Northern Helex Company v. United States

• Decision Date: 21 January 1972
• Docket Number: No. 454-70.,454-70.
• Citation: 455 F.2d 546
• Parties: NORTHERN HELEX COMPANY v. The UNITED STATES.
• Court: U.S. Claims Court

455 F.2d 546 (1972)

NORTHERN HELEX COMPANY v. The UNITED STATES.

No. 454-70.

United States Court of Claims.

January 21, 1972.

COPYRIGHT MATERIAL OMITTED

Clarence T. Kipps, Jr., Washington, D. C., atty. of record, for plaintiff; David W. Richmond, John L. Rice, Miller & Chevalier, Washington, D. C., F. V. Roach, Ralph P. Blodgett, Jim W. Krueger, Omaha, Neb., of counsel.

Edward J. Friedlander, Washington, D. C., with whom was Asst. Atty. Gen. L. Patrick Gray, III, for defendant.

Before COWEN, Chief Judge, LARAMORE, Judge, DURFEE, Senior Judge, DAVIS, COLLINS, SKELTON and NICHOLS, Judges.

ON PLAINTIFF'S MOTION AND DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

DAVIS, Judge.

This is the preliminary round in an effort by the Northern Helex Company to recover $83,632,368 allegedly due it as a result of an admitted breach by the Government of a contract to purchase helium. On cross motions for summary judgment, we decide the issues of materiality of the defendant's breach and of claimed waiver by the plaintiff of that default. Only those threshold issues of liability are disposed of today; the critical questions of the validity of the subsequent termination of the contract by the Government and of the recovery of damages by the plaintiff are not before us in any way.

The plaintiff, a wholly owned subsidiary of Northern Natural Gas Company, made a contract with the United States, acting through the Department of Interior, on August 15, 1961. This agreement was authorized by the Helium Act Amendments of 1960 (50 U.S.C. § 167, et seq.), a long-range program designed to conserve helium as a natural resource for future use. A by-product of the production of natural gas, helium was wasted daily as it escaped into the atmosphere at such a rate that the helium-bearing gas resources in the southwestern states were expected to be inadequate for national needs by 1980-1985. Because of the unique properties of helium and the slim likelihood of finding new sources as rich as the Hugoton Area, involved here, the helium conservation program was initiated. One of its components was plaintiff's contract.

This provided for the purchase by the United States of the helium to be produced by Northern Helex which was estimated to be 13.5 billion cubic feet over a span of years. The helium was to be extracted from Hugoton gas, delivered, and paid for each month over the 22-year contract period with an annual fiscal year limitation of $9.5 million. The unit price of $11.24 per thousand cubic feet had increased to $12.41 by the date this action was filed (in December 1970) due to automatic price adjustments envisaged by the agreement. The Government also entered into similar contracts with Cities Service Helex, National Helium Corporation and Phillips Petroleum Company. Pursuant to its contract, Northern Helex constructed facilities, extracted, and delivered helium from December 7, 1962, onward.

The helium conservation program was intended to be self-liquidating, financed with borrowing authority provided by Congress and with funds lent by the Treasury Department to Interior. The borrowed funds were to be supplemented and, within 25 to 35 years, repaid with interest from helium sales proceeds. Interior was to sell some of the helium at a price high enough to pay for the entire program and still have 40-50 billion cubic feet in storage for use after 1983. The "federal market"—consisting of Government agencies, their prime contractors and subcontractors—was expected to purchase its major helium requirements from Interior and provide the basic financing for the whole program.

Unfortunately this forecast did not prove itself. The difficulty was that, from the mid-1960's, private helium plants began to operate outside the program and to sell to government contractors. Also, other conservation contractors produced helium in excess of the amount which could be sold to Interior under their contracts and sold the excess in competition with Interior at lower prices. Northern Helex sold helium only to Interior, but over the period of 1965-1969, some $25 million (it is said) was lost to the program because helium was purchased for federal use from other private producers rather than the Bureau of Mines. Congress did not appropriate enough funds to satisfy the payments due under the agreements of Northern Helex and its companions in the program. By letter dated November 26, 1968, Interior informed plaintiff that the Government would be unable to make payments when they became due as of January 1969. Beginning in December 1968, and continuing through 1969 the Government failed to pay the complete amount owed. Arrearages in the monthly payments ranged from a low of $664,122 to a high of $3,235,349. For deliveries from November 1969 through November 1970, the Government paid nothing at all.

In May 1970, the Interior Department convened a meeting of the four conservation contractors in which they were told that the unit price and the maximum annual payment would have to be negotiated downward. A letter of June 24, 1970 (acknowledged June 26), from Northern Helex notified the Government that its failure to make payments was a material breach which was not being waived, but that Northern Helex was willing to discuss modifications. A draft agreement which would have increased the obligations of plaintiff while the payments to it were decreased was circulated along the lines discussed in the negotiations. Meanwhile, in his request for supplemental appropriations for fiscal year 1971, the President asked only $56,100,000 in borrowing authority for obligations under the helium contracts. This amount was not sufficient to pay outstanding debts and all anticipated deliveries for the remainder of the fiscal year but only to cover five months of operation at the present contract price and seven months at the reduced price proposed by Interior. No real progress was made during the negotiations, as Northern Helex delivered 657,008,000 cubic feet of helium from November 1, 1969, through November 30, 1970, plus an additional 44,647,000 through December 24, 1970, the date of filing of the petition in this court, without receiving any payment.

In its petition, plaintiff alleged that although its contractual obligation to perform had been discharged by the Government's material breaches of contract, it would continue to tender helium to the Government in mitigation of damages and in the interest of conservation. This was done, according to Northern Helex, because helium extraction facilities have been interrelated with its liquefied petroleum gas and petrochemical operations in such a way that the helium facilities must be continued in operation whether helium is wasted or stored. Northern Helex has no facilities for storage, purification, distribution, or marketing of helium and there is so little demand for the gas in the private market that the company has not considered it financially feasible to develop such facilities. On December 30, 1970, Northern Helex notified Interior of this suit and of its decision to continue to deliver helium, despite the material breach, because of the integration of its facilities and the need to save helium.

On January 14, 1971, the United States sent Northern Helex a check for $8,671,631.99—the total amount then due for all helium delivered by plaintiff—which the company cashed, without any notation on the check, and it then amended its petition to reflect payment as a reduction of damages. On January 26, 1971, the Under Secretary of Interior wrote plaintiff terminating the contract under its termination clause, effective March 28, 1971. Plaintiff does not acknowledge the legitimacy of this asserted termination. Since then, a "no prejudice agreement" has been entered into under which Interior agrees to store helium which Northern Helex has continued to deliver. Payment also continued. Northern Helex billed Interior for helium delivered through March 31, 1971. The bills carry a legend indicating that delivery, submission of documents, and payment shall be without prejudice to the rights of the parties. After the recent Congressional appropriation of funds, on June 23, 1971 Northern Helex received a check of $2,285,872.87 for the period of December 1970 through March 28, 1971. This June payment is also considered by Northern Helex to be a reduction of damages without prejudice to its rights.

I. The materiality of the breach

The Government's failure to pay a large amount over an extended period of time was a conceded breach of its contractual obligation. Arrearages in monthly payments which began in December, 1968 and continued through 1969 ranged from $664,122 to $3,235,349. For deliveries from November 1, 1969 through November 30, 1970, the Government paid nothing at all. By the time suit was filed in December 1970, $8,671,632 was owing to the plaintiff.¹ The failure of the Government to pay required Northern Helex to borrow funds to continue performance. These loans which were zero at the beginning of 1969 increased steadily to $7,175,000 by December 31, 1970. Northern Helex claims it was thus damaged at the rate of $56,000 a month (the interest rate of 8% times $8,600,000).² Unlike Interior's contracts with the three other conservation producers of helium, plaintiff's arrangement did not provide for payment of interest by defendant on amounts due but unpaid.

The Government contends, however, that such delinquency without more does not constitute a total breach warranting the contractor in ending the agreement. Perhaps mere delay in payment, for a while, would not be a material breach but there is a clear distinction between delay of that kind and a total failure to pay over many months. Our jurisprudence strongly suggests that the latter sort of breach by the Government is material, just as it would be in the case of a private party. Ferris v. United States, 27 Ct.Cl. 542, 546 (1892); Pigeon v. United States, 27...