NYMEX price. The

testimony from all of the witnesses, including the expert witness, was

that the NYMEX price represents the applicable price for natural gas

that Hess would expect to pay in purchasing undelivered natural gas

on the scheduled date of delivery. Lightning has already had the

opportunity to present evidence that the NYMEX price was not the

proper market price, and it used this opportunity to tender only wit-

nesses who undermined this position. Thus, the jury's apparent find-

ing that the NYMEX price supplies the proper market price was fully

supported by the evidence.

Lightning's final arguments - that the jury award improperly

included consequential damages (which are prohibited in the Master

Agreement) in the form of lost profits and that Hess failed to mitigate

these consequential damages - are premised upon a mischaracteriza-

tion of the damages awarded in this case. Section 8.2-713 makes the

distinction between direct damages and consequential damages. It

states that an aggrieved buyer's damages for repudiation by the seller

are the market-contract differential "together with any incidental and

consequential damages." Va. Code § 8.2-713 (emphasis added). This

language reflects that a buyer's damages from having to purchase

12

goods in the market upon the seller's refusal to deliver are plainly

direct rather than consequential damages. See Pulte Home Corp. v.

Parex, Inc., 579 S.E.2d 188, 193 (Va. 2003) (noting that direct dam-

ages "flow directly and immediately" from the act of the breaching

party, whereas consequential damages are present where "a detour is

required to get from [defendant's] breach . . . to [plaintiff's] dam-

ages"). Because consequential damages are prohibited by the Master

Agreement, Hess properly limited its evidence to proving its direct

damages - the difference between the price it contractually agreed

to pay Lightning for the natural gas and the market price of the unde-

livered natural gas on the date of delivery, and the jury apparently

adopted Dr. Carpenter's calculation of this amount.

For this reason, Lightning's additional arguments challenging the

jury verdict and certain of the district court's evidentiary rulings

based on Lightning's misconstruction of the distinction between

direct and consequential damages are likewise without merit, and

therefore we reject them also.

Accordingly, we affirm the judgment of the district court.

AFFIRMED

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