[00:00:01] Speaker 00:
The next case before us this morning, and our last case today, is 23-2116 Davidson Oil Company versus City of Albuquerque.

[00:00:13] Speaker 00:
And when you are ready, counsel, we are ready.

[00:00:21] Speaker 04:
Good afternoon, and may it please the court.

[00:00:26] Speaker 04:
My name is Robert Desiderio, representing the City of Albuquerque.

[00:00:31] Speaker 04:
Joining me today are Jeanette Angelica Duran, a colleague, and Devin King, the deputy city attorney for the city of Albuquerque.

[00:00:43] Speaker 04:
I'd like to reserve three minutes for rebuttal.

[00:00:49] Speaker 04:
The city is requesting that this court reverse the district court when the district court held that the city breached an applied covenant of good faith.

[00:01:02] Speaker 04:
when it exercised the termination for convenience clause.

[00:01:08] Speaker 04:
And secondly, assuming there was a breach of the implied covenant, the city is asking that this court reverse the district court as to the awarding of damages for the hedge losses.

[00:01:23] Speaker 04:
The city is not appealing the decision of the court awarding Davidson Oil its lost profits.

[00:01:34] Speaker 04:
In my brief time I have here, I'd like to respond to Davidson Oil's arguments in its response brief or answer brief to our briefing chief.

[00:01:48] Speaker 04:
Davidson Oil makes three arguments.

[00:01:52] Speaker 04:
First, Davidson argues that the decision of the district court holding that the city of Albuquerque

[00:02:02] Speaker 04:
did not breach the contract should be reversed, even though Davidson Oil never cross appeals.

[00:02:12] Speaker 04:
Secondly, Davidson Oil is arguing that the city breached an implied covenant of good faith and fair dealing when it exercised the termination clause by acting in bad faith when it did so.

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And thirdly,

[00:02:33] Speaker 04:
Davidson is arguing that it is entitled to the losses on its hedge contracts as incidental damages under section 2-710 of the New Mexico Uniform Commercial Code.

[00:02:50] Speaker 04:
I'd like to take these arguments in order.

[00:02:54] Speaker 04:
The first argument that this court can reverse the lower court's decision

[00:03:03] Speaker 04:
that the city did not breach the underlying contract is fundamentally wrong with it.

[00:03:14] Speaker 04:
It is universally held that if a part of an appellee is to challenge a judgment of a lower court, it must do so by cross-appealing.

[00:03:29] Speaker 02:
I understand that, but going to the merits rather than whether or not it crossed the field was necessary.

[00:03:37] Speaker 02:
Isn't the issue essentially, this is for whatever reason, the city was trying to get a better price.

[00:03:49] Speaker 02:
Isn't that what they were doing?

[00:03:52] Speaker 04:
Yes, Your Honor, the city was trying to reduce its cost.

[00:03:56] Speaker 04:
And it was doing so because

[00:03:58] Speaker 04:
of the consequences of the pandemic.

[00:04:02] Speaker 02:
Is there anything in the record that indicates what studies, what things they relied upon in March to determine that their revenues would be dramatically affected and therefore that's the extra factor?

[00:04:25] Speaker 04:
Your Honor, the record indicates

[00:04:28] Speaker 04:
that the chief financial officer and the other financial officers of the city, based upon information that was available at that time, feared that there would be a serious impact on the collection of gross receipts taxes.

[00:04:49] Speaker 02:
What was it that they relied upon?

[00:04:50] Speaker 02:
That's what I want to know.

[00:04:51] Speaker 04:
The New Mexico Department of Finance sent a

[00:04:58] Speaker 04:
a warning out to each of the cities and locales, telling them that because of the pandemic, they could use rollover budgets, which would mean that their budget would be the prior year's budget and not the current year's budgets.

[00:05:18] Speaker 04:
So the state of New Mexico had decided that there was going to be a crisis at the local city area

[00:05:28] Speaker 04:
as to the ability of local governments to provide the services necessary for the citizens.

[00:05:36] Speaker 02:
And all this is in the record?

[00:05:38] Speaker 04:
The fact that the State of New Mexico Department of Finance sent to the cities, allowing them to use a rollover budget is in the record.

[00:05:52] Speaker 02:
And the reasons you stated are in the record?

[00:05:55] Speaker 04:
All the reasons are not in the record, Your Honor.

[00:05:58] Speaker 04:
It is just that the state recognized this and allowed them to do it.

[00:06:02] Speaker 02:
Is there anything in the record that indicates the quantum, the size of this impact on revenues and therefore on the budgets?

[00:06:17] Speaker 04:
There is nothing in the record, Your Honor, indicating the size of it in March, right?

[00:06:23] Speaker 02:
Because... Well, is there anything in the record of any time after that?

[00:06:27] Speaker 04:
No, nothing in the record, John.

[00:06:29] Speaker 04:
I was just responding to your question before as to March.

[00:06:33] Speaker 04:
It had to be solely done on prediction as to the consequences.

[00:06:37] Speaker 02:
Let me ask you this.

[00:06:38] Speaker 02:
What if instead of a pandemic, they were dealing with a major employer in Albuquerque who shut down and left, would that be the extra factor

[00:06:53] Speaker 02:
that would allow the invocation of this clause to get a better price?

[00:06:58] Speaker 04:
It's hard to answer that directly.

[00:07:01] Speaker 04:
I would say that probably not with it.

[00:07:04] Speaker 04:
The difference is that the consequences and the crisis of the pandemic was such that no one had predicted it and no one had played for it.

[00:07:16] Speaker 02:
I understand that, but what I'm asking about is that was that quantified

[00:07:23] Speaker 02:
so that it can be determined whether it's really significant, you know, and at the time they anticipated it or after the fact measured it, you know, were they wrong?

[00:07:37] Speaker 04:
There is nothing in the record showing a quantification of it because in March there was no evidence or information at the time, only the expertise of the financial officers who had to

[00:07:53] Speaker 04:
plan for the city.

[00:07:55] Speaker 02:
All right.

[00:07:56] Speaker 02:
So in one sense that they were trying to get a better price based on this additional factor to invoke the termination clause, that they weren't really sure about.

[00:08:10] Speaker 02:
They didn't know.

[00:08:12] Speaker 02:
Isn't that a fair way to summarize what you're telling me?

[00:08:18] Speaker 04:
There was nothing in the record that shows that again.

[00:08:22] Speaker 04:
that they knew of the total amount.

[00:08:26] Speaker 04:
I accept that, again, based upon their knowledge, the city financial officers' knowledge and expertise, they predicted that there would be a serious reduction in gross receipts taxes, which would have a major impact on providing services for the citizens of New Mexico.

[00:08:50] Speaker 01:
And just to button that up,

[00:08:52] Speaker 01:
The city employees didn't try to make an estimate of what that reduction would be.

[00:08:58] Speaker 01:
They just thought it was going to be substantial.

[00:09:00] Speaker 04:
There's nothing in the record showing that they did that, your honor, only that they knew or believed it was to be substantial.

[00:09:09] Speaker 01:
So it seemed to me that from some of the record that the precipitous price drop was a justification for terminating for convenience.

[00:09:22] Speaker 01:
So is that fair characterization?

[00:09:27] Speaker 04:
If I understand, Your Honor, the justification was the seriousness of the price, not the price drop, but the consequences of the pandemic, which required that the city revert to a prior year's budget.

[00:09:52] Speaker 04:
for which it had not planned the contract in question.

[00:09:59] Speaker 04:
And it had to readjust its budget completely.

[00:10:02] Speaker 01:
So you were all in agreement that if all we're talking about here is a 65% drop in price, that would not be grounds to terminate for convenience?

[00:10:16] Speaker 04:
In my opinion, Your Honor, that would not be grounds for doing it.

[00:10:20] Speaker 04:
The grounds for the exercise of the termination for convenience clause obviously was to reduce costs with it.

[00:10:30] Speaker 04:
But that was because the city had an obligation to its citizens to be able to provide its services, which required a reduction in its budget.

[00:10:45] Speaker 04:
And that was what precipitated

[00:10:48] Speaker 04:
the exercise of the clause, the termination for convenience clause.

[00:10:53] Speaker 01:
And I think Judge Murphy might have explored this with you a little bit.

[00:10:56] Speaker 01:
But there are other things that could happen to the city.

[00:11:02] Speaker 01:
For example, they could make a major budgeting error that put them in a serious financial situation.

[00:11:09] Speaker 01:
And you wouldn't contend that in that situation, it would give grounds for terminating for convenience.

[00:11:17] Speaker 04:
I would not contend, Your Honor, not knowing the total fact circumstances, but I don't think that that would be sufficient.

[00:11:27] Speaker 04:
The general rule is that to exercise an implied, I'm sorry, a termination for convenience clause, there has to be a change in circumstances unanticipated by the parties.

[00:11:42] Speaker 04:
That was clearly what occurred with the pandemic.

[00:11:46] Speaker 02:
Council, when you rely upon this new letter from the state of New Mexico, in order for it to have any significance, don't we have to be able to compare the budget they thought they would be dealing with in March and the budget of the previous year and determine what the differences are and whether they're so significant that it can be invoked as a

[00:12:16] Speaker 02:
The X factor.

[00:12:19] Speaker 04:
Your honor, again, in March, when the pandemic was existed, I mean, there was in New Mexico, a public health order with it.

[00:12:33] Speaker 04:
And so what the city had to do was based on its expertise to decide how much its budget should be.

[00:12:43] Speaker 04:
In March, they weren't even sure of it.

[00:12:45] Speaker 04:
That's why the state allowed the cities to go to rollover budgets and to review them monthly.

[00:12:52] Speaker 02:
All right.

[00:12:53] Speaker 02:
So they had no budget and they were working on the budget and they didn't know what to do.

[00:12:57] Speaker 02:
And so the state says, just rely on last year's budget, correct?

[00:13:02] Speaker 04:
In the sense, yes, your honor, you can do that and review it every month as more information becomes available.

[00:13:11] Speaker 02:
Can I switch gears?

[00:13:13] Speaker 02:
In March, when this invocation of the clause took place, and I'm not good at name pronunciation, Mr. Bakta, is that the name?

[00:13:25] Speaker 04:
Yeah, Mr. Bakta, the chief financial officer for the city.

[00:13:33] Speaker 02:
He says, the question is, so your testimony is that Davidson knew the contract could be terminated for convenience due to the substantial price decline.

[00:13:43] Speaker 02:
But the city did not understand the same thing about its own contract.

[00:13:48] Speaker 02:
Answer.

[00:13:49] Speaker 02:
We understand that we can cancel the contract for any reason.

[00:13:55] Speaker 02:
Question.

[00:13:56] Speaker 02:
There's no limit.

[00:13:58] Speaker 02:
Answer.

[00:13:59] Speaker 02:
There's no limit on that.

[00:14:01] Speaker 02:
And I believe they also understood that because they particularly were negotiating that particular clause.

[00:14:08] Speaker 02:
Now, isn't that an indication that on March,

[00:14:12] Speaker 02:
when this clause was terminated, that the city thought it could invoke the clause for any reason.

[00:14:22] Speaker 04:
Mr. Batka was not a lawyer and was not aware of the requirements for terminating.

[00:14:33] Speaker 04:
But later on in his deposition, it's in the record, he indicates that

[00:14:41] Speaker 04:
They could not predict at the time of the contract, the pandemic.

[00:14:47] Speaker 04:
And it was the pandemic that led to this problem.

[00:14:52] Speaker 02:
I understand, but he did testify that it was the city's position.

[00:14:58] Speaker 02:
They could cancel for any reason.

[00:15:00] Speaker 04:
That's what the termination for communists clause says.

[00:15:03] Speaker 04:
You can cancel for any reason.

[00:15:05] Speaker 04:
It is the... But we know that that's not... We know that that's not the law in the matter.

[00:15:11] Speaker 04:
You have to have a change of circumstances and you have to do so in good faith.

[00:15:18] Speaker 04:
And that's what the district court held when it decided that the city had not breached the contract with it.

[00:15:27] Speaker 04:
Remember, there was no decision of the district court that the city breached the contract.

[00:15:35] Speaker 04:
The court held that the city

[00:15:38] Speaker 04:
Invoke determination for convenience clause in good faith.

[00:15:44] Speaker 04:
My time is up.

[00:15:44] Speaker 04:
Thank you.

[00:16:09] Speaker 03:
May it please the Court, Your Honors.

[00:16:12] Speaker 03:
My name is Ross Crown.

[00:16:13] Speaker 03:
I'm counsel for Davidson Oil Company, the plaintiff and appellee in this case.

[00:16:23] Speaker 03:
The city sued, well, the city of Albuquerque and Davidson Oil, sorry, I'm shouting here, entered into a contract by which Davidson Oil would supply all of the city's fuel requirements for at least one year at fixed prices.

[00:16:40] Speaker 03:
to help guarantee those fixed prices.

[00:16:43] Speaker 03:
The contract further required that Davidson Oil hedge its position.

[00:16:51] Speaker 03:
Immediately following a sudden decline in oil prices and before Davidson Oil could even begin making deliveries under the contract, the city invoked the termination for convenience clause

[00:17:05] Speaker 03:
and decided to purchase its fuel requirements from another vendor at what were then lower market prices.

[00:17:14] Speaker 03:
Meanwhile, in accordance with the contract, Davidson Oil had purchased hedge contracts and were faced with a loss on those hedge contracts upon the termination by the city.

[00:17:31] Speaker 01:
There were situations

[00:17:33] Speaker 01:
where even if the city had performed but at lower than anticipated levels that you would have lost money on those hedge contracts too, aren't there?

[00:17:45] Speaker 03:
I believe that that's not an issue that came up in the case but I believe that's theoretically possible.

[00:17:50] Speaker 03:
That's a risk that Davidson Oil took because the contract did

[00:17:57] Speaker 03:
provide that the city would purchase only its requirements under its contract, only its fuel requirements.

[00:18:05] Speaker 03:
And so Davidson certainly took the risk that its requirements would be less than expected.

[00:18:12] Speaker 03:
The city did provide data concerning past requirements that Davidson Oil was able to evaluate as part of its proposal.

[00:18:20] Speaker 02:
Did the city ever take the position that that meant that

[00:18:25] Speaker 02:
Your damages are overstated because you've been dealing in fewer volumes, less volume.

[00:18:35] Speaker 03:
No, I don't believe the city took that position.

[00:18:37] Speaker 00:
You also undertook the risk of having a termination for convenience clause in the contract and specifically negotiated the terms of that clause, right?

[00:18:51] Speaker 03:
Well, they did negotiate the length of the notice period

[00:18:55] Speaker 03:
And yes, Davis and I was aware of a termination for convenience clause.

[00:19:01] Speaker 03:
However, it had no reason to anticipate that the clause would be exercised in the manner it was, which that manner was in violation of New Mexico law in our judgment.

[00:19:12] Speaker 03:
All contracts are subject to public policy.

[00:19:16] Speaker 00:
Well, you didn't anticipate the pandemic, did you, when you entered into the contract?

[00:19:21] Speaker 03:
No, and the contract

[00:19:25] Speaker 03:
I don't think was affected by the pandemic.

[00:19:29] Speaker 03:
Maybe it's one of the few things in this world that wasn't.

[00:19:32] Speaker 03:
Everybody's claiming the pandemic affected everything.

[00:19:35] Speaker 03:
But the pandemic, first of all, at least in terms of the city, claims that led to a sudden decrease in the price of oil.

[00:19:49] Speaker 03:
I don't know if that's exactly true.

[00:19:52] Speaker 03:
I guess it's assumed for the purposes of this case that it is.

[00:19:55] Speaker 03:
But the contract was designed to accommodate that risk.

[00:20:04] Speaker 03:
I mean, it was a fixed price contract because the city of Albuquerque realized that the oil market is volatile and they were willing, in order to avoid spikes in oil prices, they were willing to contract for fixed prices.

[00:20:19] Speaker 03:
So to say that the price of oil changed,

[00:20:24] Speaker 03:
is really kind of meaningless because that's what the contract anticipated would happen and that's why it was a fixed price contract.

[00:20:31] Speaker 03:
The other claimed effect of a pandemic on the city is twofold.

[00:20:36] Speaker 03:
One, they said, well, we may not need as much oil because there'll be less economic activity or less city operations during the pandemic.

[00:20:45] Speaker 03:
That made no difference whatsoever because it was a requirements contract and the city was only obligated to

[00:20:54] Speaker 03:
procure the amount of fuel it actually needed.

[00:20:57] Speaker 03:
The big argument the city made was, well, we have a fear that our revenues are going to drop as a result of the pandemic again.

[00:21:06] Speaker 01:
I mean, that was not out of the realm of possibility, was it?

[00:21:12] Speaker 01:
In March of, I can't remember, I can't remember the year.

[00:21:16] Speaker 01:
I know that we went home in 2020.

[00:21:20] Speaker 01:
You know, people thought that the effects of the pandemic could be catastrophic on the entire world economy.

[00:21:26] Speaker 01:
I mean, it sort of was.

[00:21:28] Speaker 03:
Yeah, well, at the time, really no one knew that.

[00:21:33] Speaker 03:
The price decline in the price of oil that prompted the termination actually bottomed out in April, which was the month after the termination.

[00:21:43] Speaker 03:
And during the first year of the contract term, the price of oil actually ended up exceeding the fixed price.

[00:21:50] Speaker 03:
But in my mind, the parade of horribles about the effect on city revenues is just another way of saying the city didn't want to pay higher prices.

[00:22:01] Speaker 03:
I mean, no actor, even a governmental entity wants to pay more than they have to.

[00:22:10] Speaker 03:
So to say that we feared that we wouldn't have enough revenue is just another way of saying we wanted cheaper prices.

[00:22:19] Speaker 03:
That's again what the contract took out of the equation by saying, no, we're not going to worry about what the world oil market is doing.

[00:22:29] Speaker 03:
We're going to agree to fix prices for fuel.

[00:22:32] Speaker 02:
Is there anything in the record that indicates what else the city did in light of its fear about its revenues?

[00:22:43] Speaker 03:
Well, there really isn't much at all on the record except

[00:22:48] Speaker 03:
The city says that they terminated for convenience other contracts for the same reason.

[00:22:55] Speaker 03:
However, as indicated in the record, the city has hundreds of procurement contracts.

[00:23:02] Speaker 03:
Besides the Davidson oil contract, they terminated for convenience during the pandemic a total of four other contracts.

[00:23:10] Speaker 03:
And as explained in the record, they all look like highly inconsequential

[00:23:16] Speaker 03:
contracts involving things like cages.

[00:23:19] Speaker 03:
Cages for animal control vehicles and I think some audio visual equipment for one city office.

[00:23:26] Speaker 03:
Really what looks to me like minimal stuff.

[00:23:29] Speaker 03:
So I think it's fair to say that termination for convenience was not a key city strategy for coping with the pandemic.

[00:23:36] Speaker 02:
Does the record indicate that termination for convenience provisions are in all?

[00:23:47] Speaker 02:
contracts with vendors, suppliers, do all the city contracts?

[00:23:54] Speaker 03:
I believe so, yes.

[00:23:55] Speaker 03:
Is that a matter of city policy?

[00:23:57] Speaker 03:
As far as I know, it is.

[00:23:59] Speaker 03:
Well, is that in the record?

[00:24:01] Speaker 03:
Well, it's a standard, that I don't know if it's in the record, but there is a standard form

[00:24:07] Speaker 03:
that was appended to our contract that recites the standard terms and conditions and the Termination for Convenience Clause is part of that and I believe it's also authorized by the New Mexico Procurement Code.

[00:24:19] Speaker 02:
So this attachment looks like it's a standard form contract or a part of a standard form contract?

[00:24:25] Speaker 03:
Yeah, there's a page of standard terms and conditions and then obviously there's many pages involving the particulars of this oil supply contract.

[00:24:34] Speaker 00:
What kind of an event do you think would allow the city to initiate the termination for convenience clause?

[00:24:44] Speaker 00:
Earthquake?

[00:24:46] Speaker 03:
Well, you know, the problem is they can initiate a termination for convenience.

[00:24:51] Speaker 03:
The problem here is they didn't want to pay for the reliance damages that Davidson Oil sustained.

[00:25:01] Speaker 03:
in attempting to perform the contract.

[00:25:03] Speaker 03:
That's why Judge Brack, it's our position that Judge Brack could have found a breach of contract.

[00:25:09] Speaker 03:
He elected to find that there was not a breach of the express terms, but the breach of the implied covenant because Davidson Oil sustained damages entering into these hedge contracts at the direction of the city.

[00:25:29] Speaker 03:
And the city comes back, I'm sorry.

[00:25:31] Speaker 02:
But the district court didn't deal much with the proposition that the determination on the bad faith claim runs smack into the determination for convenience clause.

[00:25:45] Speaker 02:
I mean, it was like it didn't exist.

[00:25:50] Speaker 02:
And you cannot have a bad faith claim that is contrary to the provision of the contract.

[00:25:58] Speaker 03:
Well, that's true, but Judge Braak said that, well, again, it's our position for the reasons set out in the briefing that the termination for convenience clause was exercised in an inappropriate way.

[00:26:12] Speaker 03:
But even if we accept Judge Braak's analysis, I think he's correct in saying that in disregarding the reliance damages sustained by Davidson Oil at the

[00:26:25] Speaker 03:
in following the city's directions and going and hedging the contract, they committed a breach of the implied covenant.

[00:26:34] Speaker 02:
So your position is a little different than the district courts, and that is that there's no clash between a bad faith claim and a provision of the contract if that provision is imposed in an unfair manner.

[00:26:55] Speaker 02:
Is that your position?

[00:26:57] Speaker 03:
I think, well, my position is that the termination for convenience clause was exercised in a manner contrary to law because it fails to meet the tests that are laid out in federal law for determining when a termination for convenience is properly.

[00:27:16] Speaker 02:
That's a contract claim.

[00:27:18] Speaker 02:
That's not a bad faith claim.

[00:27:19] Speaker 02:
It's a breach of contract, right?

[00:27:20] Speaker 03:
Yeah.

[00:27:21] Speaker 03:
Well, that's my contract argument.

[00:27:22] Speaker 02:
Right.

[00:27:23] Speaker 02:
Well, I'm talking about, you know,

[00:27:26] Speaker 02:
I don't see how this bad faith claim survives because it clashes with the determination for convenience cause.

[00:27:39] Speaker 03:
Well, I mean, it's not a bad faith claim.

[00:27:43] Speaker 03:
I mean, it's another form of contract claim.

[00:27:46] Speaker 03:
It's a breach of the implied covenant of good faith and fair dealing.

[00:27:49] Speaker 02:
Well, the implied covenant cannot be contrary to another express covenant.

[00:27:53] Speaker 03:
Yeah, well, I don't think it is contrary because

[00:27:57] Speaker 03:
what Judge Brack was addressing were the reliance damages.

[00:28:01] Speaker 00:
So Judge Brack was not saying that... We have to have a breach first to get to damages.

[00:28:07] Speaker 03:
Right.

[00:28:07] Speaker 03:
Well, he found that the implied covenant was breached.

[00:28:10] Speaker 00:
Yeah, and I mean, we're going round and round, but I had the same problem.

[00:28:16] Speaker 00:
You cannot have an implied covenant that writes out a term of the contract.

[00:28:24] Speaker 00:
You can't have a breach of the implied covenant here that ignores the fact that you've got a termination for convenience clause.

[00:28:34] Speaker 00:
So it seems to me your issue is whether you have a breach of contract in terms of how that termination for convenience clause was applied.

[00:28:44] Speaker 00:
Am I making sense to you?

[00:28:46] Speaker 02:
It makes sense to me.

[00:28:47] Speaker 03:
But I'm not going to answer your question.

[00:28:50] Speaker 03:
I wish I had Judge Brack here to help me out.

[00:28:52] Speaker 03:
But I don't know if I'm necessarily defending Judge Brack.

[00:28:55] Speaker 03:
I think it's important to establish that the termination for convenience clause was itself breached.

[00:29:00] Speaker 03:
But I think what Judge Brack would say is the city was free to terminate the contract, but they still, at the direction of the city, they required Davidson Oil.

[00:29:13] Speaker 03:
to incur expenses and reliance on the contract.

[00:29:17] Speaker 00:
Again, you don't get to those damages until you first have a breach.

[00:29:20] Speaker 00:
And so help me out again.

[00:29:23] Speaker 00:
When is it proper, in your view, for the city to terminate under the termination for convenience clause when there's an unforeseen event like a pandemic or an earthquake or a flood or a hurricane?

[00:29:42] Speaker 00:
What did they need here more than the pandemic and the uncertainty and fear about their revenues for the future as a result?

[00:29:56] Speaker 03:
Well, they had to act in good faith and not be just looking for a cheaper price, which under some circumstances may be OK.

[00:30:04] Speaker 03:
But when you have a contract, if you look at the questions and answers, the city is

[00:30:11] Speaker 00:
So if they in good faith believed that their revenues were going to be seriously impacted due to the pandemic, then you would say it was okay?

[00:30:22] Speaker 03:
No, I would not say that.

[00:30:24] Speaker 03:
I would say that they cannot establish a change in circumstances as it relates to this particular contract.

[00:30:31] Speaker 03:
All they can show is there was a price drop in the world oil market, which this contract anticipated.

[00:30:37] Speaker 00:
That's why that contract was there.

[00:30:38] Speaker 00:
But the whole world went home.

[00:30:40] Speaker 00:
That's not a change in circumstance?

[00:30:43] Speaker 03:
Not as it relates to this contract, no.

[00:30:47] Speaker 03:
Then they say that we don't know if it's going to affect our revenues.

[00:30:52] Speaker 03:
We may have a revenue problem.

[00:30:54] Speaker 03:
As Judge Murphy's question elicited, there's no such, there's not an explanation of that in the record.

[00:31:02] Speaker 00:
So they didn't, they had, their fear was not documented enough.

[00:31:07] Speaker 03:
Well, it was not documented.

[00:31:08] Speaker 03:
Plus, all they're saying is we didn't want to pay the higher prices, which they were stuck with the fixed prices, because that's what they contracted for.

[00:31:16] Speaker 03:
And then they're saying, oh, we may not have enough money, so now we don't want to pay for those contracts.

[00:31:21] Speaker 03:
So they ended up saving a claim over a million dollars, and Davidson Oil lost $600,000 to allow the city to save money.

[00:31:35] Speaker 01:
I have a question about the implied covenant issue.

[00:31:37] Speaker 01:
I mean, it was your claim.

[00:31:39] Speaker 01:
So you had a theory before the district court on how the city's action violated the implied covenant.

[00:31:48] Speaker 01:
Sounds like it might have been different than what Judge Brack thought as far as that all worked.

[00:31:54] Speaker 01:
What was your theory?

[00:31:55] Speaker 01:
What did you argue to the district court about how the implied covenant was breached?

[00:32:01] Speaker 03:
Well, I just, I think that the

[00:32:04] Speaker 03:
city disregarded the purpose of the contract and the spirit of the contract in attempting to save money by not dealing with the consequences of their attempt.

[00:32:18] Speaker 01:
That's the same, though, as your breach of contract theory.

[00:32:24] Speaker 03:
Well, they could terminate.

[00:32:26] Speaker 03:
I mean, the breach of contract theory says they shouldn't have terminated under these circumstances.

[00:32:32] Speaker 03:
I guess the implied covenant says, well, if they were okay terminating, they still breached the implied covenant by not compensating Davidson Oil for the reliance damages that it suffered and the other damages that it suffered as a result.

[00:32:51] Speaker 03:
But as a city, the big distinction between this case and most of the case law in this area is that the city specifically directed Davidson Oil to hedge

[00:33:01] Speaker 03:
to enter into hedge contracts.

[00:33:02] Speaker 02:
So isn't one conclusion you can draw from what you just said is that if the termination for convenience clause is appropriately, there's a basis to invoke it.

[00:33:20] Speaker 02:
If there is a basis to invoke it, you still have to pay damages

[00:33:30] Speaker 02:
to a Vendor like your Davidson.

[00:33:34] Speaker 02:
I think that seems contrary to the Termination for Convenience Clause.

[00:33:39] Speaker 03:
Frankly, I think the Termination for Convenience Clause used by the city in the state of New Mexico itself lacks consideration because compared to the federal version, the federal version requires... We're not going there.

[00:33:50] Speaker 02:
Are we right?

[00:33:53] Speaker 02:
I mean, this is not a lack of consideration case.

[00:33:56] Speaker 03:
Yeah, I think it is.

[00:33:57] Speaker 03:
It's an illusory contract the way the city

[00:33:59] Speaker 03:
prefers to interpret it.

[00:34:02] Speaker 00:
Well, that's not how to argue.

[00:34:04] Speaker 03:
Yeah, that's argued at length.

[00:34:06] Speaker 03:
It's an illusory contract without mutual consideration.

[00:34:09] Speaker 03:
It's a heads I win, tails you lose contract.

[00:34:12] Speaker 02:
That's the contract claim.

[00:34:14] Speaker 03:
That's not a bad faith claim.

[00:34:16] Speaker 03:
That's the contract claim.

[00:34:18] Speaker 03:
But the contract, my argument, Judge Brack, is the contract lacked consideration.

[00:34:24] Speaker 03:
Unlike the federal version of the contract, which says cost of performance will be paid before termination takes effect, the state version has no such provision.

[00:34:32] Speaker 00:
All right.

[00:34:35] Speaker 00:
Thank you.

[00:34:36] Speaker 00:
You're out of time.

[00:34:37] Speaker 00:
Thank you.

[00:34:38] Speaker 00:
Because you went three and almost four minutes over, if you'd like some rebuttal, we'll be happy to provide it.

[00:34:44] Speaker 00:
Why don't you give him three minutes?

[00:34:50] Speaker 04:
Thank you, Your Honor.

[00:34:51] Speaker 04:
Just a few points.

[00:34:53] Speaker 04:
First, I'd like to reiterate that the district court made a finding that the city did not reach the contract when it exercised determination for convenience costs.

[00:35:09] Speaker 02:
The district court... Isn't that a conclusion, a law, not a finding?

[00:35:12] Speaker 04:
No, I was... Your Honor, the court found as fact that the city's purpose was to reduce its cost

[00:35:23] Speaker 04:
resulting from the, that was going to occur because of the pandemic and that that exercise was therefore done in good faith.

[00:35:33] Speaker 02:
And that's a conclusion of law from the evidence, right?

[00:35:37] Speaker 02:
That's not a finding.

[00:35:39] Speaker 02:
This is summary judgment.

[00:35:40] Speaker 04:
You're right.

[00:35:40] Speaker 04:
It's a conclusion from the facts in the record where we argued that and Davidson argued the opposite.

[00:35:50] Speaker 04:
and the district court agreed with our position with it.

[00:35:56] Speaker 04:
Secondly, this contract, determination from convenience clause cannot be part of an illusory contract with it.

[00:36:06] Speaker 04:
Not only is there the requirement of good faith, which takes it out of that, but also the case law has held that where the person exercising determination clause has a notice requirement.

[00:36:21] Speaker 04:
That is a sufficient obligation to meet the contractual rule of consideration.

[00:36:28] Speaker 04:
So there was no illusory contract in this case.

[00:36:33] Speaker 04:
And lastly, I would submit that Davidson did accept the risk of an uneventful or an eventful event occurring.

[00:36:46] Speaker 02:
Didn't the city take the risk when it signed the contract?

[00:36:51] Speaker 02:
that prices were going to go down from what they agreed to pay to Davidson?

[00:36:57] Speaker 02:
And that's what happened.

[00:37:00] Speaker 04:
But again, they also required that Davidson take a risk that if there was sufficient reason, that is change of circumstances and acting in good faith, that they could terminate the contract.

[00:37:16] Speaker 04:
Davidson was aware of that.

[00:37:18] Speaker 04:
They negotiated.

[00:37:21] Speaker 04:
with the city as to the termination for convenience clause?

[00:37:26] Speaker 02:
Well, as to whether or not it went in, they asked could it not be in.

[00:37:30] Speaker 02:
And basically it sounds like because of the standard conditions that it's just a policy of the city.

[00:37:37] Speaker 02:
It was going to be in.

[00:37:39] Speaker 04:
But then the city countered with a 90-day notice and Davidson and the city agreed to a 60-day notice with it.

[00:37:52] Speaker 04:
My point is, this was a risk that Davidson accepted.

[00:37:57] Speaker 04:
My time is up.

[00:37:58] Speaker 04:
Thank you.

[00:37:59] Speaker 00:
Thank you, counsel.

[00:37:59] Speaker 00:
We will take this matter under advisement, and we appreciate your argument today.

[00:38:04] Speaker 00:
The court will be adjourned until tomorrow at, I think, 9.

[00:38:08] Speaker 00:
Thank you.

[00:38:12] Speaker 00:
Court is in recess.