Texasgulf, Inc. v. United Gas Pipe Line Co.

• Decision Date: 04 June 1985
• Docket Number: Civ. A. No. 2253-71.
• Parties: TEXASGULF, INC., Plaintiff, v. UNITED GAS PIPE LINE COMPANY, Defendant.
• Court: U.S. District Court — District of Columbia

610 F. Supp. 1329

TEXASGULF, INC., Plaintiff, v. UNITED GAS PIPE LINE COMPANY, Defendant.

Civ. A. No. 2253-71.

United States District Court, District of Columbia.

June 4, 1985.

COPYRIGHT MATERIAL OMITTED

James J. Bierbower, John T. Miller, Jr., Washington, D.C., for plaintiff.

W. DeVier Pierson, Peter J. Levin, Paul Ryberg, Jr., Washington, D.C., for defendant.

MEMORANDUM ON LIABILITY

GESELL, District Judge.

This diversity suit for breach of contract arises out of the failure of United Gas Pipe Line Company (United) to deliver to Texasgulf, Inc. (Texasgulf) the amount of natural gas specified under a long-term continuing supply contract. Texasgulf required the gas to operate its sulphur mine in Louisiana. Texasgulf claims substantial damages. The case is before the Court on an Amended and Supplemental Complaint after a bench trial. Proof was limited by the Court to the issue of liability and focused on the reasons underlying United's admitted failure to supply gas as required by the contract.

I. Proceedings to Date

This case has a prolonged history. The original complaint was filed November 10, 1971, and the Amended and Supplemental Complaint, upon which this action has proceeded to trial, was filed March 23, 1982.¹ There have been a number of administrative and judicial actions relating to this controversy which require brief reference to put the dispute as it eventually came before the Court in proper context.

The original complaint was dismissed by the Court (Jones, J.) on January 21, 1972, on the ground that the subject matter of the controversy lay within the exclusive jurisdiction of the Federal Power Commission (FPC) and that Texasgulf had failed to exhaust its administrative remedies. This order was vacated and the action remanded on April 19, 1972. Monsanto Company v. Federal Power Commission, 463 F.2d 799 (D.C.Cir.1972). Judge Jones, retaining jurisdiction, then took cognizance of the agency's primary jurisdiction, where related proceedings were in progress, and stayed this case awaiting agency action.

Thereafter various hearings involving curtailment of delivery by United and certain other pipelines due to supply shortages that had developed continued before the FPC, and later before the Federal Energy Regulatory Commission (FERC).² Both Texasgulf and United actively participated. In April 1975, this Court vacated the stay, the case having been reassigned following Judge Jones' death. Discovery was then conducted concurrent with agency proceedings until late 1978. On February 12, 1979, the Court again stayed further court proceedings and referred three specific issues³ to the FERC for determination under its primary jurisdiction.⁴

Subsequently, Texasgulf made several attempts to have the Court lift the stay and proceed to trial, but these were denied.

Finally, on September 14, 1982, a detailed decision was issued by the FERC Administrative Law Judge (ALJ) bringing certain basic issues in the administrative proceedings into focus for Commission decision. 20 FERC ? 63,070. In anticipation of trial, the Court on October 27, 1983, made further rulings in an effort to narrow issues and resolve remaining pretrial problems. But after further consideration in the light of Mississippi Power & Light Co. v. United Gas Pipe Line Co., 532 F.2d 412 (5th Cir.1976), cert. denied, 429 U.S. 1094, 97 S.Ct. 1109, 51 L.Ed.2d 541 (1977), the Court reluctantly determined that trial should await definitive action by the Commission on appeals from the ALJ's decision, an appeal both United and Texasgulf were seeking to expedite.

Two years went by after the ALJ's decision, and the Commission did not make the expected decisions or take any action on the specific issues referred to it by the Court in February, 1979. With no indication when the Commission might act and in response to further urging by Texasgulf that trial should proceed, the Court over United's objection finally set aside the stay and proceeded to trial.⁵

By Orders of October 26, 1984, and December 7, 1984, the Court established an expedited trial schedule, and trial began on February 25, 1985.

The record includes an agreed series of 854 stipulated facts⁶ and approximately 850 exhibits consisting of documents, pertinent judicial and administrative decisions, and excerpts from prior testimony taken under adversary conditions. Thirteen witnesses testified at trial. The parties have submitted extensive proposed findings of fact documented to the record,⁷ as well as pretrial and post-trial briefs. Now after argument, the Court makes its findings of fact and reaches conclusions of law on the issue of liability as set forth below.

II. The Gas Sales Agreement and United's Failure to Deliver

Texasgulf has mined sulphur for approximately 50 years at locations in different states. Its principal offices are in New York. It is also a small producer of natural gas at one or two gas fields.

United is a "natural gas company within the meaning of the Natural Gas Act of 1938," United Gas Pipe Line Co., 3 FPC 863 (1942), operating at times relevant to this suit as a Delaware corporation with its principal offices in Louisiana. It is the second largest natural gas pipeline in the United States with a 10,250-mile pipeline system extending from the Texas coast through Louisiana, Mississippi and Alabama into the Florida panhandle. United functioned in 1967 as a wholly owned subsidiary of United Gas Corporation, which, in turn, was controlled by Pennzoil Company. As of April 1, 1968, Pennzoil merged with United Gas Corporation, thus becoming United's direct parent.

In 1967 Texasgulf undertook to extract sulphur from deposits that existed at its Bully Camp dome in the coastal marshes about 40 miles southwest of New Orleans, Louisiana. Texasgulf had used the so-called frasch process for extracting sulphur at its sulphur mines since 1919. This process depended on a continuous, uninterrupted, 365-day-a-year energy source to melt the sulphur with superheated water in underground deposits and to keep the sulphur in molten form after it was extracted from the ground. Extensive facilities were required. These were constructed away from the site and eventually came to rest on barges and pilings in the muck above the dome.⁸

Texasgulf considered natural gas the only practical energy source at this location. It sought a single large supplier, negotiating for natural gas first with Texaco and then with United in 1967. United prevailed as the lower bidder, obtaining the contract for Texasgulf's full requirements. United built two pipeline extensions on its system, one to Texasgulf's mine, and the other to the intercoastal storage base, both at United's expense, thus becoming, in effect, the only available gas supplier on which Texasgulf could thereafter rely to operate the mine.

United drafted the Gas Sales Agreement between the companies, undertaking to supply up to 10,100 Mcf⁹ of natural gas per day to the mine over a continuous period of 20 years.¹⁰ United was fully aware of Texasgulf's need for continuous 24-hour-a-day supply and repeatedly represented during the negotiations that it already had "a supply of gas available" and was "willing to sell and deliver" Texasgulf's full requirements. Texasgulf made no independent investigation of United's gas reserves, relying entirely on United's representations and size.¹¹ Texasgulf did not bargain for or receive any commitment from United requiring that the gas originate in Louisiana or from interstate sources. CS 56.

The Gas Sales Agreement, as executed October 27, 1967, specified certain contingencies limiting United's otherwise firm commitment to deliver.

Article VIII, Force Majeure, contained a detailed exculpatory clause applicable to both parties, which included along with a listing of specific contingencies not applicable here "restraints of governments," and encompassed "any other causes, whether of the kind enumerated or otherwise, not within the control of the party claiming suspension and which by the exercise of due diligence such party is unable to prevent or overcome."¹²

Article IX, Impairment of Deliveries, provided that in the event United was unable to supply all its customers' needs, Texasgulf as an industrial customer would receive a lower priority than other customers of United who served domestic gas needs.¹³

Article XVI, Duly Constituted Authorities, stated:

This agreement is especially made subject to all present or future valid rules, regulations or orders of any commission or regulatory body having jurisdiction.

This clause brings into play the applicability of United's federal tariffs to the contract, a matter to be considered shortly.

United began delivering natural gas to Texasgulf's Bully Camp mine pursuant to the Gas Sales Agreement in May 1968 and subsequently met Texasgulf's requirements under the contract until November 1970,¹⁴ when United began reducing deliveries pursuant to tariffs on file. From November 1970 through November 1971, Texasgulf limited its takes of gas to that allocated by United. From December 1971 to November 1972, Texasgulf deliberately violated its allotment and took from the pipeline the amount of gas it believed necessary to continue operating its mine. On November 22, 1972 the FPC ordered Texasgulf to obey United's curtailment and to pay back its overtakes by reducing subsequent takes below its entitlement.¹⁵ In response to this order, Texasgulf shut down the Bully Camp mine until June 1973, when it partially reopened the mine using reduced deliveries from United supplemented by gas from other suppliers. Texasgulf again closed the mine in July 1978, at which point all deliveries of gas to the mine stopped.¹⁶

III. United's Liability Is Not Excused by Its Tariff and Its Tariff Defense Must Fail If It Did Not Exercise Due Care

In view of the respective contentions of the parties, the Court will first consider the meaning and effect of United's tariffs to...