Overview
Market uncertainty is the backdrop of today’s business environment. Tariffs shift overnight. Energy prices swing on geopolitical headlines. Supply chains that once looked stable are being renegotiated, and buyers locked into fixed-price contracts are looking for a way out.
As reported in the Wall Street Journal, the price dislocation between physically delivered oil and the price implied in the futures market has reached its highest level on record. That divergence is a signal worth heeding: in one of the core commodities to which this advisory applies, market conditions are extreme, and contracts tied to oil — and related commodities — are under mounting stress.
When a buyer of goods walks, the seller’s losses are real and immediate. But the legal tools courts reach for first were built at a time when a supply contract meant physical goods changing hands, not the layered financial instruments that make fixed-price commitments commercially possible. That mismatch can leave a commodity supplier exposed to a damages theory that recovers only a fraction of what the breach actually cost.
That gap is where creative lawyering matters most. This advisory explains the Petroleum Traders Corporation case, where an innovative damages theory persuaded a federal court to apply Uniform Commercial Code (“UCC”) damages provisions to futures contracts and hedging instruments that, at first glance, the UCC was never designed to reach. Petroleum Traders Corporation, led by a partner at this firm, established a framework for recovering the full cost of a buyer’s breach: not just lost profit, but the concrete, out-of-pocket expense of unwinding the financial positions the supplier built on the buyer’s behalf.
Petroleum Traders Corporation is relevant to buyers and sellers evaluating the risks and benefits of an efficient breach (or any other type of breach) in a contract supported by futures hedges.
The Problem Most Suppliers Don’t See Coming
When a seller wins a fixed-price fuel supply contract, it does not sit back and wait for delivery orders to arrive. It purchases futures contracts on an exchange like the New York Mercantile Exchange (“NYMEX”)—gasoline futures for gasoline, diesel futures for diesel fuel—to lock in the price it will pay for the physical product it has committed to supply. Without that hedge, the fixed-price commitment would be commercially impossible, because any move in the market would expose the seller to unlimited downside.
Futures contracts are the operational mechanism through which the fixed-price commitment is fulfilled. The seller’s economic position under the contract is defined not by the spot market price at any given moment, but by the relationship between the contract price and the futures price at which the hedge was established.
If a buyer wrongfully terminates the supply contract, the seller is forced to liquidate those futures positions. By the time liquidation happens, the market has moved. The hedge that was purchased to guarantee profitability now generates a direct, out-of-pocket cash loss. In many cases—and in the significant and informative legal decisions discussed below—that futures liquidation loss far exceeds the seller’s lost profit on the undelivered gallons.
The legal issue is this: how should courts measure damages when a seller is forced to liquidate its futures positions? The UCC provides straightforward methods to measure damages when a seller is forced to re-sell goods after a buyer’s breach. For instance, under UCC § 2-706 a seller can recover damages for commercially reasonable resale of goods after a buyer’s breach. Under UCC § 2–708, a seller can recover its lost profits. And under UCC § 2–710, a seller can recover the incidental damages it incurred in stopping delivery after a buyer’s breach.
Since futures contracts are financial instruments, not physical goods, a buyer’s lawyer will argue the UCC does not apply. A buyer’s lawyer will also argue that futures liquidation losses are consequential, rather than direct damages; in other words, that liquidation losses are speculative, unforeseeable, and attributable to the seller’s independent financial decisions rather than to the buyer’s breach. If that argument succeeds, the seller recovers only a fraction of its actual loss.
Two Proven Legal Pathways to UCC Damages
Two federal court decisions establish that a commodity seller can recover its full hedge losses—including futures liquidation losses—as direct damages under the UCC. Each case traveled a different legal route to the same destination. While neither route is foolproof, both establish that the seller has a better chance of full recovery than most lawyers would assume at first blush.
The first is Petroleum Traders Corporation v. Baltimore County, decided on a post-trial motion by the U.S. District Court for the District of Maryland in 2009 and affirmed by the Fourth Circuit in 2011.[1] In that case, a petroleum distributor purchased NYMEX gasoline and heating oil futures to hedge a fixed-price requirements contract with a Maryland county buying consortium (the “counties”). When the counties wrongfully terminated in December 2005, the distributor was forced to liquidate its futures positions at a cash loss of over one million dollars—a figure that represented the direct out-of-pocket cost of the counties’ breach.
Most of the counties settled after the court rejected their argument that the seller’s losses were consequential damages. One fought the case through a jury trial and lost. The court approved a jury instruction that the jurors should decide whether the futures contracts at issue were “the same as or equivalent to” the purchase and sale of physical gallons of gasoline or diesel fuel that the seller was obligated to supply.[2] On that foundation, the court held that the futures liquidation losses were direct resale damages recoverable under UCC § 2-706.[3] The distributor had purchased the futures for the counties’ benefit; the futures declined in value because oil prices had declined in value, and the loss arose directly from the breach.
The court also found independent textual support in § 2-706(4)(a) itself, which expressly provides that a seller may resell “where there is a recognized market for a public sale of futures in goods of the kind,” language the court found affirmatively authorized PTC’s NYMEX liquidation.[4] Theresale on the largest public market for energy futures was, as a matter of law, commercially reasonable.
The second case is Davidson Oil Company v. City of Albuquerque, decided by the U.S. District Court for the District of New Mexico in 2023 and affirmed by the Tenth Circuit in 2024.[1] In Davidson Oil, a fuel oil distributor purchased swap contracts to hedge a fixed-price city supply contract that expressly required the winning bidder to have hedging capability. When the city terminated in bad faith, the distributor’s net hedge losses were $601,859.
In Davidson Oil, the hedge instrument was a third-party swap rather than an exchange-traded NYMEX future, so the futures-as-goods equivalence argument used in Petroleum Traders was unavailable. The court instead awarded the hedge losses as incidental damages under New Mexico’s equivalent to UCC § 2-710: commercially reasonable expenses incurred in reliance on the contract, rendered valueless by the buyer’s bad-faith termination.[2] The court also awarded lost profit damages.[3] On appeal, the Tenth Circuit affirmed that “courts may categorize hedge losses as incidental damages under [§ 2-710], and hedge losses are therefore recoverable under [§ 2-708].”[4]
The Davidson Oil court cited Petroleum Traders in its analysis, confirming that the two cases are doctrinally linked and that the choice between the two pathways turns on the structure of the hedge instrument. Moreover, Petroleum Traders is featured in § 8:6. Seller’s resale, 1 White, Summers, & Hillman, Uniform Commercial Code § 8:6 (6th ed.), the leading legal treatise on the U.C.C.
What This Means for You
If your company supplies commodities under fixed-price government or institutional contracts, and if you use futures or swap contracts to hedge your price exposure, you should know three things.
First, disappointed sellers may believe that their litigation goal necessarily must be limited to less than a full recovery of both losses and lost profits. That assumption is wrong. Whether through § 2-706 resale, § 2–708 lost profits, or § 2-710 incidental damages, courts have found that a buyer who wrongfully terminates a fixed-price supply contract bears the full cost of that decision, including the cost of unwinding the seller's hedge positions.
Second, the factual record matters enormously. The recoveries in Petroleum Traders and Davidson Oil depended on detailed evidence that the hedging was an operational necessity embedded in the supply contract, not a voluntary financial decision made independently of the contract. The earlier that evidence is developed and preserved, the better. Counsel should be involved from the moment a buyer begins signaling that it may not honor its commitment.
Third, the legal framework requires deliberate strategy. The choice among the § 2-706, § 2–708, and § 2-710 pathways depends on the type of hedge instrument used, the structure of the contract, and the factual record available. These pathways have been validated by federal courts and endorsed in the leading commercial law treatise on Article 2. A seller who understands this framework enters any dispute with a significant advantage.
Our Experience
One of our partners was lead counsel in Petroleum Traders Corporation. The legal framework developed in that case, confirmed by the Fourth Circuit’s affirmance and by the leading treatise on UCC Article 2, reflects years of careful, original legal work at the intersection of commercial law and commodities markets.
We are available to consult on fixed-price commodity supply disputes, damages strategy, and contract structuring to support full recovery in the event of a buyer’s wrongful termination.
This advisory is provided for informational purposes only and does not constitute legal advice. The legal analysis summarized here is general in nature; results in any particular matter will depend on the specific facts and applicable law. This communication does not create an attorney-client relationship.
[1] See Petroleum Traders Corp. v. Baltimore Cnty., No. CIV L-06-444, 2009 WL 2982942, at *1 (D. Md. Sept. 14, 2009), aff’d sub nom. Petroleum Traders Corp. v. Baltimore Cnty., Md., 413 F. App’x 588 (4th Cir. 2011).
[2] See Petroleum Traders Corp. v. Baltimore Cnty., No. CIV L-06-444, ECF No. 198 at 28 (D. Md. Sept. 14, 2009).
[3] See Petroleum Traders Corp. 2009 WL 2982942, at *8.
[4] See id. at *9.
[5] See Davidson Oil Co. v. City of Albuquerque, 678 F. Supp. 3d 1321 (D.N.M. 2023), aff’d, 108 F.4th 1226 (10th Cir. 2024).
[6] See Davidson Oil, 678 F. Supp. 3d at 1331.
[7] See id. at 1329.
[8] See Davidson Oil Co. v. City of Albuquerque, 108 F.4th 1226, 1237 (10th Cir. 2024).
