El Paso Nat'l Gas v. Minco Oil & Gas

• Decision Date: 27 January 2000
• Docket Number: No. 98-0478,98-0478
• Citation: 8 S.W.3d 309
• Parties: (Tex. 1999) El Paso Natural Gas Co., Petitioner v. Minco Oil & gas, Inc., and Charles F. Doornbos as Trustee for the Charles F. Doornbos Revocable Trust, Respondents
• Court: Texas Supreme Court

Page 309

8 S.W.3d 309 (Tex. 1999)

El Paso Natural Gas Co., Petitioner v. Minco Oil & gas, Inc., and Charles F. Doornbos as Trustee for the Charles F. Doornbos Revocable Trust, Respondents

No. 98-0478

IN THE SUPREME COURT OF TEXAS

Argued on December 10, 1998

November 18, 1999

Rehearing Overruled January 27, 2000.

On Petition for Review from the Court of Appeals for the Seventh District of Texas

[Copyrighted Material Omitted] Justice Enoch delivered the opinion of the Court, in which Chief Justice Phillips, Justice Hecht, Justice Baker, Justice Abbott, Justice O'Neill, and Justice Gonzales joined.

This is an appeal from a judgment awarding respondents Minco Oil & Gas, Inc. and Charles F. Doornbos as Trustee for the Charles F. Doornbos Revocable Trust damages for breach of gas purchase agreements against petitioner, El Paso Natural Gas Company. As to Minco, the principal issue is whether the Uniform Commercial Code's good faith obligations apply to its final release of its agreement with El Paso. We conclude that the UCC¹ does not impose a duty of good faith upon the formation or procurement of a final release of liability. Thus, we hold that Minco's release is enforceable and releases El Paso from its take-or-pay obligations to Minco. Regarding Doornbos, the issue is whether El Paso waived error thus limiting the court of appeals' authority to render judgment for El Paso on the enforcement of Doornbos's release. Because we conclude El Paso did not waive error, we reach the question and conclude that Doornbos's release is enforceable and releases El Paso from its take-or-pay obligations to Doornbos. Accordingly, we reverse the court of appeals' judgment and render judgment for El Paso. Background

In 1979, Minco and Doornbos entered into separate agreements with El Paso containing identical "take-or-pay" clauses. The agreements' take-or-pay provisions required El Paso to purchase a stated minimum quantity of gas or pay Minco and Doornbos the difference between the quantity actually taken and the stated minimum quantity. Due to the mid-1980's sharp decline in natural gas prices and demand, El Paso determined that it was unprofitable to continue purchasing gas under the agreements' take-or-pay requirements. To mitigate its losses, El Paso executed with Minco and Doornbos various amendments to the agreements that reduced El Paso's take-or-pay obligations and granted El Paso the right to unilaterally reduce the price it paid for gas. In addition, the parties executed over eighty other contracts ("monthly releases") that: (1) released El Paso from its monthly take-or-pay obligation; (2) allowed Minco and Doornbos to sell their gas on the spot market during the relevant time period; and allowed EL paso the option either to reduce its annual take-or-pay obligation by the amount of gas Minco and Doornbos sold on the spot market or to disregard El Paso's obligation for the month covered by the contract.

In 1988, Minco requested and received from El Paso a final termination of its agreement and a mutual release of liabilities ("Minco termination letter"). Under this termination letter, El Paso and Minco released each other "from any and all claims, causes of action or liability that may have existed concerning the Agreement."

In 1991, El Paso decided to terminate its relationship with Doornbos and sent Doornbos and his predecessors-in-interest form letters that the parties signed agreeing to waive "[a]ll past liabilities that might exist between the parties."

In 1992, Minco and Doornbos sued El Paso under the 1979 agreements' take-or-pay provisions. Minco and Doornbos argued that the releases were invalid, alleging that El Paso obtained the Minco and Doornbos amendatory agreements, monthly release letters, and termination letters unconscionably and in bad faith. El Paso responded that the parties had mutually released all claims through the Minco and Doornbos amendatory agreements, monthly release letters, and termination letters.

In a preliminary ruling, the trial court granted partial summary judgment for Minco and Doornbos, holding that the amendatory agreements, the monthly releases, and the Minco and Doornbos final termination letters were all unconscionable as a matter of law. In a bench trial on the remaining issues, the trial court not only reaffirmed its earlier ruling, but also concluded that El Paso procured the amendatory agreements, monthly releases, and the Minco termination letter in bad faith. But the trial court did not make a bad faith determination concerning the Doornbos termination letter. In any event, the court declined to enforce any of the releases and ordered El Paso to pay Minco and Doornbos damages under the agreements' take-or-pay provisions.

The court of appeals reversed the trial court's finding of unconscionability as to all the agreements.² The court, however, agreed with the trial court's finding that El Paso procured the Minco final termination letter in bad faith and affirmed the judgment for Minco. Because unconscionability was the only ground upon which the trial court relied to void the Doornbos termination letter, the court of appeals concluded the release was valid and rendered judgment that Doornbos take nothing.³

On rehearing, the court of appeals concluded that El Paso had not properly preserved error on its defense that the Doornbos termination letter operated as a release. The court reasoned that because the trial court, in its findings of fact and conclusions of law, found the Doornbos termination letter to be ambiguous and expressly refused to rule upon whether the termination letter was a release, El Paso had the burden to show on appeal that it had raised the issue that the document was a release as a matter of law. But because El Paso failed to challenge the court's refusal to hold the letter a release, El Paso waived error on whether the document effectuated a release. The court thus concluded that it was without authority to now find the document was a release.⁴ The court of appeals then considered whether the amendatory agreements and monthly releases were valid to determine if the Doornbos Agreement's take-or-pay provision was enforceable. In its analysis, the court considered whether El Paso hada duty to act in good faith in obtaining the amendatory agreements and monthly releases, and if so, whether El Paso had in fact breached the duty. The court of appeals, agreeing with the trial court, concluded that UCC section 1.203 imposed a duty on El Paso to act in good faith in procuring the amendatory agreements and monthly releases. The court then concluded that El Paso procured the amendatory agreements and monthly releases in bad faith and, therefore, held them unenforceable. Thus, on rehearing, the court of appeals also affirmed the trial court's judgment for Doornbos.

Minco -- Duty of Good Faith

Because the issue of whether one has a duty to act in good faith is a question of law, our review is de novo.⁵ The general rule is that, absent a special relationship there is no duty between parties to a contract to act in good faith.⁶ Here, the parties do not contend that a common law duty of good faith exists. Rather, they disagree over whether the UCC's statutory duty of good faith and fair dealing in the performance, enforcement and modification of a commercial contract applies to a final release of liability.⁷

Minco asserts that the UCC's duty to act in good faith applies to all the parties' agreements, including the final termination letter. Specifically, Minco contends that El Paso violated the UCC's good faith duty of "honesty in fact in the conduct or transaction concerned."⁸ It further asserts that both UCC section 1.203's requirement that "[e]very contract or duty within this title imposes an obligation of good faith in its performance or enforcement" and UCC section 2.209's requirement that modifications meet the test of good faith impose a duty of good faith to all the parties' agreements, including the release.

El Paso, by contrast, contends that the court of appeals erred by applying the UCC's obligation of good faith to the formation or procurement of the final release. El Paso asserts that the UCC's duty of good faith applies to the "enforcement and performance" of contracts, including "modifications" of those contracts, but does not apply to the "formation" of contracts. Thus, El Paso reasons that because a final release of liability constitutes neither the "enforcement and performance" of a contract for sale of goods nor a "modification" of an agreement, but rather is the "formation" of a separate contract releasing the parties' obligations to each other, the UCC's duty of good faith does not apply. We agree.

Buying and selling oil and gas pursuant to take-or-pay gas purchase agreements is a transaction involving "goods" within the meaning of the UCC's good faith provisions.⁹ Accordingly, El Paso has a statutory obligation to act in good faith in the performance, enforcement and modification of these agreements.¹⁰ But that does not mean that El Paso is under a statutory good faith obligation when it procures or forms those contracts.

The court of appeals concluded that the good faith obligation in sections 1.203 and 2.209, as defined in section 2.103, imposed a duty of good faith in procuring the final termination letter on El Paso. True, section 1.203 states that "[e]very contract or duty within this title imposes an obligation of good faith in its performance or enforcement."¹¹ And section 2.103 further defines "good faith" in the case of a merchant as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade."¹² But this duty of good faith does not extend to the formation of a contract.¹³ And that includes releases because releases are contracts.¹⁴ Indeed, a final release is a contract by which the parties agree that there are no longer any duties to perform or enforce under the original...