Carter Baron Drilling v. Badger Oil Corp., Civ. A. No. 82-K-2232.

• Decision Date: 05 March 1984
• Docket Number: Civ. A. No. 82-K-2232.
• Citation: 581 F. Supp. 592
• Parties: CARTER BARON DRILLING, a Canadian partnership, Plaintiff, v. BADGER OIL CORPORATION, a Louisiana corporation, Defendant and Third-Party Plaintiff, v. EXCEL ENERGY CORPORATION, a Utah corporation, et al., Third-Party Defendants.
• Court: U.S. District Court — District of Colorado

581 F. Supp. 592

CARTER BARON DRILLING, a Canadian partnership, Plaintiff, v. BADGER OIL CORPORATION, a Louisiana corporation, Defendant and Third-Party Plaintiff, v. EXCEL ENERGY CORPORATION, a Utah corporation, et al., Third-Party Defendants.

Civ. A. No. 82-K-2232.

United States District Court, D. Colorado.

March 5, 1984.

John V. McDermott, Ireland, Stapleton & Pryor, P.C., Denver, Colo., for plaintiff Carter Baron Drilling.

Phillip D. Barber, Welborn, Dufford & Brown, Denver, Colo., for Badger Oil Corp.

Donald C. McKinley, Thomas P. Johnson, Mayer, Brown & Platt, Denver, Colo., for all third-party defendants except Knee Hill Energy, Inc.

James T. Ayers, Jr., Clanahan, Tanner, Downing & Knowlton, Denver Colo., for Knee Hill Energy, Ltd.

ORDER DENYING MOTION FOR PARTIAL SUMMARY JUDGMENT

KANE, District Judge.

Plaintiff, Carter Baron Drilling, brought this action for breach of contract against the defendant, Badger Oil Company. The contract was executed on a standardized International Association of Drilling Contractors form on June 24, 1981. Carter Baron was styled the "contractor" and Badger Oil was styled the "operator." The contract obligated Carter Baron "to furnish the equipment and labor to drill (a well for Badger Oil)¹ in search of oil or gas on a daywork basis." In return, Paragraph 4 provided that "Operator shall pay contractor" specified amounts for mobilization, for demobilization, for moving the rig, plus a payment for each day's operations.

At the time the contract was signed, Badger allegedly explained to Carter Baron that the working interest in the well was owned by Knee Hill Energy, Inc., and that as Knee Hill had no staff to operate the well, it had retained Badger to operate it on behalf of Knee Hill. Andersen Deposition at 28; Roemer Deposition at 19.

Drilling commenced in August 1981. In September of that year Badger allegedly first experienced difficulty in collecting money from Knee Hill. It informed Carter Baron that this was the reason why payments for the drilling work were in arrears. Carter Baron allegedly discussed the matter directly with Knee Hill. Hilliard Affidavit ¶ 5c. This state of affairs continued until January 1982 when Badger resigned as operator because of continued difficulty in obtaining money from Knee Hill. Badger alleges both that Carter Baron repeatedly told Badger that it would seek payment for its expenses from Knee Hill and that it never sought to collect from Badger.

In January 1982 Badger resigned as operator. Carter Baron sent no further invoices to Badger, but instead dealt directly with Knee Hill. McAdam Deposition at 74; Hilliard Affidavit ¶ 6g. Following Badger's resignation as operator, Carter Baron was paid no money by Badger but was paid approximately $950,000 on its account on the Chrisman No. 1 well by Knee Hill and the other working interest owners. McAdam Deposition at 67.

On July 22, 1982, Carter Baron demanded payment from Badger. When Badger refused to pay, this suit was initiated. The plaintiff, Carter Baron, now moves for summary judgment on the issue of Badger's liability for breach of contract. The main thrust of this motion is that the clause of the contract that reads "operator shall pay to the contractor" is unambiguous. The defendant's position is that as it was acting solely as Knee Hill's agent, it was under no duty to pay Carter Baron if Knee Hill did not provide it with funds. The defendant wants to introduce extrinsic evidence to prove this.

The intent of the parties to a contract is determined primarily from the language of the instrument itself. Extrinsic evidence is only admissible to prove intent when there is an ambiguity in the terms of the contract. Radiology Prof. Corp. v. Trinidad Area Health, 195 Colo. 253, 577 P.2d 748 (1978); McNichols v. City and County of Denver, 120 Colo. 380, 209 P.2d 910 (1949). Written contracts that are free from ambiguity are enforced because they express the intention of the parties. American Mining Co. v. Himrod-Kimball Mines Co., 124 Colo. 186, 235 P.2d 804 (1951).

I find no ambiguity in the phrase "operator shall pay contractor" since the identity of the operator and the contractor is established in an earlier paragraph of the contract. Badger, however, contends that the function of an operator is open to debate. This is irrelevant because the issue is who is liable to pay for work performed. This is a question of identity, and function is only relevant if identity is in doubt. The cases cited by Badger do not aid its position. In McNichols v. City and County of Denver, 120 Colo. 380, 209 P.2d 910 (1949) the issue arose of whether funds originating from a sale of bonds authorized for "improving, extending and equipping the Denver General Hospital" could be used for a building for the Bureau of Public Welfare. The Colorado Supreme Court held that the word "hospital" had a clear meaning that did not encompass public welfare services. Therefore the use of the funds for such services was improper. By looking at the function of a hospital the court was able to determine the identity of the proper recipient of the funds. The word "operator" does not have as clear a meaning as the word "hospital," but the identity of the operator in this case is incontrovertible and so a determination of his function is not as relevant as in the McNichols case.

The case of American Mining Co. v. Himrod-Kimball Mines Co., 124 Colo. 186, 235 P.2d 804 (1951) also fails to support Badger's position. That case involved the interpretation of a contract to grant a lease. The Colorado Supreme Court approved the admission of parol evidence because the contract relied on was not final or complete. Significantly, the contract did not contain the names of all parties, 235 P.2d at 807, whereas the contract in this case names the parties. Badger also cites Fink v. Montgomery Elevator Co., 161 Colo. 342, 421 P.2d 735 (1966) in support of its position. The court in Fink stated that:

The law is that any ambiguity in an instrument whereby it is sought to hold a purported agent personally liable, can be explained by parol evidence. In such a situation the court will take the entire contract into consideration, not the signature alone. See Fricke v. Belz, 237 Mo. App. 861, 177 S.W.2d 702 (1944) (other citations omitted).

The ambiguity in that case arose from the fact that the names of both the purported principal and the agent appeared in the contract. The Fricke case, cited in the Fink case, emphasized that if only one signature appeared on the contract, there would be no ambiguity as to who was responsible. 177 S.W.2d at 706. In this case only the Badger Oil Co., through its Vice-President, Lamar Roemer, signed the contract.

A more difficult question is whether the alleged acts and statements of the parties during the life of the contract, and the usage of the trade, qualified the express payment term "operator shall pay to contractor." I must first consider whether evidence of these extrinsic elements is admissible at all.

Before the adoption of the Uniform Commercial Code in Colorado² the Colorado courts took the position that evidence of custom and usage was not admissible to vary the terms of an unambiguous contract. See, e.g., Burt v. Craig, 146 Colo. 173, 177-78, 360 P.2d 976-79 (1961); Zimbelman v. Hartford Fire Ins. Co., 92 Colo. 536, 545-46, 22 P.2d 866, 869-70 (1933). However, since its adoption,³ parol evidence of usage of trade, course of dealings and course of performance can be introduced to explain or supplement a contract. Colo.Rev.Stat. 4-2-202.⁴ In addition, Colo.Rev.Stat. 4-1-205(4) provides that

The express terms of an agreement and an applicable course of dealing or usage of trade shall be construed wherever possible as consistent with each other; but when such construction is unreasonable, express terms control both course of dealing and usage of trade and course of dealing controls usage of trade.⁵

Thus § 4-1-205(4) has assumed the role of a quasi-parol evidence rule for evidence of usage of trade and course of dealings.⁶ The new test, however, is consistency rather than ambiguity. Evidence that is reasonably consistent with the express terms of an agreement is admissible.⁷See Budget Systems, Inc., v. Seifert Pontiac, Inc., 40 Colo.App. 406, 579 P.2d 87 (1978). See also Thrifty Rent-a-Car System v. Chuck Ruwart Chevrolet, Inc., 500 P.2d 172 (Colo.App.1972) (parol evidence of oral agreement by dealer to pay rebates was admissible despite apparent inconsistency with the terms of a written chattel mortgage); Board of Trade of San Francisco v. Swiss Credit Bank, 597 F.2d 146, 148 (9th Cir.1979) (ambiguity is not necessary to admit usage evidence). But evidence which contradicts or negates the terms of a written agreement is inadmissible. See MacGregor v. McReki, 30 Colo.App. 196, 494 P.2d 1297 (1971).

The courts which have considered the admissibility of evidence of course of performance, course of dealing and usage of trade have been liberal in their determinations of what is consistent with the express terms of a contract. In what is perhaps the leading case, Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971), Royster signed a contract to sell phosphate to Columbia. The contract terms set out the price that would be charged by Royster and the amount to be sold. The contract did not provide for price declines. When the price of nitrogen fell drastically, Columbia refused to accept the full amount of nitrogen specified in the contract. At trial, Columbia offered to prove that the quantity specified in the contract was merely a projection to be adjusted according to market forces. The district court refused to admit this evidence. The Fourth Circuit reversed, holding that the express quantity term could reasonably be construed as consistent with a usage that such terms would be mere projections. It reasoned that the contract did not expressly state that evidence of usage...