Lone Star Gas Co. v. Howard Corp.

• Decision Date: 30 August 1977
• Docket Number: No. 8418,8418
• Citation: 556 S.W.2d 372
• Parties: LONE STAR GAS COMPANY, Appellant, v. The HOWARD CORPORATION, Appellee.
• Court: Texas Court of Appeals

Page 372

556 S.W.2d 372

LONE STAR GAS COMPANY, Appellant, v. The HOWARD CORPORATION, Appellee.

No. 8418.

Court of Civil Appeals of Texas, Texarkana.

Aug. 30, 1977.

Rehearing Denied Sept. 27, 1977.

Joe N. McClendon, Jack Pew, Jr., Jackson, Walker, Winstead, Cantwell & Miller, Dallas, for appellant.

Roach & Robertson, Dallas, for appellee.

RAY, Justice.

This is a suit by the seller of gas, The Howard Corporation, appellee (plaintiff), against the buyer, Lone Star Gas Company, appellant (defendant), to recover the difference between the price actually paid by Lone Star to Howard for gas sold by Howard to Lone Star in Scurry County from January 1, 1973, through June 30, 1975, in intrastate commerce and the price Howard contends Lone Star was required to pay under the "favored nations" provisions of the contract. The quantum of gas actually sold and delivered and the price actually paid by Lone Star to Howard were stipulated. After a trial before the court, judgment was rendered in favor of Howard against Lone Star for increases in price under the favored nations clause, amounting, after a remittitur, to $46,121.32 plus interest and attorney's fees. Findings of fact and conclusions of law were made and filed. Appellant, Lone Star Gas Company, has perfected its appeal and submits thirteen points of error for our consideration.

The dispute in this case is over the existence and sufficiency of facts necessary to trigger the favored nations clause in the intrastate gas purchase contract between the parties.

A favored nations clause is a vendor protection clause. It enables the vendor to receive the benefit of increases in the market price of his product over the term of a long range contract with a purchaser. A three-party favored nations clause enables a vendor to receive the benefit of a higher than contract price paid by any purchaser. A two-party favored nations clause restricts the vendor to the benefit of higher than contract price paid by his contract purchaser. The instant case is concerned with a two-party favored nations clause. The contract provides the following:

"COMPARATIVE PRICE ADJUSTMENTS: If, at any time or times, subsequent to the date of the execution of this agreement and so long as gas is delivered hereunder, there shall be in effect any agreement between Buyer and any other producer or producers of gas providing for the purchase of gas produced in District 8 of the Railroad Commission of Texas, as presently constituted, at a price per one thousand (1,000) cubic feet higher than the price per one thousand (1,000) cubic feet, payable at the same time hereunder and for gas of a like character taken under substantially similar provisions relating to delivery, pressures, quantity, compression requirements, and primary term of contract, then Buyer will thereupon increase the price thereafter payable hereunder so that it will equal the price payable at the same time under such other agreement, and such higher price hereunder shall continue in effect during the remainder of the primary term of this contract so long as any such higher price is paid for gas by Buyer under any such other agreement." (Emphasis added.)

It was stipulated that the "comparative price adjustments" clause was part of the contract between the parties. The parties further stipulated the amount of gas sold and the price paid under the contract, as well as the existence of eight separate contracts entered into by the appellant for the purchase of gas from other parties. There is no dispute over the price payable under these contracts. Dispute arose from the appellee's contention that the subsequent contracts of the appellant were sufficiently similar to trigger the favored nations clause and implement a higher price to be paid by Lone Star, the purchaser, to Howard, the seller.

Appellant-purchaser paid to subsequent sellers higher prices for gas than was contracted for with the appellee. The appellant has focused its appeal on the adequacy of the subsequent contracts to meet all provisions of the favored nations clause and implement the higher price in the Howard contract. The appellant's first twelve points of error are essentially "no evidence", "insufficient evidence", and "against the great weight of the evidence" attacks upon the findings of the trial court that the gas purchased in the subsequent contracts was of like character and taken under substantially similar conditions to that of the Howard contract.

The appellant has also complained on appeal of the award of attorney's fees against it.

The gas sales contracts of a natural gas company dealing in interstate commerce of gas for resale are controlled by the federal Natural Gas Act, 15 U.S.C.A., Sec. 717, et seq., and are subject to the jurisdiction of and regulation of the Federal Power Commission. Superior Oil Company v. El Paso Natural Gas Company, 377 S.W.2d 691 (Tex.Civ.App. El Paso 1964, no writ); Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035 (1954). When favored nations clause cases have found their way into the federal courts, the courts have shown great deference for the Federal Power Commission's finding of relative similarity when based upon specialized knowledge gained from experience in regulation or trade practice, and have limited their participation to application of rules of ordinary contract construction. Texas Gas Trans. Corp. v. Shell Oil Co., 363 U.S. 263, 80 S.Ct. 1122, 4 L.Ed.2d 1208 (1960). The Texas Gas Transmission case presents an example of the U. S. Supreme Court applying contract law in review of a FPC order. The court affirmed the conclusion of the FPC that the favored nations clause being reviewed by the court had not been triggered by redetermination of price under a contract which had antedated the favored nations clause. The clause called for an agreement by the purchaser to buy from another source at a higher price. A price adjustment of a pre-existing contract was held not to be such an agreement as would trigger the favored nations clause.

In an appeal not dealing with questions of law, the FPC appears to have much discretion. A case in which the FPC declined to implement a favored nations clause on a finding of substantial dissimilarity to the alleged triggering contract is Pure Oil Company v. Federal Power Commission, 299 F.2d 370 (7th Cir. 1962). The FPC found that the high pressure and great quantity of gas purchased in the subsequent contract were distinguishing features. The Court of Appeals upheld the right of the FPC in weighing comparability to consider all factors the FPC considered relevant in arriving at the value of gas, whether specifically authorized by contract or not.

When the FPC has not contributed its technical expertise, the trial court must weigh similarities as best it can. In Louisiana-Nevada Transit Co. v. Woods, 393 F.Supp. 177 (W.D.Ark.1975), a court in such a position construed broadly the requirement of the favored nations clause that any triggering contract be "comparable". The critical inquiry was held to be one of price, not condition. The appellee in the instant case persuasively points out the similarity of the Louisiana-Nevada Transit case to the case at bar.

A case in superficial conflict is Chemplex Company v. Tauber Oil Company, 309 F.Supp. 904 (S.D.Iowa 1970). Respective conditions were held to more rigorous analysis, and found not to be comparable. As pointed out by the Louisiana-Nevada Transit case, supra, the particular favored nations provision in Chemplex would impose on the parties all of the same conditions of the triggering contract, thus warranting the scrutiny of these different conditions. The Louisiana-Nevada favored nations clause, as the clause before the court in the instant case, would impose only the higher price of the triggering contract on the parties.

The appellant has attempted to distinguish the Louisiana-Nevada Transit case on the basis of the plain language of the favored nations clause. It is urged that the favored nations clause in the instant case is not activated by a showing that the triggering contract contains a higher price, without a further showing that a list of conditions precedent have been satisfied. The essence of the appellant's position is contained in its statement that "in order to maintain an action under such clause Howard was required to prove (1) that the contract relied upon contained an agreement for the purchase of the gas at a price per MCF, and (2) that such price was payable for gas taken, and (3) that such price was payable for gas of like character to that being purchased from Howard, and (4) that the gas was taken under substantially similar conditions as to all of the following delivery, pressures, quantity, compression requirements and primary term of contract."

The appellant's first three assertions appear to be in error. The favored nations clause does not require that a subsequent triggering contract express its price in terms of thousands of cubic feet of gas (MCF), but rather that such price be greater than the existing contract price when expressed in MCF. Similarly the clause does not require that subsequent contracts of purchase and sale be for gas of like character, but rather that the gas be of like character when its price per MCF is calculated for purposes of comparison. Neither does the clause require that the gas actually be taken by the purchaser, but rather that there be an agreement for the purchase of gas taken under substantially similar provisions.

The appellant's fourth assertion that the gas must be taken under substantially similar conditions is supported by the language of the contract. The trial court found, however, that this requirement had been satisfied. Such a finding is subject to the same force and dignity as a jury verdict upon special issues, and when supported by competent evidence will not be disturbed on appeal unless so against the overwhelming...