Arcadia Exploration and Production Company, et al. v. Texas Utilities Fuel Company, a subsidiary of Texas Utilities Company--Appeal from 87th District Court of Freestone County

SUPREME COURT CASES

Laws-info.com » Cases » Texas » 10th District Court of Appeals » 1999 » Arcadia Exploration and Production Company, et al. v. Texas Utilities Fuel Company, a subsidiary of Texas Utilities Company--Appeal from 87th District Court of Freestone County

State: Texas

Court: Texas Northern District Court

Docket No: 10-98-00177-CV

Case Date: 07/07/1999

Plaintiff: Arcadia Exploration and Production Company, et al.

Defendant: Texas Utilities Fuel Company, a subsidiary of Texas Utilities Company--Appeal from 87th District Co

Preview:Arcadia Exploration and Production Company, et al. v.
Texas Utilities Fuel Company, a subsidiary of Texas
Utilities Company--Appeal from 87th District Court of
Freestone County
IN THE
TENTH COURT OF APPEALS
No. 10-98-177-CV
ARCADIA EXPLORATION AND
PRODUCTION COMPANY, ET AL.,
Appellants
v.
TEXAS UTILITIES, A SUBSIDIARY
OF TEXAS UTILITIES COMPANY,
Appellee
From the 87th District Court
Freestone County, Texas
Trial Court # 96-236-B
O P I N I O N
Arcadia Exploration and Production Company sued Texas Utilities Fuel Company for breach of the take or pay
provision of a gas sales contract. Both sides moved for summary judgment. The trial court denied Arcadia s motion
file:///C|/Users/Peter/Desktop/opinions/PDFs1/2740.html[8/20/2013 7:12:39 PM]

and rendered final summary judgment for TUFCO. Arcadia appeals both the denial of its motion for summary
judgment and the granting of TUFCO s motion.
FACTUAL AND PROCEDURAL HISTORY
In 1983, Texas Utilities Fuel Company (TUFCO) entered into a gas-purchase agreement with Hinton Production
Company (Hinton) whereby TUFCO agreed to purchase a percentage of the delivery capacity of one of Hinton s
natural gas wells located in Freestone County (the Mills Well). This agreement continued until August 1994, when
Hinton assigned its interest in the well to Arcadia Exploration and Production Company, Rancho Oil Company, and
others (Arcadia, collectively).
Arcadia and TUFCO continued to perform under the agreement until July 1996, when Arcadia terminated the contract
and sued TUFCO for breach. Arcadia claimed that TUFCO owed more than $3,000,000 in deficiency payments for
failing to comply with the contract s take-or-pay provision. Arcadia moved for partial summary judgment asserting
that, under the proper interpretation of the take or pay clause, there was no genuine issue of material fact as to TUFCO
s breach. TUFCO filed a cross-motion seeking the court s adoption of its construction of the clause, asserting that
under its construction there was no breach as a matter of law. The trial court accepted TUFCO s interpretation, denied
Arcadia s motion, and rendered final summary judgment for TUFCO. Arcadia appeals both the denial of its motion
and the granting of TUFCO s. See Jones v. Strauss, 745 S.W.2d 670, 674 (Tex. 1988).
Article V of the gas purchase agreement contains the take or pay provision, which reads:
Buyer agrees to receive and purchase or pay for if available for delivery and not taken, and Seller agrees to deliver and
sell to Buyer from Seller s gas reserves, subject to the limitations and conditions herein elsewhere provided, during
each Accounting Period, the Daily Contract Quantity multiplied by the actual number of days in the Accounting
Period.
The Daily Contract Quantity is defined as 70% of Seller s Delivery Capacity. Thus, TUFCO is obligated to pay for
70% of Arcadia s available delivery capacity, whether TUFCO chooses to accept delivery or not.
At issue in this case is what constitutes the Seller s Delivery Capacity, which Article I section 9 of the agreement
defines as:
[T]he maximum quantity of gas which can be delivered per day to Buyer from Seller s Gas Reserves, against Buyer s
line pressure up to a maximum of 900 Psig averaged over a period of seventy-two (72) hours, including that which can
be delivered by compression if compression is being utilized; such determined delivery capacity shall be effective from
the first day of the next succeeding month after such determination, and thereafter until superseded by the results of
the next determination thereof; provided, however, Seller s Delivery Capacity shall not exceed the quantity of gas
available for delivery by Seller.
Initially, the well s delivery capacity was based on a G-10 deliverability test performed in July 1983. According to the
summary-judgment evidence submitted by Arcadia, which we must take to be true, the test indicated a delivery
capacity of 1890 million cubic feet (mcf) per day. It is undisputed that since that date, the well s actual gas production
has been considerably less than that amount.
At the heart of this dispute is the parties interpretation of the proviso, italicized above, included in the contract s
definition of delivery capacity. In points of error 1-4, Arcadia asserts the trial court erred in construing the proviso in
favor of TUFCO and rejecting Arcadia s interpretation, and asks us to reverse the summary judgment and render
judgment for Arcadia. Alternatively, Arcadia contends the contract is ambiguous and asks us to remand for a factual
determination of its meaning. Whether a contract is ambiguous is a question of law for the court to decide by looking
at the contract as a whole in light of the circumstances existing at the time the contract was made. Exxon Corp. v. West
Texas Gathering Co., 868 S.W.2d 299 (Tex. 1993). When a written instrument is so worded that it can be given a
certain or definite legal meaning or interpretation, then it is not ambiguous and the court will construe the contract as a
file:///C|/Users/Peter/Desktop/opinions/PDFs1/2740.html[8/20/2013 7:12:39 PM]

matter of law. R & P Enterprises v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517, 518 (Tex. 1980). If a contract is
ambiguous, a motion for summary judgment cannot stand because the interpretation of the instrument becomes a fact
issue. Harris v. Rowe, 593 S.W.2d 303, 306 (Tex. 1980). If, however, a contract is unambiguous, the courts will give
effect to the intention of the parties as expressed or as is apparent in the writing. Exxon Corp., 868 S.W.2d at 302.
The proviso states that Seller s Delivery Capacity shall not exceed the quantity of gas available for delivery by seller.
TUFCO argues this language operates as a continual cap on Seller s Delivery Capacity such that TUFCO can never be
obligated to take or pay for gas that could not have been actually delivered. Arcadia argues that the proviso applies
only during the 72-hour deliverability test period. Arcadia reads the proviso as merely a clarification of Seller s
Delivery Capacity in that it requires there be an amount of gas actually available for delivery by which capacity can be
measured during the 72-hour deliverability test period. As Arcadia puts it, the proviso guarantees that during the test,
the well must actually have available for delivery an average daily quantity of gas, equal to the determined Seller s
Delivery Capacity. Arcadia s contention throughout this litigation has been that it was TUFCO s obligation to request a
redetermination of the well s delivery capacity, and until such redetermination was made, the 1983 G-10 results govern
Seller s delivery capacity for the entire term of the contract. Under Arcadia s interpretation, TUFCO had an ongoing
responsibility to take or pay for 70% of the delivery capacity as initially tested, or 1323 mcf per day (70% of 1890
mcf).
The agreement, read as a whole, provides a clear scheme by which TUFCO s take or pay liability may be determined
during each accounting period. Article V binds TUFCO to purchase and take or pay for the Daily Contract Quantity
multiplied by the number of days in the accounting period. Article I section 9 then defines Daily Contract Quantity as
70% of Seller s Delivery Capacity. Finally, Article I section 10 defines Seller s Delivery Capacity as the maximum
amount of gas which can be delivered per day from Arcadia s gas reserves averaged over a period of 72 hours. Section
10 also stipulates that the initial deliverability test result governs delivery capacity until superseded by a subsequent
test, provided that Seller s Delivery Capacity shall not exceed the quantity of gas available for delivery.
The language used by parties to a contract should be afforded its plain, grammatical meaning unless the intentions of
the parties would thereby be defeated. Fox v. Thoreson, 389 S.W.2d 88, 92 (Tex. 1966). The word provided in common
speech expresses a qualification, limitation, condition, or exception respecting the scope and operation of the words
previously used. Knight v. Chicago Corp., 144 Tex. 98, 188 S.W.2d 564, 567 (1945). Although a proviso in statutes,
contracts or wills not infrequently introduces new or independent matter, its true office and its general purpose is to
restrict the sense or make clear the meaning of that which has gone before. Id. at 567.
The proviso in Article I section 10 is unambiguous. It refers to and restricts the scope of the phrase immediately
preceding it. As such, it constitutes an exception to the contract s general requirement that the initial and subsequent
deliverability tests govern Seller s Delivery Capacity for all purposes throughout the term of the agreement. The
proviso ensures that the Seller s Delivery Capacity cannot exceed the amount of gas available for delivery during any
accounting period. It protects TUFCO from the obligation to take or pay for gas that Arcadia could not physically have
made available for delivery during the accounting period.
Arcadia argues TUFCO s interpretation of the proviso contravenes the purpose of take or pay clauses in gas purchase
contracts. In Lenape Resources Corp. v. Tennessee Gas Pipeline Co., the Supreme Court recognized that the central
purpose underlying take-or-pay contracts is to allow the risk of fluctuations in the market demand to be allocated to
the buyer. 925 S.W.2d 565, 572 (Tex. 1996). Arcadia maintains that TUFCO s attempt to limit its take or pay
obligation to gas available for delivery is an impermissible attempt to avoid the risk of demand fluctuations. Properly
construed, the take or pay provision guarantees Arcadia a demand for its delivery capacity, but the proviso limits such
delivery capacity to gas it could actually deliver under the conditions prescribed. TUFCO still bears the risk of a
decrease in demand for gas actually produced because TUFCO must pay for at least 70% of all the gas Arcadia makes
available for delivery, regardless of whether TUFCO actually decides to take delivery. However, the proviso ensures
that TUFCO does not also bear the risk of a significant decrease in the well s ability to produce gas. We therefore hold
that the gas purchase agreement requires TUFCO to take or pay for 70% of the gas actually available for delivery
during each accounting period. TUFCO s interpretation of the contract was correct; Arcadia s motion for partial
summary judgment was properly denied.
file:///C|/Users/Peter/Desktop/opinions/PDFs1/2740.html[8/20/2013 7:12:39 PM]

That does not, however, end our inquiry. We next turn to the question whether TUFCO has conclusively established
compliance with the contract s terms as we and the trial court have interpreted them. In doing so, we apply the familiar
summary-judgment standard of review. The movant has the burden of showing that no genuine issue of material fact
exists and that it is entitled to judgment as a matter of law. See Nixon v. Mr. Property Mgmt. Co., 690 S.W.2d 546,
548 (Tex. 1985); City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 678 (Tex. 1979). We must accept all
evidence favorable to the non-movant as true, indulging every reasonable inference and resolving all doubts in favor of
the non-movant. Wornick Co. v. Casas, 856 S.W.2d 732, 733 (Tex. 1993). We will consider evidence which favors
TUFCO only if it is uncontroverted. See Great Am. Reserve Ins. Co. v. San Antonio Plumbing Supply Co., 391 S.W.2d
41, 47 (Tex. 1965).
We note at the outset that the summary-judgment proof submitted by the parties was directed largely toward the
question of the proper construction of the agreement. Other summary-judgment proof was directed toward TUFCO s
claims of waiver and modification. These claims are conditional cross-points which, by virtue of our decision today,
we do not reach. Thus, very little of the summary-judgment evidence bears directly on the question which we must
now address: whether TUFCO established as a matter of law that it took or paid for 70% of the gas that was available
for delivery from the Mills Well during each accounting period.
From the applicable summary-judgment evidence we can glean the following uncontroverted facts:
1. The Mills Well was one of many wells from which TUFCO took gas.
2. When the Mills Well was operating at full capacity, it was producing the maximum amount of gas available for
delivery.
3. Because TUFCO was not contractually bound to take each well s entire delivery capacity, TUFCO had a policy of
requesting percentages of the gas available from its producers based on a monthly schedule referred to as its market
demand factor.
4. Beginning in 1988, TUFCO s market demand factor required that TUFCO request from all its producers the
following monthly percentages:
January 100%
February 100%
March 80%
April 60%
May 60%
June 80%
July 100%
August 100%
September 80%
October 60%
November 60%
December 80%
file:///C|/Users/Peter/Desktop/opinions/PDFs1/2740.html[8/20/2013 7:12:39 PM]

The market demand factor percentages never varied from year to year, and were calculated so that TUFCO would take
an average of 80% of the gas available for delivery every year from each of the producing wells.
4. On a monthly basis, TUFCO contacted the pumpers responsible for the various wells gas flow and requested the
increases or cutbacks necessary for the implementation of TUFCO s market demand factor.
5. Jack Burleson is a pumper who was responsible for the Mills Well and as many as fifteen other wells producing gas
for TUFCO.
The difficulty in applying the above facts arises when one attempts to determine what percentage of delivery capacity
TUFCO took from the Mills well during any given month. // Burleson testified that TUFCO contacted him whenever it
was necessary to change the well s production rate in order to comport with the market demand factor. An order
changing the production rate typically applied to all the TUFCO wells under Burleson s control. However, Burleson
testified that the Mills Well was attached to a compressor, the purpose of which was to increase the gas pressure to a
level capable of delivering the gas into TUFCO s pipeline. Burleson further testified that reducing the flow rate or
choking back the Mills Well neutralized the purpose and effect of the compressor and was therefore impractical.
Therefore, in response to a request for a production cutback, Burleson would often allow the Mills Well to produce at
full capacity and correspondingly reduce the flow rate of a non-compressed well so that the wells under his control
collectively produced at a rate compliant with TUFCO s market demand factor. At other times Burleson would
completely shut the Mills Well down in response to a cutback request. TUFCO s market demand schedule therefore
does not conclusively establish the percentage of delivery capacity taken by TUFCO from the Mills Well during any
particular month. As stated previously, TUFCO s burden on appeal is to establish as a matter of law that they took or
paid for 70% of the gas actually available for delivery from the Mills Well during each accounting period. Because the
summary-judgment evidence does not reveal how often the Mills Well was producing at full capacity and how often it
was shut in, we simply cannot determine from the summary-judgment evidence whether TUFCO took or paid for 70%
of the gas available for delivery from the well during each accounting period.
Having reviewed the entirety of the record and employed all applicable standards, we conclude there exists a genuine
issue of material fact as to whether TUFCO took or paid for 70% of the gas available for delivery from the Mills Well
during each and every relevant accounting period. Because a fact issue exists, summary judgment on this issue was
improperly granted.
Because the order granting TUFCO s motion for summary judgment did not specify the grounds relied on, we must
affirm if any of the theories advanced are meritorious. Carr v. Brasher, 776 S.W.2d 567, 569 (Tex. 1989). As an
additional ground for summary judgment, TUFCO invoked the contractual limitations clause located in Article IX
section 4 of the gas purchase agreement. That clause reads:
Each party hereto shall have, at its expense, the right at all times to examine the books and records of the other party to
the extent necessary to verify the accuracy of any statement, charge, computation, or demand made under or pursuant
to this Contract. Each party agrees to keep records and books of account in accordance with generally accepted
accounting principles and practices in the industry. Any statement shall be final as to both parties unless questioned
within two (2) years after payment thereof has been made.
The statements referenced in the limitations clause are discussed in Article IX section 3:
After delivery of gas has commenced, or payments are due under the terms of this Contract, Buyer shall, on or before
the twenty-fifth (25th) day of each month, render to Seller a statement showing the quantity of gas delivered during
the preceding calendar month and any adjustments made by Buyer, and shall therewith pay Seller the amount due for
all such gas. Buyer, at its election, may deduct from its payment to Seller sums, if any, due by Seller to Buyer under
the terms of this Contract.
file:///C|/Users/Peter/Desktop/opinions/PDFs1/2740.html[8/20/2013 7:12:39 PM]

TUFCO asserts that none of its statements or payments to Arcadia were challenged until the contract was terminated in
June 1996. Thus, to the extent that Arcadia may recover damages, TUFCO argues that they may not recover damages
for deliveries made prior to June 1994.
We do not understand Arcadia to be seeking payment for deliveries made. Rather, Arcadia asserts TUFCO failed to
either take delivery of or pay for 70% of the well s delivery capacity. Although the monthly statements mandated by
section 3 would indicate the amount of gas taken and the amount paid for the gas, they would not reveal whether
TUFCO took the requisite percentage of delivery capacity during the applicable accounting period. The limitations
period applies specifically to challenges to payments for gas delivered. It is inapplicable to a claim that TUFCO failed
to take or pay for the amount of gas agreed to in the contract. To the extent that Arcadia may recover damages for
TUFCO s failure to take 70% of the well s available delivery capacity, its claim will not be barred by the contractual
limitations period.
CONCLUSION
The gas purchase agreement required TUFCO to take or pay for 70% of the Seller s Delivery Capacity. We hold the
proviso of Article I section 9 of the agreement is unambiguous; it limits Seller s Delivery Capacity to the amount of
gas actually available for delivery throughout the term of the agreement. Thus, Arcadia s motion for partial summary
judgment was properly denied, and TUFCO was entitled to a partial summary judgment on the contractual
interpretation question. However, TUFCO s motion was improperly granted as the evidence raises a genuine issue of
material fact regarding the amount of gas TUFCO took or paid for. The summary judgment granted TUFCO is
therefore reformed to a partial summary judgment, and the cause is remanded for a determination of whether TUFCO
has taken or paid for 70% of the gas actually available from the Mills Well during each accounting period.
The contractual limitations period in Article IX is inapplicable to Arcadia s claim. We need not consider whether any
of the other grounds asserted in TUFCO s motion for summary judgment are meritorious, as they were contingent on
Arcadia s interpretation of the proviso.
BOBBY L. CUMMINGS
Justice (Retired)
Before Chief Justice Davis,
Justice Vance, and
Justice Cummings (Retired)
Affirmed in part; reversed and remanded in part
Opinion delivered and filed July 7, 1999
Do not publish
file:///C|/Users/Peter/Desktop/opinions/PDFs1/2740.html[8/20/2013 7:12:39 PM]

Download 2740.pdf