Appeals court rules against city in canceled fuel purchase

The city of Albuquerque is on the hook for at least $744,000 plus interest for canceling a fixed-price fuel contract in 2020 to get a better deal on the open market.

The 10th Circuit Court of Appeals ruled the city was obligated to honor its contract with Texas fuel distributor Davidson Oil Co. even if it could obtain a cheaper price elsewhere.

A spokeswoman for the city said on Tuesday the amount the city will have to pay “is something that the City will need to calculate and then the other party will need to agree to.” She said the city wouldn’t appeal the decision.

A top city official contended last year that the termination of the supply contract saved taxpayers $830,000 when the city found cheaper fuel prices.

But an Albuquerque attorney for Davidson Oil told the Journal on Wednesday that the damages awarded, plus post-judgment interest, could push the final amount to $790,000.

And that doesn’t count fees the city incurred in hiring outside attorneys to defend the case and file an appeal in 2023.

Counting those fees, “the city is likely going to be losing money on this,” said Ross L. Crown of Albuquerque, the attorney representing Davidson Oil.

The city in early 2000 went to a competitive bid for a fuel distributor to furnish diesel and gasoline for its fleet of vehicles. Davidson Oil had the winning bid and signed a fixed-price contract with the city that included a “termination for convenience” clause allowing the city to cancel the contract with 60 days notice.

Then fuel prices dipped, and the city terminated the contract by invoking the clause. Davidson sued the city for breach of contract, noting that the company had protected itself against market fluctuation by signing hedge contracts with a third party. The city knew that, the appeal court opinion stated.

Senior U.S. District Judge Robert C. Brack of Las Cruces ruled for Davidson Oil in June 2023, setting damages at $601,858 as the cost of securing the hedge contracts. The judge added $96,648 for the company’s lost profits on fuel and $46,066 for lost profits on fuel transport. At issue in the appeal was whether the city was liable, and the cost of the hedge contracts.

Davidson Oil argued the city exercised the contract’s termination clause in bad faith “because (the city) sought only to secure a better bargain. We agree,” stated the ruling by the appeals court.

“A buyer who signs a fixed-price requirements contract knows the market price for the commodity will fluctuate but the buyer’s obligation will remain the same,” the July 19 appeals court ruling stated. “If the market price rises, the fixed price will insulate the buyer from the market fluctuation. But if the commodity’s market price falls, the buyer must honor its contract — even though the buyer could attain a better bargain elsewhere.”

After Brack’s ruling last year, then-city chief financial officer Sanjay Bhakta wrote a column in the Journal defending the termination of the contract.

“The real raw deal would be paying for overpriced fuel to benefit an out-of-state company and sticking taxpayers with that bill — especially when there is a loud-and-clear clause in the contract that would let the city cancel such contract,” wrote Bhakta, who retired from the city at the end of 2023.

“Not only did the city have the right to terminate the contract with Davidson Oil, but the cancellation clause ensured it was the city’s duty to do so under the circumstances.

“The decision to cancel the contract was made with one thing in mind: Albuquerque taxpayers and their best interests,” Bhakta added.

The city maintained in the lawsuit that it did not breach the supply contract because it exercised the convenience clause due to the “unprecedented decline in oil prices” caused by the COVID-19 pandemic. The appeals court said it was unpersuaded by that argument, noting that the city initially asked Davidson Oil to drop its price after signing the contract, and then sought and acquired a better deal from another supplier.

The parties agreed the city would pay $1.77 per gallon of gasoline and $1.97 per gallon of diesel. Its new supplier charged $1.44 per gallon of gasoline on average and $1.45 per gallon on diesel.

Davidson Oil’s lawyer Crown said the ruling makes it clear that the city’s use of such termination clauses in contracts is “unenforceable” when city officials claim the right to “cancel a contract at any time for any reason” and the supplier can’t recover costs incurred.

“It’s unfair to vendors,” Crown added. “It’s not the way to do business.”