Kennedy & Mitchell, Inc. v. Anadarko Production Co., 61272

Decision Date29 April 1988
Docket NumberNo. 61272,61272
Citation243 Kan. 130,754 P.2d 803
Parties, 94 P.U.R.4th 533 KENNEDY & MITCHELL, INC., Appellant, v. ANADARKO PRODUCTION COMPANY, Appellee.
CourtKansas Supreme Court

Syllabus by the Court

1. The construction of a written instrument is a question of law, and the instrument may be construed and its legal effect determined by an appellate court.

2. Whether an ambiguity exists in a written instrument is a question of law to be decided by the court.

3. Language in a contract is ambiguous only when the words used to express the meaning and intention of the parties are insufficient in that the contract may be understood to reach two or more possible meanings.

4. Where parties have carried on negotiations, and have subsequently entered into an agreement in writing with respect to the subject matter covered by such negotiations, the written agreement constitutes the contract between them and determines their rights.

5. A "market-out" clause in a gas purchase contract is discussed and held to grant to the pipeline purchaser the unilateral right to propose a lower gas purchase price if it determines the existing price is "uneconomical and unacceptable."

Bruce M. Daniel, of Albright & Welch, P.C., Tulsa, Okl., argued the cause, and Stanley E. Antrim, of Yoxall, Antrim, Richardson & Yoxall, Liberal, was with him on the brief for appellant.

Robert J. O'Connor, of Hershberger, Patterson, Jones & Roth, Wichita, argued the cause, and David E. Bengtson, Wichita, and Clarence A. Conoley, of Anadarko Production Co., Kansas City, Mo., were with him on the brief for appellee.

McFARLAND, Justice:

This is a declaratory judgment action seeking a judicial determination of the effect of a "market-out" provision in a gas purchase contract. The district court held the contract was clear and unambiguous and that the defendant-purchaser's actions in lowering the price paid for the gas were authorized by the contract. Plaintiff-seller appeals from the summary judgment entered in favor of the defendant-purchaser.

The facts pertinent to the controversy herein are not materially disputed and are set forth in the district court's journal entry of judgment as follows:

"1. On November 6, 1980, APC [Anadarko Production Company] and KMI [Kennedy & Mitchell, Inc.] entered into the Gas Purchase and Sales Agreement ('the Contract') in issue. Thereby APC agreed to purchase and KMI agreed to sell the natural gas produced from the Morrow formation of the Liberal No. 29-189 well located in the Southeast Quarter (SE/4) of Section 4, Township 35 South, Range 33 West, Seward County, Kansas.

"2. Article X of the Contract concerns the price to be paid and accepted for the aforesaid gas. Specifically, Section 10.3 of the Contract, the 'market-out clause', states that:

'In the event Buyer finds the price of gas sold under this contract to be uneconomical and unacceptable, the Buyer shall propose to Seller a lesser and acceptable price level. Seller shall have a period of thirty (30) days following said notice to either accept or reject Buyer's offer. If Seller rejects Buyer's offer, then Buyer shall release Seller's gas from the terms of this contract.'

"3. Article XIV of the Contract concerns billing and payment for gas sold and purchased under the Contract. Specifically, Section 14.6 of the Contract states:

'Each party hereto shall have the right at reasonable times to examine the books and records of the other party to the extent necessary to verify the accuracy of any statement, charge, computation, or demand made under or pursuant to this Agreement.'

"4. By letter dated February 12, 1985, APC notified KMI that, pursuant to Section 10.3 of the Contract, the price of gas under the Contract would be adjusted to $2.70 per MMBTU, inclusive of adjustments, less the Cimarron River System Cost of Service (hereafter 'CRSCOS'). KMI was allowed thirty days to either accept this redetermined price or to cancel the Contract.

"At the time it issued this letter, APC was paying KMI a contract price based on the NGPA [Natural Gas Policy Act] § 103 price. Thereafter, APC paid a contract price based on the price described in that letter until that letter was modified.

"5. By letter dated March 11, 1985, KMI notified APC that it rejected APC's price redetermination, but reaffirmed the Contract and requested payment for the gas sold under the Contract at the published NGPA § 103 price pursuant to Section 10.1 of the Contract.

"6. By letter dated May 6, 1985, APC reaffirmed its prior price redetermination as set forth in its letter of February 12, 1985, and offered KMI another thirty-day period to either accept the redetermined price or to cancel the Contract.

"7. APC received no response from KMI to its price redetermination offer and concluded that KMI had elected to terminate the Contract. By letter dated July 9, 1985, APC submitted a Cancellation Agreement to KMI for its execution.

"8. By letter dated August 5, 1985, counsel for KMI denied APC's contractual authority to redetermine the price of gas under the Contract, demanded payment therefore at the current published NGPA § 103 price, and demanded payment for the incremental difference between the Section 103 price and the price paid to KMI since APC's price redetermination.

"9. By letter dated August 13, 1985, counsel for KMI requested the opportunity to examine APC's books and records to verify the accuracy of APC's statement that gas purchased from KMI pursuant to the Contract is actually uneconomical.

"10. By letter dated September 3, 1985, APC refused to allow KMI to examine APC's books and records as KMI had requested.

"11. By letter dated October 17, 1985, APC notified KMI that, pursuant to Section 10.3 of the Contract, the current price of gas under the Contract was uneconomical and unacceptable and would be adjusted effective December 1, 1985, to $2.25 per MMBTU, inclusive of adjustments, less the CRSCOS. KMI was allowed thirty days to either accept this redetermined price or to cancel the Contract. After its issuance of this letter, APC paid KMI a contract price based on the price described in that letter, until that letter was modified. KMI did not respond to APC's October 17, 1985 letter.

"12. KMI filed this action on or about March 18, 1986."

The trial court then concluded:

"1. The central issue in this matter is whether Section 10.3 of the Contract is compatible with Section 14.6, or whether the Contract should be construed [to be] ambiguous. The Court concludes: that the Contract is not ambiguous; that Section 10.3 grants APC, as the Buyer, the unilateral right to determine that a current price is uneconomical and unacceptable; and that the provisions of Section 14.6 apply to all of the other provisions of the Contract except Section 10.3, which requires the aforesaid unilateral determination. The briefs of APC are specifically incorporated into this Journal Entry.

"2. On three separate occasions, APC determined that the price of gas under the Contract was uneconomical and unacceptable to it. APC submitted a lower price to KMI, and offered to cancel the Contract if the price [was] not acceptable to KMI.

"APC's actions were expressly authorized by Section 10.3 of the Contract. That clause clearly grants APC the right unilaterally to lower the price paid for gas sold under the Contract. APC's unilateral actions lawfully and effectively lowered the Contract price. APC is entitled to summary judgment as a matter of law. KMI's Cross-Motion for Summary Judgment is denied."

KMI appeals from the entry of summary judgment in favor of APC. KMI's position may be summarized as follows:

1. The contract is clear and unambiguous;

2. the market-out clause grants APC the right to lower the price only if the existing price is provably uneconomical;

3. "uneconomical" means APC is losing money in its sale of the gas purchased under the contract and the burden of proof of same is on APC;

4. KMI has the right to inspect APC's books and records pursuant to Section 14.6 of the contract to determine whether the existing purchase price is, in fact, uneconomical and, accordingly, whether or not the market-out clause has been triggered;

5. the district court erred in construing the disputed contractual provisions adversely to the position of KMI; and,

6. as a fall-back position, the contract is ambiguous and should be construed strictly against APC, its scrivener.

The construction of a written instrument is a question of law, and the instrument may be construed and its legal effect determined by an appellate court. Peterson v. Midland Nat'l Bank, 242 Kan. 266, Syl. p 1, 747 P.2d 159 (1987). Whether an ambiguity exists in a written instrument is a question of law to be decided by the court. Holly Energy, Inc. v. Patrick, 239 Kan. 528, 534, 722 P.2d 1073 (1986). Language in a contract is "ambiguous" only when words used to express the meaning and intention of the parties are insufficient in that the contract may be understood to reach two or more possible meanings. Havens v. Safeway Stores, 235 Kan. 226, 231, 678 P.2d 625 (1984).

The district court held that the...

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