American Exploration Co. v. Columbia Gas Transmission Corp.
| Decision Date | 30 July 1985 |
| Docket Number | CRA-1981,CRA-1982,No. 85-3227,85-3227 |
| Citation | 779 F.2d 310 |
| Parties | 42 UCC Rep.Serv. 1218 AMERICAN EXPLORATION COMPANY; The Clinton Oil Company; Edco Drilling & Producing, Inc.; Hopco Resources, Inc.; Land Pro Vest, Inc.; Universal Minerals, Inc.; Vicking Resources Corporation; Consolidated Resources of America; CRA 1977 Gernsey County Drilling Program; CRA/Gradvantage 1977 Program A; CRA 1979 Program B; CRA 1978 Program A, dba CRA/Gradvantage 1979 Program A; CRA 1978 Guernsey County Drilling Program; CRA/Spectrum 7 1979 Drilling Program aka CRA/RD 1979; CRA 1979 Guernsey County Drilling Program I dba 1979 Guernsey Co.; Drilling Program I; CRA/Gradvantage 1977 Program B; CRA/Spectrum 7 1980 Program A;Drilling Program; CRA/Spectrum 7 1980 Drilling Program I dba CRT Spectrum 7 1980 Drilling Program;Drilling Program, Plaintiffs-Appellants, v. COLUMBIA GAS TRANSMISSION CORP., Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
John C. Elam, argued, Duke W. Thomas, Thomas B. Ridgley, Vorys, Sater, Seymour & Pease, Columbus, Ohio, for plaintiffs-appellants.
John E. Beerbower, argued, Robert N. Feltoon, Richard M. Breslow, and Susan P. Jordan, Cravath, Swaine, & Moore, New York City, for defendant-appellee.
Before KEITH, MERRITT and CONTIE, Circuit Judges.
In this diversity action under Ohio law, the plaintiffs, a group of Ohio corporations and partnerships who are owners, operators and producers of natural gas wells located in the Clinton standstone formation in eastern Ohio, seek a preliminary injunction prohibiting defendant Columbia Gas Transmission Corporation (Columbia) from implementing a plan to purchase only 25% of the gas produced by these wells during 1985 under a long-term "take or pay" contract between the plaintiffs and Columbia. The District Court declined to issue a preliminary injunction because it found that the plaintiffs are unlikely to succeed on the merits because the contract allows Columbia to curtail its purchases in the proposed manner. For the reasons stated below, we affirm.
Beginning in 1981, the plaintiffs entered into gas purchase contracts with Columbia for the wells at issue here which provide that the plaintiffs must sell to Columbia and Columbia must buy from plaintiffs all the gas produced by these wells for the productive lifetime of the well. See sections 1.1 and 2.1 of the contract, Plaintiffs' Exhibit FF, Appendix, 22-52. In addition, section 10.1 of the contract provides that Columbia will pay the maximum lawful price under federal gas regulations, and under section 6.2, a "take or pay" clause common in oil and gas contracts, "seller will sell and deliver to buyer, and buyer will purchase and take from seller, or pay for if available and not taken during each contract year ... an average quantity of gas equal to seventy-five per cent of seller's delivery capacity."
The basic structure of the contract is thus that of a fixed-price output contract with Columbia obligated to take or pay for later a fixed percentage of the plaintiffs' gas in any given year. The contract provides clear benefits to the producers, and was offered by Columbia at a time of gas shortages to attract producers and secure greater supplies. However, Columbia's actual obligation to purchase and take gas during any given year is severely limited by clear language in several other provisions of the contract. First, section 6.1 provides that although Columbia, "insofar as it can consistently do so having regard for its other related interests, (promises) to take all the gas the seller has available during the term of this contract at the full flow of said gas from seller's pipeline into buyer's pipeline ..."
[I]t is further expressly understood and agreed that Buyer may restrict the flow or discontinue the taking of the gas temporarily, when and for such length of time as in its judgment it is deemed expedient so to do, Buyer's judgment being based upon consideration of market demand, its then existing pipeline facilities, the line pressure it deems necessary to maintain, and the competitive and other conditions in the various fields in which it is purchasing or producing gas.
In addition, section 6.4 of the contract provides that "[i]t is recognized that buyer may not be able to take and need not take gas from seller hereunder ... during any definite period," and section 6.5 provides that so long as the volume of gas specified in the take or pay clause is taken or paid for, "all gas delivered hereunder may be taken in whatever manner and at such times as will best suit the convenience of the Buyer."
The record established at the hearing on the preliminary injunction held before the District Court shows that Columbia has exercised its rights under these clauses granting it the power to curtail production frequently in the past several years, as market conditions have changed and supply shortages have lessened and demand has fallen off. Columbia "shut-in"--that is, closed access to the transmission pipelines and stopped production--plaintiffs' wells for sixty days in 1981, for five months in 1982, and for six months (alternating on and off) in 1983. In 1984, Columbia demanded a reduction in the price of plaintiffs' high-priced Clinton formation gas, which then had a maximum price under federal law of $6.00 per standard unit, to $4.50 per unit. When plaintiffs refused to modify the price term in their contracts with Columbia and agree to this lower figure, Columbia announced that it would shut-in all gas, both high and low priced, produced by the plaintiffs for six months in 1984, this despite plaintiffs' complaints that it was unreasonable for Columbia to shut-in both low and high priced gas because plaintiffs would not agree to lower the price on high priced gas.
After plaintiffs brought suit and secured a temporary restraining order, the parties reached a settlement agreement covering 1984. On November 30, 1984, Columbia announced an explicitly price-based purchase schedule for 1985, proposing to purchase 100% of all gas priced at $3.00 per unit, 75% of all gas priced at $3.00 to $3.50 per unit, and 25% of all gas priced over $3.40 per unit. In January, 1985, the plaintiffs brought the present action seeking to enjoin implementation of the 1985 purchase plan.
Plaintiffs claim that Columbia's proposed restrictions will severely damage the output capacity of their wells, due to the geologic nature of the sandstone into which they are drilled, and that Columbia's plan is not a permissible curtailment under section 6.1 of the contract because its extent--purchasing only 25% of available supplies during the year--exceeds that which is permissible under section 6.1 and because the curtailment is not based on "market demand" as that term has come to be understood in the course of performance under the contract. Plaintiffs thus claim that Columbia's plan represents a bad faith attempt to coerce a modification in the price term of the contract.
The District Court found that the plaintiffs' wells would be irreparably damaged by Columbia's plan, but denied the motion for a preliminary injunction because it found that the plaintiffs had not demonstrated a likelihood of success on the merits. The court found that section 6.1 expressly allowed Columbia to discontinue taking gas for "such length of time as it deemed...
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