Northern Arizona Gas Service, Inc. v. Petrolane Transport, Inc.

• Decision Date: 24 December 1984
• Docket Number: CA-CIV,No. 1,1
• Citation: 145 Ariz. 467,702 P.2d 696
• Parties: NORTHERN ARIZONA GAS SERVICE, INC., Plaintiff-Appellee, Cross-Appellant, v. PETROLANE TRANSPORT, INC., Defendant-Appellant, Cross-Appellee. 6279. . Filed
• Court: Arizona Court of Appeals

Page 696

702 P.2d 696

145 Ariz. 467

NORTHERN ARIZONA GAS SERVICE, INC., Plaintiff-Appellee, Cross-Appellant, v. PETROLANE TRANSPORT, INC., Defendant-Appellant, Cross-Appellee.

No. 1 CA-CIV 6279.

Court of Appeals of Arizona, Division 1, Department D.

Filed Dec. 24, 1984.

Reconsideration Denied April 3, 1985.

Review Denied June 25, 1985.

Gust, Rosenfeld, Divelbess & Henderson by Richard A. Segal, Michael L. McAllister and Fred Cole, Phoenix, for plaintiff-appellee, cross-appellant

Lewis & Roca by John P. Frank, Susan M. Freeman, David J. Cantelme, Phoenix, and Duecy, Moore, Robinson & Bennett by William F. Bennett, Scottsdale, for defendant-appellant, cross-appellee.

OPINION

HAIRE, Presiding Judge.

This is an appeal from the trial court's grant of summary judgment in favor of the appellee on its breach of contract claim and the award of damages after a subsequent trial to the court. The appellee, Northern Arizona Gas Service (NAGS), claimed that appellant, Petrolane, had charged more for liquified petroleum gas (LPG) than was permitted by a fuel supply agreement existing between the parties. Petrolane's primary contention on appeal is that the contract must be re-interpreted in light of federal regulations enacted during the term of the contract. In addition, Petrolane raises several issues relating to the trial court's rejection of its defenses of waiver and failure to mitigate and to the measure of damages. NAGS filed a cross-appeal challenging the trial court's denial of its claim for prejudgment interest on the damages awarded.

FACTS

Petrolane is a supplier of LPG. NAGS is a wholesale and retail seller of that commodity. The LPG involved was propane gas used mainly as a fuel in central heating systems, for cooking, water heating, and other domestic uses. It is transported by truck or rail and sold in tanks and cylinders for domestic use.

The parties entered into a long-term "Fuel Supply Agreement" in 1966. The price was to be determined as follows:

"BUYER agrees to pay SELLER for all liquified petroleum gas delivered to BUYER at the following destination prices, adjusted upward or downward from time to time to reflect increases or decreases in SELLER'S delivered cost of gas to such locations...."

It went on to list specific prices, in cents per gallon, for delivery to given locations. The agreement then requires that, in case of a change in price the seller shall, upon written request:

"... furnish BUYER with an explanation in reasonable detail of the cost factors which changed to produce an increase or decrease in SELLER'S delivered cost of gas to various locations...."

The agreement also contained a clause excusing non-performance by either party to the extent that it was caused by "interference or regulation by any public bodies or officer acting under claim of authority ... [or by a] shortage of products...."

Between the execution of the agreement in 1966 and the enactment of federal regulations in 1973 "delivered cost" was interpreted by both parties as dependent on the actual cost of gas delivered to NAGS. Changes in price essentially reflected changes in acquisition or transportation costs. Most of the gas delivered to NAGS was from the El Paso Natural Gas Refinery at Wingate, New Mexico, and nearly all the price adjustments during that period were based on the shifts in price at that refinery.

In 1973 Congress enacted the Emergency Petroleum Allocation Act. 15 U.S.C. § 751 et seq. Pursuant to its mandate, the federal government enacted mandatory price and allocation regulations, codified at 10 C.F.R. § 205 et seq. The regulations established a ceiling on the price suppliers of petroleum products could charge.

"... seller may not charge a price ... which exceeds the weighted average price ... [charged] ... on May 15, 1973, plus an amount which reflects, on a dollar-for-dollar basis, the increased product costs concerned." 10 C.F.R. § 212.93(a)(1); (emphasis added).

The weighted average price is calculated on the basis of the seller's entire undivided stock of regulated products, unless the seller's historic practice was to use separate inventories. 10 C.F.R. § 212.92(d). If separate inventories were used, separate and corresponding weighted averages could be computed. The regulations permit sellers to include specific product and non-product costs in calculating their maximum lawful price. 10 C.F.R. §§ 212.92(d), 212.93(b)(4)(iii).

Petrolane had not, prior to 1973, "pooled" gas from the El Paso Refinery with that from any other source either physically or for accounting purposes. In response to the new regulations, however, it created a regional pool which averaged together the prices charged by its sources for southern California and Arizona customers. From that point on, NAGS was charged a higher price based on this pool's weighted average cost, even though the gas which was actually delivered continued to come primarily from the El Paso refinery. Petrolane continued to maintain records of its actual costs, as well as the "pool" cost records it was required to keep to calculate its weighted average.

NAGS questioned Petrolane about the increases in price and was told that they were caused by the government's pooling requirements. Nevertheless, NAGS continued to purchase its LPG from Petrolane until 1976, when it requested substantiation of the increases. Petrolane responded with a letter demonstrating its increased pool costs. It did not provide NAGS with information on the actual cost of LPG delivered, although those figures were available. Unsatisfied with Petrolane's response, NAGS began to buy surplus LPG on the spot market. Occasionally no surplus was available and NAGS purchased LPG from Petrolane.

NAGS initiated this action by filing a complaint in July of 1979 alleging that Petrolane had been overcharging for LPG since 1973. The statute of limitations barred claims for the pre-1975 period. The trial judge granted NAGS' motion for summary judgment on the issue of breach of contract. Upon a motion for reconsideration and clarification by Petrolane, the trial judge confirmed her decision, finding as matters of law that the term "delivered cost" was unambiguous and that the enactment of the government regulations did not render it ambiguous. The balance of the action was heard by a different trial judge, with evidence being presented relating to waiver, mitigation and damages in a three day trial.

After hearing the evidence, the trial judge concluded that the contract allowed a profit margin of 1.723 cents per gallon, the margin as it existed in the first quarter of 1973, and awarded NAGS the sums it had paid in excess of that amount. He rejected Petrolane's defenses of waiver and failure to mitigate and its assertion of a "pass-through" defense.

A. The Effect of the Government Regulations on the Contract.

Petrolane's primary contention on appeal, as previously stated, is that the government regulations re-defined "delivered cost" as it was used in the fuel supply agreement, and thus that Petrolane was justified in charging NAGS a price which reflected costs of supplying customers throughout southern California and Arizona rather than the actual cost of the products supplied to NAGS. In response, NAGS argues that the agreement is unambiguous and unaffected by the government regulations.

In reviewing a summary judgment, this court must view the record in the light most favorable to the party against whom the motion was directed. Payne v. M. Greenberg Construction, 130 Ariz. 338, 343, 636 P.2d 116, 121 (App.1981). We are limited to the evidence before the trial court when the motion was heard and may not consider evidence presented at the subsequent trial. Id.

The meaning of delivered cost before the regulations were enacted is undisputed. Petrolane admits that it consisted of an opening price, which included a margin for overhead and profit, and which was to be adjusted up or down to reflect fluctuations in the actual cost of the product delivered to NAGS' various locations. Petrolane has abandoned its original argument that the subsequent government regulations compelled it to breach the contract.

Petrolane now contends that the regulations, in effect, imposed a new definition of "cost" which replaced the parties' prior interpretation of the contract, relying on Nevada Half Moon Mining Co. v. Combined Metals R. Co., 176 F.2d 73 (10th Cir.1949) and North Central Airlines, Inc. v. Continental Oil Co., 574 F.2d 582 (D.C.Cir.1978).

The controversy in Nevada Half Moon concerned a contract for the sale of a mine. The contract obligated the buyer to pay a royalty of 2 1/2 percent of the net mill or smelter returns from the sale or disposal of the ores mined for a period of 10 years. 176 F.2d at 74. During the term of the contract, Congress placed a ceiling on the production of certain minerals and authorized subsidy payments to affected miners. The buyer of the Nevada Half Moon Mine received subsidy payments, but refused to pay the seller any royalty on them because they did not come within the contract definition of net smelter returns. The court of appeals held that in light of the parties' obvious intent that the buyer pay for the mine, the subsidy payments were the equivalent of "returns paid for ores" under the contract and that the royalty should be paid. Id. at 75.

Petrolane argues that this was an expansion of the contract term beyond its original definition to encompass the government regulations and that the same principle should be applied here. Delivered cost would be expanded to include the additional costs that the regulations permit oil companies to charge.

Nevada Half Moon is distinguishable from this case. The mining regulations flatly prohibited the buyer from continuing to mine and sell ores as the parties had contemplated and supplanted their method for determining the amount of the payments. The regulations replaced "returns for ores" with its...