Manchester Pipeline Corp. v. Peoples Natural Gas. Co., a Div. of Internorth, Inc., s. 86-1666

• Citation: 862 F.2d 1439
• Decision Date: 13 December 1988
• Docket Number: Nos. 86-1666,86-2720,s. 86-1666
• Parties: 7 UCC Rep.Serv.2d 1000 MANCHESTER PIPELINE CORPORATION, Plaintiff/Appellee, v. PEOPLES NATURAL GAS COMPANY, A DIVISION OF INTERNORTH, INC., Defendant/Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)

Page 1439

862 F.2d 1439

7 UCC Rep.Serv.2d 1000

MANCHESTER PIPELINE CORPORATION, Plaintiff/Appellee, v. PEOPLES NATURAL GAS COMPANY, A DIVISION OF INTERNORTH, INC.,

Defendant/Appellant.

Nos. 86-1666, 86-2720.

United States Court of Appeals, Tenth Circuit.

Dec. 13, 1988.

Kenneth N. McKinney (David W. Kirk with him on the briefs), McKinney, Stringer & Webster, Oklahoma City, Okl., for plaintiff/appellee.

Joseph P. Titterington (William L. Peterson with him on the briefs), Kenan & Peterson, Oklahoma City, Okl., for defendant/appellant.

Before ANDERSON, BALDOCK and EBEL, Circuit Judges.

STEPHEN H. ANDERSON, Circuit Judge.

This diversity case arises out of an alleged gas purchase contract between the seller, Manchester Pipeline Company ("Manchester"), a corporation formed to sell natural gas produced from a reservoir in Oklahoma, and the buyer, Peoples Natural Gas Company ("PNG"), a natural gas distribution company. Manchester brought suit in district court in Oklahoma, claiming that PNG had breached the gas purchase contract and seeking damages. A jury returned a verdict for Manchester and awarded Manchester damages in the amount of $1,450,000. The district court denied PNG's post-trial motions for judgment n.o.v., for a new trial and for a remittitur.

Manchester thereafter filed a motion to tax costs and attorney's fees. The district court awarded Manchester its costs and referred the question of attorney's fees to a magistrate, who, after conducting an evidentiary hearing, assessed $175,000 in attorney's fees against PNG. The district court affirmed that award. PNG's appeal from the award of attorney's fees has been consolidated with its appeal from the jury verdict and award of damages to Manchester. For the reasons set forth below, we AFFIRM the jury verdict finding that PNG breached the contract with Manchester, but REVERSE and REMAND for a recalculation of damages. Because we partially remand, we do not address at this time the propriety of the award of attorney's fees to Manchester.

BACKGROUND

William H. Davis and others discovered and developed a natural gas reservoir known as the Manchester Field (the "Field"), located in Grant County, Oklahoma. By the end of 1983, there were four completed wells in the Field. Ultimately, eleven wells were completed in the Field. In late 1983, Davis began contacting several natural gas purchasers, including PNG, to explore possibilities for selling the gas.

Actual negotiations between Manchester and PNG commenced in November, 1983. There were several meetings between Manchester representatives and PNG representatives. PNG's representatives on several occasions provided Davis with sample gas purchase contracts for his review. In April, 1984 Davis met with Rod Donovan, PNG's gas contracts representative. Donovan testified that he often, but not always, told prospective sellers that any offer he made was subject to PNG management approval. R.Vol. II at 165. Donovan further testified that his superior, Bill Eliason, never told Donovan that any of the offers or letters he [Donovan] sent in connection with the negotiations with Manchester were "improper or inappropriate." Id. at 168; R.Vol. III at 172. Eliason testified that he approved the terms Donovan was negotiating with Manchester at each stage of those negotiations and communicated those terms to other members of Donovan sent Davis a letter dated May 14, 1984 "offering" to purchase natural gas from Manchester, at the price of $2.65 per Million British Thermal Units ("MBTUs"), for a 20 year period.

                PNG's management.  Eliason's superior in PNG management, Richard Coil, testified that he was generally aware of the terms being negotiated with Manchester and that he never disapproved of any such terms.  R.Vol. II at 189;  R.Vol. IV at 20-21.  Davis testified that Donovan told him "he did have authority to negotiate contracts.  He didn't imply that he had authority to sign contracts."    R.Vol. II at 48-49.  Coil indicated that Donovan had no actual authority to execute documents on behalf of PNG.  R.Vol. IV at 19
                

The parties continued to negotiate over the following months. On three or four occasions during those months, Donovan sent to Davis a single copy of a sample gas purchase contract. On those copies, "draft copy" was stamped in red ink. On September 12, 1984, Donovan sent to Davis three copies of a document titled "Gas Purchase Contract" (the "Document"), covering six wells in the Field. These did not have "draft copy" stamped in red on the front page. The Document provided for a term of ten years and contained detailed provisions concerning price, minimum "take" obligations, determination of reserves, and the right of PNG to reduce the price paid for gas taken in order to remain competitive in the gas market. ¹ The copies were accompanied by a letter, which stated in pertinent part:

"Enclosed for your review and approval, please find three copies of our Gas Purchase Contract covering acreage referenced above.

"If you find this Contract acceptable, please fully execute all three copies, (including notary pages) and return to this office. Following [PNG's] execution, one completed Contract will be forwarded to you."

R.Vol. I at Tab I, Ex. B. Coil testified that it would not be normal PNG procedure to send out a contract for a gas producer to sign unless PNG management found the terms of the contract acceptable.

On September 18, 1984, the Vice President of Manchester, Richard Massengale, executed the three copies and returned them to Donovan. PNG never executed the copies and denies that a contract for the purchase of gas has ever been formed between the parties. PNG's explanation for its failure to sign the contract is that it lost its largest industrial gas customer and there was a general "softening" of the gas market, the combined effect of which rendered it unable to enter into a contract. ² Coil testified that he began to be concerned about PNG's loss of market even before the Document was sent to Manchester for signature, but that he "did let them go ahead and send out the contract with the understanding that it may not get approved...." R.Vol. II at 188.

The parties presented conflicting evidence as to the custom in the oil and gas industry regarding entering into gas purchase contracts. Both Donovan and Davis testified that gas purchasers always drafted the contracts. Donovan testified that, after a gas contract representative such as himself had drafted the contract, he would forward it to the producer for execution. He testified that after the gas contract representative had received the executed copy from the producer, he would "forward it to ... management for their review and finally their execution." R.Vol. III at 148. Coil testified similarly as to the custom in the industry. He stated that "we do not feel we have a contract with the producer During the negotiations between PNG and Manchester, the parties had agreed that Manchester would acquire any necessary rights of way and construct a pipeline from the Field to PNG's pipeline system. This obligation was embodied in the Document. R.Vol. I at Tab 1, Ex. C. Davis testified that in July and August, he instructed Massengale, who was an engineer, to commence the engineering studies necessary for Manchester to build the pipeline. R.Vol. II at 117-18. He further testified that, at PNG's request, Manchester used larger pipe in building the pipeline (six-inch instead of four-inch) "to match up with the system they [PNG] already had in place." Id. at 51. Donovan testified that he had a number of conversations with Massengale concerning the pipeline, and that he told Massengale "that it would be more prudent to wait until after the contract had been approved and executed by my management before he would go ahead with [the pipeline]." R.Vol. III at 149.

                until it is signed by both parties."    R.Vol. IV at 16.  PNG presented an expert witness who testified that this practice was followed without exception.  Davis testified that, in practice, while the buyer always expected the producer to sign and execute the contract first, the buyer always returned an executed contract once the producer had executed the document.  Manchester's expert, William Dutcher, testified that it was the custom in the oil and gas industry to only formally exchange executed documents after the producer and buyer had agreed, at least verbally, on all the terms.  One of the other working interest owners of the producing wells in the Field, George Singer, expressed a similar opinion
                

After Manchester returned the executed copies of the Document, Davis met with Donovan and Eliason in September, 1984 to discuss the pipeline. There was conflicting evidence as to what happened at that meeting. Manchester presented testimony that Davis was assured that, despite PNG's failure to return the executed copy of the Document, PNG wanted to purchase Manchester's gas but was experiencing some internal gas allocation problems, and that Davis should continue in his efforts to construct the pipeline. Donovan and Eliason testified that Eliason explained to Davis PNG's hesitancy to sign the Document, and urged Davis to discontinue construction on the pipeline until PNG's management had signed it. Eliason testified that, at that meeting, PNG was only "considering" whether to purchase Manchester's gas. Donovan further testified that Davis said he would continue with the pipeline and sell to another buyer if PNG refused to sign the Document. Donovan then acknowledged that, after Davis said he would continue the pipeline and sell to another buyer if PNG refused to sign the Document, he never again urged Davis to stop building the pipeline. ³

Davis testified that Donovan called him in mid-October to tell Davis that PNG was losing a major customer, but that Donovan assured Davis he should continue with the pipeline. Donovan also informed Davis that PNG would probably only be able to take the...