Good Faith in the Sale of a Noble Gas

Regency Gas Services owns a natural gas processing facility in the Hugoton Basin. One of the byproducts of natural gas is crude helium.  In 1996, Regency entered into a 12-year contract with Keyes Helium Co., which owned a helium processing facility in Oklahoma.  Under the agreement, Keyes agreed to purchase all of the crude helium produced by Regency’s facility.  But in 2003, Regency found out that one of its biggest customers was unlikely to renew its contracts, which would deprive Regency of the volumes of natural gas needed to make helium production possible.  As a result, Regency decided to shut down its plant and move its processing to a nearby facility owned by another company.  Keyes sued for breach of contract, contending that Regency had not acted in good faith when it decided to eliminate its production of crude helium.  The jury returned a verdict in favor of Regency.

On appeal, Keyes claimed jury charge error in the trial court’s definition of “good faith” under the UCC.  Keyes contended that the trial court should have limited its instruction to the one found in the U.C.C., which simply states that good faith means “honesty in fact and the observance of reasonable commercial standards standards in the trade.”  The trial court had expanded on that definition by adding the phrase “including whether Regency had a legitimate business reason for eliminating its output under the Contract, as opposed to a desire to avoid the contract.”  The court of appeals rejected that argument, concluding that the additional language could not have caused the rendition of an improper verdict because Keyes had failed to submit any evidence that Regency’s decision to shut down its plant had been made in bad faith.  The court of appeals also affirmed the trial court’s grant of a directed verdict against Keyes on its claim that the UCC prevented Regency from reducing its output below the estimates stated in the contract, ruling that section 2-306(1) of the UCC did not such reductions if they were made in good faith.

Keyes Helium Co. v. Regency Gas Services, LP, No. 05-10-00929-CV