Kaiser-Francis Oil Co. v. Producer's Gas Co.

• Decision Date: 08 March 1989
• Docket Number: No. 86-2382,KAISER-FRANCIS,86-2382
• Citation: 870 F.2d 563
• Parties: 8 UCC Rep.Serv.2d 1048 OIL COMPANY, a Delaware corporation, Plaintiff-Appellee, v. PRODUCER'S GAS COMPANY, a Texas Corporation, Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 563

870 F.2d 563

8 UCC Rep.Serv.2d 1048

KAISER-FRANCIS OIL COMPANY, a Delaware corporation, Plaintiff-Appellee, v. PRODUCER'S GAS COMPANY, a Texas Corporation, Defendant-Appellant.

No. 86-2382.

United States Court of Appeals Tenth Circuit.

March 8, 1989.

J. Michael Medina (Bruce M. Daniel with him on the brief and Holliman, Langholz, Runnels & Dorwart, of counsel), Tulsa, Okl., for plaintiff-appellee.

Richard E. Miller of Robertson & Miller, Dallas, Tex. (Craig W. Hoster of Baker, Hoster, McSpadden, Clark, Rasure & Slicker, Tulsa, Okl., with him on the brief), for defendant-appellant.

Before ANDERSON, BALDOCK and EBEL, Circuit Judges.

BALDOCK, Circuit Judge.

Appellee and seller, Kaiser-Francis Oil Co. (Kaiser-Francis), sought to enforce the provisions of two similar gas purchase contracts (the "Ellis" and "Cronin" contracts) against appellant and buyer, Producer's Gas Co. (PGC). Under the contracts, PGC was required to take or pay for certain minimum quantities of gas from wells in which Kaiser-Francis had a percentage interest. When the resale price for natural gas declined, PGC did not pay Kaiser-Francis for gas taken on the theory that it was purchasing the gas from Kaiser-Francis' co-owners at reduced prices. PGC also declined to pay for the minimum contract quantities of the gas which were not taken. PGC's actions were based on various defenses to the contracts. The district court granted summary judgment on the issue of liability in favor of Kaiser-Francis, thereby rejecting all of PGC's defenses. The parties thereafter stipulated as to the appropriate damages, interest and attorney's fees that would accrue upon the liability determination. Thus, we consider only issues of liability under the contracts, whether the district court improperly rejected any or all of PGC's defenses to the contract.

On appeal, PGC contends that the district court erred in granting partial summary judgment in favor of Kaiser-Francis because 1) the force majeure provision in the contracts extends to a partial lack of demand caused by market forces, 2) the gas to be supplied by Kaiser-Francis failed to meet the quality specifications of the contract, 3) PGC was not purchasing gas from Kaiser-Francis, but rather from Kaiser-Francis' co-owners in various wells, and 4) any take-or-pay payments required under the contract would violate ceiling prices set by the Natural Gas Policy Act [NGPA]. We find each of these contentions without merit and affirm. Our jurisdiction to review this diversity case arises under 28 U.S.C. Sec. 1291. Consistent with the choice of law provision in each contract, we apply Oklahoma substantive law.

Summary judgment is appropriate when the materials submitted to the court "show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). What facts are material depends on the substantive law being applied. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). Although we view the evidence in the light most favorable to the party opposing summary judgment, Adickes v. S.H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970), disputes about immaterial facts will not preclude summary judgment. Anderson, 477 U.S. at 247-48, 106 S.Ct. at 2509-10. Should a non-moving party make some showing on a material issue, we must consider the standard of proof in the case (here, a preponderance of evidence) and decide whether the showing is sufficient for a reasonable trier of fact to find for the non-moving party on that issue. Id. at 253, 106 S.Ct. at 2512-13. A scintilla of evidence in favor of the non-moving party is not enough to preclude summary judgment. Id. Moreover, should a non-moving party not make a sufficient showing on any essential element of his case, all other facts are rendered immaterial, and summary judgment is appropriate. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). Based on our de novo review of the grant of partial summary judgment, we are convinced "that the issues before us may be resolved as a matter of law." Missouri Pac. R.R. Co. v. Kansas Gas & Elec. Co., 862 F.2d 796, 799 (10th Cir.1988). Accordingly, summary judgment was proper.

I.

PGC first contends that the force majeure provision ¹ in each contract extends to a lack of demand for gas, thereby providing relief in this case from the take-or-pay obligation ² contained in each contract. PGC suggests that there is an issue of fact concerning the extent of the failure of demand for gas. Essentially, PGC contends that a force majeure event occurred because the demand for gas sharply decreased, with a corresponding decrease in the resale price of gas that PGC was obligated to take or pay for under the contracts. Unfortunately for PGC, however, the Oklahoma Supreme Court, in interpreting a similar force majeure provision, has determined that neither a decline in demand, nor an inability to sell gas at or above the contract price, constitutes a force majeure event. Golsen v. Ong Western, Inc., 756 P.2d 1209, 1213 (Okla.1988) (interpreting force majeure provision extending to "failure of gas supply or markets"). That decision applies to this case.

PGC's interpretation of the force majeure provision is antithetical to the take-or-pay provision. Under its interpretation, PGC could be expected to take only when the demand for gas resulted in a resale price at or above the contract price. PGC could never be expected to take or pay when the demand for gas resulted in a resale price below the contract price. Rather than taking or paying under the take-or-pay provision, PGC would rely on the force majeure provision. Thus, Kaiser-Francis would be shut in during any drop in demand, for up to twenty years, without any ability to sell in other markets. Such a one-sided interpretation is suspect.

The purpose of the take-or-pay clause is to apportion the risks of natural gas production and sales between the buyer and seller. The seller bears the risk of production. To compensate the seller for that risk, the buyer agrees to take, or pay for if not taken, a minimum quantity of gas. The buyer bears the risk of market demand.

Universal Resources Corp. v. Panhandle E. Pipe Line Co., 813 F.2d 77, 80 (5th Cir.1987); see also Golsen, 756 P.2d at 1213; 4 H. Williams & C. Meyers, Oil & Gas Law Sec. 724.5 (1988) (take-or-pay provision assures the seller "of a minimum annual return and that his premises will be permitted to produce in paying quantities"). Should the resale price decline below the contract price, PGC could still take the gas and sell it, albeit at a loss, or pay for the gas without taking it, also at a loss. The change in the general or relative resale price of gas does not constitute a "partial failure of gas demand" which would relieve PGC of its obligation to take or pay. The force majeure provision cannot substitute for a price redetermination or market-out provision which would allow PGC to reduce the price paid to Kaiser-Francis for gas, thereby ameliorating PGC's take-or-pay obligation when the resale price of natural gas declined.

II.

PGC next contends that it was excused from its take-or-pay obligation because the gas did not meet the quality specification provision concerning allowable water vapor in the gas. ³ Like gas not taken by reason of force majeure, p 4.7 of the contracts allows PGC a credit against its take-or-pay obligation for "quantities of gas not taken for failure of the gas to meet the quality specifications" contained in each contract. See rec. vol. II, contracts at p 4.7 (Attachment to Brief in Support of Kaiser-Francis Oil Company's Motion for Partial Summary Judgment--1980 Ellis & 1982 Cronin Contracts). PGC established a factual issue concerning whether the gas met the quality specification, see rec. vol. I, doc. 40 (Thompson affidavit), however, Kaiser-Francis conceded the point for purposes of summary judgment. ⁴ Still, the district court granted summary judgment on this issue in favor of Kaiser-Francis because of the lack of adequate assurances by PGC that PGC would perform under the contract, even if remedial measures were undertaken by Kaiser-Francis to cure the water vapor problem.

The contract allowed Kaiser-Francis the right to cure. ⁵ The district court decision on this issue follows from certain uncontroverted facts. When Kaiser-Francis notified PGC of its 1982 take-or-pay liability under the Ellis contract, PGC denied liability on the basis of the force majeure and quality specification provisions discussed above. PGC then proposed a contract amendment which would have modified the take-or-pay arrangement with a system of "flexible pricing of natural gas at the wellhead to respond to constantly changing market conditions." Rec. vol. II (Attachment to Brief in Support of Kaiser-Francis Oil Company's Motion for Partial Summary Judgment--Letter from PGC to Kaiser dated March 30, 1983, at 2). The amendment ⁶ would have given PGC, among other things, unilateral control over price. PGC sent its letter and contract amendment to every producer with which it had a gas purchase contract in Oklahoma. Id. PGC made it clear that it intended "to take ratably on each system from all producers agreeing to this contract amendment" and that it would only take under the terms and conditions it proposed. Id. at 2, 4.

Kaiser-Francis rejected the amendment and demanded that PGC pay for that proportion of gas already taken and attributable to Kaiser-Francis. Rec. vol. II (Attachment to Brief in Support of Kaiser-Francis Oil Company's Motion for Partial Summary Judgment-Letter from Kaiser-Francis to PGC dated June 15, 1988). Kaiser-Francis also sought assurance that PGC intended to perform its take-or-pay obligation. Id.; Okla.Stat.Ann. tit. 12A, Sec. 2-609(1) (West 1981) (right to assurance of performance under...