International Minerals and Chemical Corp. v. Llano, Inc., 83-2657

• Decision Date: 09 August 1985
• Docket Number: No. 83-2657,83-2657
• Parties: 41 UCC Rep.Serv. 347 INTERNATIONAL MINERALS AND CHEMICAL CORPORATION, Plaintiff-Appellant, v. LLANO, INCORPORATED, Defendant-Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 879

770 F.2d 879

41 UCC Rep.Serv. 347

INTERNATIONAL MINERALS AND CHEMICAL CORPORATION, Plaintiff-Appellant, v. LLANO, INCORPORATED, Defendant-Appellee.

No. 83-2657.

United States Court of Appeals Tenth Circuit.

Aug. 9, 1985.

Keith A. Jones, John B. Ruhl of Fulbright & Jaworski, Washington, D.C., and James P. Houghton, Mark Thompson III of Modrall, Sperling, Roehl, Harris & Sisk of Albuquerque, N.M., for plaintiff-appellant.

Don Maddox of Maddox & Renfrow, Hobbs, N.M., and Jeron Stevens of Baker & Botts, Houston, Tex., for defendant-appellee.

Before BARRETT, DOYLE and McKAY, Circuit Judges.

BARRETT, Circuit Judge.

After examining the briefs and the appellate record, this three-judge panel has determined unanimously that oral argument would not be of material assistance in the determination of this appeal. See Fed.R.App.P. 34(a); Tenth Cir.R. 10(e). The cause is therefore submitted without oral argument.

International Minerals and Chemical Corporation (IMC) brought this diversity action against Llano, Inc. (Llano), seeking a declaratory judgment that it was excused from its obligation to pay for natural gas under a contract between IMC and Llano. Llano counterclaimed for $3,564,617.12, the amount it claimed was due under the contract. The district court granted judgment in favor of Llano and against IMC. The court found that IMC had no legal excuse for non-performance, and ordered IMC to pay Llano $3,441,869.79.

IMC, a New York corporation, operates a potash mine and processing facility near Carlsbad, New Mexico. At all times relevant to this action, IMC obtained the natural gas it needed to operate its facilities from Llano. Llano is a New Mexico corporation engaged in the business of intrastate transportation of natural gas by pipeline. The natural gas contract between Llano (seller) and IMC (buyer) that is the subject of this litigation was made in 1972, and continued in effect until June 30, 1982. It was amended only once, in 1975. That amendment concerned pricing structure as set forth in paragraph 5 of the contract, and is not an issue in this case. The pertinent portions of the contract are as follows:

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties do hereby bargain, contract and agree as follows:

1. SUPPLY OF NATURAL GAS: Subject to the terms and conditions of this Contract, Seller will sell and deliver to Buyer and Buyer will take, purchase and pay for the entire fuel requirements of Buyer's Plant, provided that Buyer may at its option procure and maintain a supply of standby fuel to be used only to such extent as may be necessary when the gas supply from Seller may be interrupted or curtailed, as hereinafter provided, and in such other amounts as may be necessary from time to time to test such standby facilities and fuel.

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6. DELIVERY REQUIREMENTS: During the term of this Contract, unless Seller agrees in writing to the contrary, the minimum daily deliveries that Seller shall make to Buyer and Buyer shall take from Seller shall be 4800 million BTU's per day except as hereafter provided. The maximum daily deliveries that Seller shall be required to make to Buyer shall be 133% of the average daily requirements of Buyer's Plant for the preceding 365 days provided, however, Seller shall at no time be required to deliver in excess of 6400 million BTU's per day unless Seller agrees in writing to the contrary.

Buyer does not contemplate reducing its operations, but on the contrary contemplates the increase thereof from the present daily requirements. In order to meet unanticipated contingencies, it is agreed that in the event Buyer during the term of this Contract reduces its operation by closing a portion of its plant, it shall have the right upon six months notice in writing to reduce the minimum requirements to a figure equal to 70% of the stated minimum of 4800 million BTU's per day. In the event of such reduction in minimum requirements, Seller's price to Buyer then in effect under the terms hereof shall be increased by 1/2cents per million BTU's, but not in excess of the highest price for a like quantity of gas then being paid by any potash company in the area.

7. MINIMUM ANNUAL PURCHASE: During the term of this Contract, commencing with the first year, Buyer agrees to take from Seller a volume of gas having a BTU content of not less than 355 times the minimum daily deliveries specified in Section 6 hereof. Buyer agrees to pay Seller for such minimum volume of gas at the price set forth in Section 5 hereof provided that if Buyer fails during any calendar year to take such minimum volume of gas, then the deficiency between the volume actually taken and Buyer's minimum purchase obligation shall be paid at the price in effect during the calendar year in which such deficiency occurs.

Billing for any payment due by reason of a deficiency in Buyer's takings of gas hereunder during a particular calendar year shall be included on the bill rendered to Buyer for gas delivered to Buyer during the month of December in the calendar year in which such deficiency occurred and payment therefor shall be made in the manner provided for monthly bills in Section 11 hereof. Failure on the part of Seller to so bill Buyer for any such deficiency payment shall not constitute a waiver hereof by Seller.

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15. FORCE MAJEURE: Either party shall be excused for delay or failure to perform its agreements and undertakings, in whole or in part, when and to the extent that such failure or delay is occasioned by fire, flood, wind, lightning, or other acts of the elements, explosion, act of God, act of the public enemy, or interference of civil and/or military authorities, mobs, labor difficulties, vandalism, sabotage, malicious mischief, usurpation of power, depletion of wells, freezing or accidents to wells, pipelines, permanent closing of Buyer's operations at its Eddy County mine and refinery, after not less than six (6) months notice thereof to Seller, or other casualty or cause beyond the reasonable control of the parties, respectively, which delays or prevents such performance in whole or in part, as the case may be; provided, however, that the party whose performance hereunder is so affected shall immediately notify the other party of all pertinent facts and take all reasonable steps promptly and diligently to prevent such causes if feasible to do so, or to minimize or eliminate the effect without delay. It is understood and agreed that settlement of strikes or other labor disputes shall be at the sole discretion of the party encountering the strike or dispute.

Nothing contained herein, however, shall be construed as preventing the Buyer from discontinuing the operation of the plant for such periods of time as may be required by Buyer to perform necessary overhaul operations on plant properties or to accomplish preventative maintenance operations on such plant properties, which the Buyer may determine as necessary to safeguard its investment in the plant.

16. ADJUSTMENT OF MINIMUM BILL: In the event that Seller is unable to deliver or Buyer is unable to receive gas as provided in this Contract for any reason beyond the reasonable control of the parties, or in the event of force majeure as provided in Section 15 hereof, an appropriate adjustment in the minimum purchase requirements specified in Section 7 shall be made.

(Pl.Exh. 3, Def.Exh. C8b).

The contract may be characterized as a requirements contract, with an important limitation: Pursuant to paragraph 6, the buyer (IMC) is obligated to take, at a minimum, a daily average of 4800 million BTU's of gas. Pursuant to paragraph 7, if the buyer does not take this minimum amount, the buyer is obligated to pay for the minimum amount of gas anyway. These provisions are known in the industry as "take or pay" provisions, the purpose of which is to compensate the seller for being ready at all times to deliver the maximum amount of gas to the buyer and to eliminate the risk that the seller would face in a pure requirements contract were the buyer's requirements to drop too low. See, e.g., Utah International, Inc. v. Colorado--Ute Electric Association, 425 F.Supp. 1093 (D.Colo.1976) ("take or pay" coal purchase contract); Mobile Oil Corporation v. Tennessee Valley Authority, 387 F.Supp. 498 (N.D.Ala.1974) ("take or pay" electricity contract). The harshness of the "take or pay" provisions in this contract are to some extent ameliorated by the "force majeure" provision of paragraph 15 and the "adjustment of minimum bill" provision of paragraph 16; paragraphs 15 and 16 are discussed below.

At the time the contract was made, IMC operated nine submerged combustion evaporators (Ozarks) at its plant. These Ozarks were gas-fired boilers in which a mixture of water and the ores sylvinite (potassium chloride) and langbeinite (potassium magnesium sulphate) was heated. The excess water was boiled off, and the hot solution was subsequently cooled. When the solution was cooled, potassium sulfate would crystallize out of solution. This potassium sulphate was marketed commercially as a fertilizer. These Ozarks were fitted with stacks that emitted large amounts of fine particulates, resulting in air pollution.

Initially, the particulate emissions from these Ozarks were not regulated by the New Mexico Environmental Improvement Board (EIB). In December, 1978, however, the EIB promulgated Regulation 508. (Pl.Exh. 19, Def.Exh. A-23). Paragraph C of that regulation limited emissions from potash processing equipment (i.e., Ozarks) to 30 pounds per hour. Compliance was to be achieved "as expeditiously as practicable" and not later than December 31, 1982. Paragraphs D and E allowed operators the option of replacing submerged combustion evaporators (i.e., Ozarks) with alternative technology, in which case emissions were required to be reduced to 350 pounds per hour by December...