HBOP, Ltd. v. Delhi Gas Pipeline Corp.
| Decision Date | 16 February 1982 |
| Docket Number | No. 54040,No. 2,54040,2 |
| Citation | 645 P.2d 1042 |
| Parties | 1982 OK CIV APP 11 HBOP, LTD., Appellee, v. DELHI GAS PIPELINE CORPORATION, Appellant |
| Court | United States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma |
Appeal from the District Court, Roger Mills County; Charles M. Wilson, Trial Judge.
Suit for cancellation of gas purchase contract and damages for breach. Trial court ordered contract cancelled and awarded $150,000 damages.
REVERSED AND REMANDED WITH DIRECTIONS.
Thomas T. Rogers, Robert J. Emery & Associates, Oklahoma City, David McCall, Counsel, Delhi Gas Pipeline Corp., Dallas, Tex., Morris Flynn, Oklahoma City, for appellant.
William Pannill, Gary Catron, Pannill & Hooper, Houston, Tex., Carl Michael Smith, Lawrence, Smith & Harmon, Oklahoma City, for appellee.
Gas purchaser appeals from judgment cancelling gas purchase contract and awarding $150,000 damages allegedly caused by Purchaser's neglecting to "ratably" take gas produced from split-stream wells. Petition alleged Purchaser failed to buy gas ratably with other purchasers from the same wells which resulted in offset drainage.
The suit is for contract cancellation and damages and is conceded to be an With these standards in mind, we are required to affirm the trial court's decision unless the judgment is clearly against the weight of evidence or contrary to the law and established principles of equity. We have reviewed the record, find no evidence of breach of contract or grounds for cancellation and reverse.
action in equity. We are constrained to apply ordinary principles of contract construction and compare and harmonize all terms of the contract to determine the intent of the parties. 15 O.S.1971 § 154; Dooley v. Cordes, Okl., 434 P.2d 289 (1967). All parts of the contract are to be given full effect without straining interpretation, ignoring part or adding provisions contrary to the intent of the parties. 15 O.S.1971 § 166; Simmons v. Fariss, Okl., 289 P.2d 372 (1955); Cities Service Oil Co. v. Geolograph Co., Inc., 208 Okl. 179, 254 P.2d 775 (1953). The court is without authority to permit a party to amend or explain contract terms by parole unless its terms are ambiguous. James Talcott, Inc. v. Finley, Okl., 389 P.2d 988 (1964).
This complex legal problem arises from a gas marketing technique whereby working interest owners market gas separately, creating what is known as "split-stream" production. Rather than sell all production to a common purchaser-for various economic reasons-the owners take their proportionate share of gas "in kind," marketing it independently of one another.
This system always creates problems of "imbalance" between owners because their various buyers seldom, if ever, take the same quantity of gas. Consequently, net well reserve equities must eventually be balanced. Balancing is legally enforceable between owners by cash settlement (where well is depleted) or "in kind" by temporarily allowing the under-produced owner to take more than his usual share of gas, where reserves permit.
Reserve equity balancing is a common, inherent, vexatious accounting problem between split-stream owners. Beren v. Harper Oil Co., Okl.App., 546 P.2d 1356 (1975); See Niebrugge, Oil and Gas: Production Imbalance in Split Stream Wells-Getting Your Fair Share, 30 Okla.L.Rev. 955 (1977).
Plaintiff HBOP, LTD., is a partnership whose general partner is Hoover & Bracken, Inc. Defendant is Delhi Gas Pipeline Corporation. HBOP is one of several principle working interest owners who own five valuable gas wells in Roger Mills County. The wells are located in the West Cheyenne Field and are conceded to be at least 20-year producers having vast reserves.
HBOP contracted with Delhi to sell all its production from these wells on March 21, 1977, for a term of 20 years. Pertinent parts of the contract deal with the "quantity of purchase" and "ratable" clauses.
In particular, Delhi agreed to "take or pay" HBOP's gas based on a formula tied to the well's allowable production. Paragraph 4.1 of the contract provides:
(B)uyer agrees to purchase ... or to pay for if available but not taken, a quantity of gas equal to the sum of the Daily Contract Quantities herein specified.
Daily Contract Quantities (DCQ) is defined by Paragraph 4.2, as being:
Seller's pro rata share of 6000 MCF (thousand cubic feet) from each gas well completed on a 640 acre unit.
Paragraph 4.8 provides:
If at the end of any Contract Year, Buyer shall have failed to receive during such year the applicable Daily Contract Quantity ... on any day or days during such Contract Year, Buyer shall pay for the remaining deficiencies as if taken.
The contract carefully defines the method of computing and crediting all aspects of the "take or pay" feature of the contract. It provides an annual accounting formula to be used in determining whether Delhi has taken its quota of gas. If it has not, Delhi must then pay for any deficiency.
HBOP based the entire suit on its interpretation of Paragraph 4.4 which is the "ratable" clause. It provides Buyer agrees to keep Seller ratable with respect to its purchases of gas and with respect to the purchases of gas by others from wells completed in the same reservoirs in which Seller's wells are completed.
HBOP urged, and the trial court ruled, Paragraph 4.4 requires Delhi's minimum purchase obligation to be measured by the maximum purchases of others and that the wells are to remain continuously balanced-on a month-to-month basis. 1
The contract allowed Delhi 60 days to commence purchases. Large imbalances existed between the other owners and HBOP at the time the contract was executed; these increased before Delhi went on stream near the end of May, 1977.
By December, 1977, only seven months into the first contract year, HBOP made demand on Delhi to take more gas and correct the unit (six wells) production imbalances which were claimed to be increasing in favor of the other working interest owners. 2 There followed several months of correspondence wherein Delhi responded that the current gas glut prevented them from increasing gas purchases.
In mid-1978, HBOP filed suit against Delhi in federal court. After that action was dismissed, this suit was filed in the District Court of Roger Mills County, alleging:
1. (P)urchasers other than Defendant are taking gas volumes at a rapid rate and is thus drawing down the reservoir's gas supply ... (which drainage has) caused Plaintiff to lose its gas reserves in the amount of $500,000.... (later amended to 1.3 million dollars);
2. Said breach ... will continue ... in the future ... and goes to the essence of the contract ... (therefore HBOP) is entitled to cancellation of its contract with Defendant; and
3. (HBOP) is entitled to ... reasonable attorney's fees.
Trial court heard two days testimony, which included proof that the five split-stream wells were indeed imbalanced. The problem was magnified by a temporary sag in the market during 1977-78 which decreased intrastate demand. It was admitted HBOP was out of balance with its co-working owners when the contract was signed because the others commenced gas sales earlier. The parties' accounting varied little regarding the imbalances between wells. It is undisputed these wells have immense reserves and, as one witness testified, could easily be balanced within a year under current market conditions existing at time of trial. 3
At trial, inexplicably, HBOP abandoned its theory that Delhi's conduct permitted offset drainage; 4 accordingly, HBOP's proof is void of damages attributed to drainage. 5
In short, HBOP pleaded one theory for cancellation and damages, then proved quite another. This shift in theory was necessary because it had not lost a single MCF of gas and Delhi had either "taken or paid" for all the gas it had contracted for. The unpled theory urged at trial was that Delhi contracted to "take or pay" for the agreed minimum, plus additional quantities measured by current purchases of others plus sufficient additional quantities to immediately retire pre-contract imbalances.
HBOP therefore construed the contract, via the "ratable" clause, to have three separate minimum purchase "take or pay" requirements. We find this to be a sophisticated interpretation in the extreme. Under HBOP's uncharitable accounting theories 6 and fanciful contract interpretation Dehli was in breach the day after it went on stream. For, even though swimming upstream against market forces beyond its control, 7 with the exception of a few MCF, Dehli is charged only with failure to retire pre-contract imbalances.
The judgment is based solely on witness Bracken's testimony. We find it to be impermissible, self-serving parole evidence which dramatically amends the contract terms. He testified he personally negotiated the contract; and, Paragraph 4.4 (the ratable clause) actually meant buyer is required to keep the wells in balance on a monthly basis. 8 It was very important to him, he testified, because HBOP needed a constant "cash flow." This evidence and its subsequent use as the basis of the judgment is erroneous for several reasons.
First, the contract is not ambiguous. Ordinary contract construction requires the "ratable" and "quantity" terms be harmonized to determine and give full effect to the intent of the parties.
We hold the ratable clause is primarily intended to promote field-wide conservation and prevent discrimination by pipeline companies among their current and potential customers. Delhi, by reason of its capacity as a pipeline, may not serve a gas field without offering its service ratably 9 to all producers in the same field. 10 Such a clause is generically statutory; 11 and, in this case, it is also contractual. It also has long-term secondary implications which indirectly affect...
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