Lone Star Gas Co. v. X-Ray Gas Co.

• Decision Date: 15 April 1942
• Docket Number: No. 7790.,7790.
• Citation: 164 S.W.2d 504
• Parties: LONE STAR GAS CO. v. X-RAY GAS CO. et al.
• Court: Texas Supreme Court

164 S.W.2d 504

LONE STAR GAS CO. v. X-RAY GAS CO. et al.

No. 7790.

Supreme Court of Texas.

April 15, 1942.

Rehearing Denied October 7, 1942.

Error from Court of Civil Appeals, Eleventh Supreme Judicial District.

Action by the X-Ray Gas Company and others against the Lone Star Gas Company to recover the value of unproduced natural gas which defendant was allegedly required to receive and pay for under a gas purchase contract. A judgment for defendant was reversed by the Court of Civil Appeals and the cause was remanded, 139 S.W.2d 142, and defendant brings error.

Judgment of the Court of Civil Appeals reversed and judgment of the trial court affirmed.

Roy C. Coffee, Marshall Newcomb, Warren J. Collins, and E. H. Selecman, all of Dallas, Conner & Conner and Earl Conner, Sr., all of Eastland, and Powell, Rauhut & Gideon, of Austin, for petitioners.

Levy & Evans, Warner Evans, and Wm. L. Evans, all of Ft. Worth, and Turner, Seaberry & Springer, of Eastland, for respondents.

SHARP, Justice.

This appeal involves the construction of a gas purchase contract, entered into by and between the owners of an oil and gas lease and the Lone Star Gas Company, wherein the Gas Company agreed to purchase the gas to be produced from 290 acres of land situated in Erath County.

The X-Ray Gas Company, O. D. Dillingham, G. A. Clements, leaseholders, and W. T. Fulfer and E. D. Garner, lessors, brought this suit against the Lone Star Gas Company to recover the value of unproduced natural gas which plaintiffs alleged defendant was required to receive and pay for under a gas purchase contract which is the subject matter of this suit. In a nonjury trial judgment was entered that plaintiffs take nothing by their suit. On appeal the Court of Civil Appeals reversed the judgment of the trial court, and remanded the case to the district court for a new trial. 139 S.W.2d 142. A writ of error was granted.

The parties will be referred to herein as they were designated in the trial court, the X-Ray Gas Company et al. as plaintiffs, and the Lone Star Gas Company as defendant.

Plaintiffs W. T. Fulfer and E. D. Garner own the 290 acres of land here involved. On January 29, 1929, they executed an oil and gas lease to G. A. White and W. F. Snebold. Lessees organized the X-Ray Gas Company, acquired a majority of its capital stock, and on May 14, 1929 assigned to the corporation all their interest in the oil and gas lease. They continued to own the majority stock and to manage the corporation until they sold their stock to plaintiffs Dillingham and Clements in April, 1935. Snebold and White drilled a well, which was productive of natural gas. This is the only well that had been drilled on the land up to the date of trial.

On April 17, 1929, the gas purchase contract, the subject matter of this suit, was entered into between Snebold and White, as vendor, and the Lone Star Gas Company, as vendee. Hoffman and Page, to whom Snebold and White had previously conveyed a 1/16 interest in the leasehold estate, ratified and confirmed the contract by written instrument dated August 25, 1929. Immediately upon the completion of the well, defendant connected its pipe line thereto, and has since continued to receive gas therefrom. The quantities of gas received by it varied from month to month, but at no time did it receive continuously the full allowable production; which fact was known to vendor. It was defendant's custom not to receive the full allowable production of gas from any of the numerous wells to which its pipe lines were connected, but to apportion its gas requirements among the wells in the various fields from which it obtained its gas supply, on the basis of potential capacity and the ability of the wells to produce. At all times subsequent to April 17, 1929, the date of the purchase contract, the supply of gas taken from the X-Ray field was apportioned among the wells in that field according to their open flow, and with consideration given to the rock pressure and other relevant factors. Defendant's plan of proration was discussed with Snebold and White on numerous occasions. The parties operated under the gas purchase contract without dissension or claim by vendor, until Hoffman and Page sold their interest in the oil and gas lease and the gas purchase contract to plaintiff G. A. Clements on February 28, 1935, and Snebold and White sold their stock in the X-Ray Corporation to plaintiffs G. A. Clements and O. D. Dillingham in April, 1935, a period of six years. This suit was filed in May, 1935.

The pertinent portions of the gas purchase contract are as follows:

The vendor (Snebold and White) "agrees to sell and deliver at the mouth of the wells, to Vendee (Lone Star Gas Company), and the Vendee agrees to receive, in the usual conduct of its business, all of the merchantable gas, in its natural state, including all hydrocarbons therein contained, as produced, from all the wells now drilled, and which may hereafter be drilled" on the 290 acres during the term of the mineral lease. Vendor "shall not be required to take gas except when delivered in commercial quantities, free from water or other fluid substances, and at pressures sufficient to enter its lines against varied working pressure therein, not to connect with unprofitable wells, nor to continue connection with any well after it becomes unprofitable to vendee; but Vendee will endeavor, so far as operating conditions will permit, to apportion gas taken from this field on basis of capacity and rock pressure of wells, and to protect the interests of the Vendor against draining through offset wells. * * * This contract is subject to all present and future valid orders, rules and regulations of any regulatory body of the state in which these premises are situated."

Hoffman and Page also become "Vendor" under this contract by virtue of their written ratification thereof.

Plaintiffs contend that under the terms of the contract defendant was obligated to accept delivery of and to pay for all the merchantable gas which the well was capable of producing, subject only to the restrictions of the Railroad Commission; or, in the alternative, it was under the obligation to receive and pay for such quantities of gas as could be produced by the well and received by defendant in the exercise of reasonable diligence, and that if defendant had exercised such reasonable diligence it would have received the full allowable production from the well continuously, and in the amount claimed in their first theory of recovery.

Defendant answered that its market for gas is uncertain, and varies from time to time, depending upon the demands of its consumers, consisting of approximately 300 cities and towns, whose needs in turn depend upon economic conditions, weather conditions, and the availability and price of competing fuels, and that all such factors control the amount of gas it is able to receive in the usual conduct of its business; that prior to and at the date of the contract, defendant had in effect and conformed to a plan of proration whereunder it apportioned its market demands among the various wells to which its pipe line facilities were connected, and from which it obtained its supply of gas; that the contract was made with reference to the peculiarities of defendant's business, which were well known to vendor; and that the vendor ratified and confirmed defendant's operations with respect to the contract as being in conformity therewith, and adopted the construction...