Conditional Termination Notices Are Not Repudiation, and Fee-Shifting Survives Mutual Termination
Penthol, L.L.C. v. Vertex Energy Operating, L.L.C., No. 24-20329 (5th Cir. Aug. 14, 2025)

1. Introduction

Penthol v. Vertex Energy is the Fifth Circuit’s latest foray into Texas contract law, offering two important clarifications:

1. A notice of termination that is conditional and allows a contractually mandated cure period is not an anticipatory repudiation.
2. A party may still be deemed in “default” (and therefore liable for contractual fee-shifting) even where the underlying contract ends by mutual agreement.

The dispute arose from a 2016 sales agreement under which Vertex acted as the exclusive U.S. sales representative for ADbase, Penthol’s Group III base oil. By late 2020, suspicions of competition and breaches of the non-compete clause escalated into a five-letter exchange, early termination, and cross-claims for breach and trade-secret misappropriation. After a bench trial, the district court:

• Found mutual termination (not repudiation),
• Awarded Vertex ≈ $1.4 million in commissions and incentives,
• Denied Vertex contractual fees and Rule 54(d) costs.

Both sides appealed portions of the ruling; Vertex principally argued that Penthol’s first letter was a repudiation and that fees should have been awarded. The Fifth Circuit affirmed in part, vacated in part, and remanded.

2. Summary of the Judgment

• No Anticipatory Repudiation – Penthol’s December 18, 2020 letter gave Vertex 30 business days to cure the alleged non-compete breach. Because the threat was conditional and prospective, it was not an “absolute and unconditional refusal” to perform.
• Mutual Termination – Vertex’s own January 27, 2021 letter constituted a “pre-emptive strike,” accepting that the contract was terminated, and Penthol’s January 29 response confirmed it. Thus, the sales agreement ended by mutual consent, albeit prematurely.
• Fee-Shifting Error – The district court wrongly equated “mutual termination” with the absence of a “defaulting party.” Because Penthol failed to pay commissions and incentives, it defaulted notwithstanding mutual termination. The fee denial under § 7.2 was vacated and remanded.
• Rule 54(d) Costs – The discretionary denial of prevailing-party costs was upheld; the district court gave adequate, permissible reasons (good-faith prosecution, difficulty of issues, mixed results).

3. Analysis

3.1 Precedents Cited and Their Role

• Gonzalez v. Denning, 394 F.3d 388 (5th Cir. 2004) – Provides the three-part test for anticipatory breach under Texas law. The panel focused on the first element: “absolute repudiation.”
• Davis v. Canyon Creek Estates, 350 S.W.3d 301 (Tex. App. 2011) – Reiterates that repudiation requires an unconditional intent not to perform. Used to show Penthol’s letter was conditional.
• El Paso Production v. Valence Operating, 112 S.W.3d 616 (Tex. App. 2003) – Same doctrinal point; cited for “absolutely and unconditionally refused” language.
• Scientific Machine & Welding v. FlashParking, 641 S.W.3d 454 (Tex. App. 2021) – Vertex argued this case supported viewing extra-contractual demands as repudiation. The Fifth Circuit distinguished it because Penthol used contractually prescribed notice procedures.
• Wal-Mart Stores v. Sturges, 52 S.W.3d 711 (Tex. 2001) and Heritage Resources v. NationsBank, 939 S.W.2d 118 (Tex. 1996) – Cited on contract interpretation principles: plain meaning and harmonization of provisions.
• Alberti v. Klevenhagen, 46 F.3d 1347 (5th Cir. 1995) & Pacheco v. Mineta, 448 F.3d 783 (5th Cir. 2006) – Provide the standard for reviewing Rule 54(d) cost awards.

3.2 Legal Reasoning

a. Anticipatory Repudiation

The court walked through the Gonzalez/Davis framework:

1. Absolute repudiation? No. Penthol’s Letter 1 merely promised future termination if Vertex failed to cure within 30 business days. Conditional + prospective ≠ repudiation.
2. Because the first element failed, further inquiry (justification, damages) was unnecessary.

The panel also rejected Vertex’s “failure to withdraw = repudiation” theory. Repudiation must come from the obligor, not from the non-breaching party’s subjective view.

b. Mutual Termination Chronology

1. Dec 18, 2020 – Penthol issues cure-or-terminate notice per § 7.1(b).
2. Jan 19, 2021 – Vertex disputes breach.
3. Jan 27 – Vertex declares it “considers the Agreement terminated.”
4. Jan 29 – Penthol: “We agree the Agreement is terminated.”

Because Vertex jumped the gun before the 30-day cure window closed (Feb 3/4), the court deemed the termination “mutual but premature.”

c. Fee-Shifting versus Mutual Termination

Section 7.2 grants the non-defaulting party recovery of “actual, reasonable out-of-pocket expenses . . . including legal fees” after any § 7.1 termination. The district court conflated “mutual termination” with “no default.” The Fifth Circuit parsed the contract:

• “Default” is not specially defined; ordinary meaning = failure to perform.
• Penthol admittedly failed to pay commissions & incentives → default.
• Thus, even though the contract ended by mutual consent, Penthol remains the “defaulting Party” for unpaid sums; Vertex can seek fees on remand.

d. Rule 54(d) Costs

The panel deferred to the district court’s discretion, noting the latter’s detailed consideration of Mineta factors (good faith, closeness, complexity).

3.3 Potential Impact

• Notice Letters – Texas litigants must draft termination notices carefully; a cure-or-quit letter will rarely constitute repudiation.
• Early Termination Strategy – Parties tempted to “pre-empt” an adversary before a cure period runs now face greater risk of being tagged with mutual termination—and losing repudiation-based damages.
• Fee-Shifting Clauses – Drafters often equate “default” with “termination for cause.” The Fifth Circuit’s reading allows fee recovery even where the contract ends amicably, so long as one party still failed to perform a substantive obligation.
• Litigation Costs – The decision reaffirms broad district-court discretion under Rule 54(d), especially in complex commercial cases with mixed outcomes.
• Commercial Oil Contracts – The opinion’s factual discussion of base-oil specs (Group II vs. III) provides guidance for non-compete clauses keyed to product classifications.

4. Complex Concepts Simplified

• Anticipatory Repudiation – A party’s clear, unconditional announcement that it will not perform its future obligations. Think of it as “breaking up before the wedding day.” If conditional (“I might cancel if you don’t change”), it’s usually not repudiation.
• Cure Period – A contractually allotted time to fix (or “cure”) an alleged breach before harsher remedies (like termination) kick in.
• Defaulting vs. Non-Defaulting Party – “Defaulting” simply means the party failed to do something the contract requires (pay, deliver, etc.), not necessarily that it caused termination.
• Fee-Shifting Provision – A clause that makes the loser pay the winner’s attorney fees/costs under defined circumstances (e.g., the defaulting party pays).
• Rule 54(d) Costs – Routine litigation expenses (filing fees, transcripts, etc.) usually awarded to the “prevailing party,” but the court can deny for equitable reasons.
• Group II vs. Group III Base Oil – Refining categories; Group III is more highly refined, higher quality, and fetches a greater price. In this case, marketing a Group III-quality oil would compete with ADbase and breach the non-compete.

5. Conclusion

The Fifth Circuit in Penthol v. Vertex Energy delivers two doctrinal clarifications likely to echo through Texas and Fifth Circuit contract cases:

1. A contractual notice that tracks the agreement’s cure-and-termination procedure will rarely, if ever, be treated as anticipatory repudiation.
2. “Default” denotes substantive non-performance, not the method of contract termination. Consequently, fee-shifting provisions keyed to default remain operative even after a mutual parting of ways.

For commercial actors, especially in industries with technical product distinctions and elaborate sales agreements, the decision underscores the importance of:

• Observing contractual cure periods before declaring breach,
• Separating termination mechanics from underlying payment or performance obligations, and
• Drafting fee-shifting clauses with precise definitions if the parties intend to limit recovery to particular termination scenarios.

Ultimately, the ruling harmonises Texas contract principles with commercial practicality, discouraging premature “nuclear options” while ensuring that parties injured by an opponent’s failure to pay still recover the costs of enforcing their rights.