Superior Oil Co. v. Western Slope Gas Co.

• Decision Date: 18 May 1982
• Docket Number: 77-F-388.,Civ. A. No. 76-F-869
• Citation: 549 F. Supp. 463
• Parties: The SUPERIOR OIL COMPANY, Plaintiff, v. WESTERN SLOPE GAS COMPANY, Defendant. CONTINENTAL OIL COMPANY, Plaintiff, v. WESTERN SLOPE GAS COMPANY, Defendant.
• Court: U.S. District Court — District of Colorado

549 F. Supp. 463

The SUPERIOR OIL COMPANY, Plaintiff, v. WESTERN SLOPE GAS COMPANY, Defendant.

CONTINENTAL OIL COMPANY, Plaintiff, v. WESTERN SLOPE GAS COMPANY, Defendant.

Civ. A. Nos. 76-F-869, 77-F-388.

United States District Court, D. Colorado.

May 18, 1982.

Robert C. Hawley, and Gretchen A. VanderWerf, Dechert, Price & Rhoads, Denver, Colo., for plaintiffs The Superior Oil Co. and Conoco, Inc.

Patrick F. Timmons, Houston, Tex., for plaintiff The Superior Oil Co.

Thomas Burton, and Joseph C. Johnson, Houston, Tex., for plaintiff Conoco, Inc.

James R. McCotter, Kelly, Stansfield & O'Donnell, Denver, Colo., for defendant Western Slope Gas Co.

Eugene C. Cavaliere, Asst. Atty. Gen., Denver, Colo., for amicus curiae Public Utilities Com'n of State of Colo.

Thomas M. Blume, and Thomas L. Barton, Denver, Colo., for amicus curiae Phillips Petroleum Co.

MEMORANDUM OPINION AND ORDER

SHERMAN G. FINESILVER, Chief Judge:

This matter is before the court on cross-motions for summary judgment concerning the validity of a two-party "favored nations" clause¹ in an intrastate gas purchase agreement. These motions raise the question of whether this clause is violative of public policy. For the reasons set forth herein, we hold that the favored nations clause contained in the parties' Gas Purchase Agreement is valid and grant partial summary judgment in favor of Plaintiffs.

BACKGROUND

For the purpose of these motions, we have consolidated two separate cases which involve identical questions of law and the same defendant, Western Slope Gas Company ("Western Slope"). Plaintiffs are The Superior Oil Company ("Superior") and Continental Oil Company (now Conoco, Inc.).²

In January, 1964 Plaintiffs entered into twenty-year Gas Purchase Agreements with Western Slope in which Plaintiffs agreed to sell and Western Slope agreed to buy natural gas from production in Rio Blanco County, Colorado. Both Agreements contained a provision which is commonly referred to as a "favored nations" clause:

8.4 Favored Nations Clause. If, at any time during the term of this agreement, buyer pays to a producer of natural gas in Mesa, Garfield, and Rio Blanco Counties, Colorado, for the purpose of reselling such gas in its Colorado market area, a price per Mcf higher than that being paid to seller hereunder, due consideration being given to the quality of the gas, basis of measurement, delivery pressure, and other conditions of sale, buyer shall, commencing upon the date of the first delivery of such natural gas at such higher price, and continuing so long as such higher price is paid for such gas, increase the price being paid to seller hereunder to equal such higher price ....

The Agreements also contain "intrastate utilization" sections (¶ 7.1) which provide that Western Slope "represents that it is engaged solely in intrastate transportation of natural gas within the State of Colorado and represents that gas purchased herein shall be sold and used only in connection therewith."

The favored nations clause was triggered on several occasions as a result of Western Slope paying a higher price per Mcf to other producers in the contract area. The first was November 14, 1971³ when Western Slope began paying another producer the ceiling rate of 23.5 cents per Mcf, which ceiling price was set forth in FPC Order 435. The favored nations clause was also triggered when, on May 15, 1974, Western Slope began paying another producer in the contract area 35 cents per Mcf. On June 21, 1974 the Federal Power Commission, in Opinion No. 699, established a rate of 50 cents per Mcf for gas produced from wells commenced on or after January 1, 1973. Pursuant to this Opinion, Western Slope contracted with other producers within the contract area, whose wells were commenced after January 1, 1973, for natural gas at 50 cents per Mcf. However, when demand was made by Superior for that higher price under their favored nations clause, Western Slope refused on the grounds that "vintaging"⁴ had been established as a requirement in the pricing of natural gas. Western Slope felt Opinion 699 did not trigger the favored nations clause in Superior's Agreement since production from plaintiff's wells was commenced before January 1, 1973.

Superior filed suit against Western Slope on September 3, 1976 alleging breach of the Gas Purchase Agreement as a result of Western Slope's refusal to pay higher price per Mcf under the favored nations clause. Western Slope filed a Motion for Summary Judgment on the grounds that the favored nations clause was not triggered because "vintage" was a "condition of sale" in the parties' Gas Purchase Agreement. On July 29, 1977 we granted Western Slope's Motion for Summary Judgment, holding as a matter of law that its interpretation of the Agreement was correct and that vintaging was an "essential factor in determining comparability of gas for purposes of the favored nations clause." The United States Court of Appeals for the Tenth Circuit reversed our Order on August 13, 1979 and remanded the case to this court for further proceedings. The Superior Oil Company v. Western Slope Gas Company, 604 F.2d 1281 (10th Cir. 1979).

Subsequent to remand from the Tenth Circuit, Plaintiffs filed a Motion for Partial Summary Judgment alleging that the favored nations clause in the Gas Purchase Agreement was valid and that the only factual dispute remaining concerned the amount of damages. Shortly thereafter, Western Slope filed a Motion for Summary Judgment in which it maintained that, as a matter of law, the favored nations clause was unenforceable as being in violation of public policy. Additionally, Western Slope has continued to maintain that the question of the appropriate interpretation of the favored nations clause is still properly before this court.

I.

Western Slope argues that the net effect of the Tenth Circuit's "interlocutory" order in Superior Oil Company v. Western Slope Gas, supra., was to place the proceeding before this court in the same posture it would have been had we denied it's Motion for Summary Judgment. Had that happened, Western Slope contends, it would have been entitled to introduce at trial additional evidence concerning the meaning of the phrase "other conditions of sale" in the favored nations clause. While testimony concerning the parties' intent in including the language "other conditions of sale" in the favored nations clause was presented at the hearing, we now hold that the question of whether "vintaging" is a "condition of sale" is not before this court.

Western Slope relies on several cases out of the United States Court of Appeals for the Fifth Circuit for its proposition that we may consider the contract interpretation issue on remand and reach a result different from that reached by the Tenth Circuit in Superior Oil. Those cases are Braniff v. Jackson Ave.-Gretna Ferry, Inc., 280 F.2d 523 (5th Cir. 1960); and E.C. Ernst, Inc. v. General Motors Corp., 537 F.2d 105 (5th Cir. 1976). However, a careful reading of these cases reveals that they are clearly distinguishable from the present case. In Braniff the Court of Appeals reversed the district court's decision granting a defendant's motion for summary judgment. They held that summary judgment was not proper because conflicting inferences or reasonable doubt could be drawn from the facts set out in the affidavits supporting and opposing the summary judgment motion. It was held to the "imperative duty" of the district court to test the case against the actual evidence adduced at every stage of the trial. 280 F.2d at 529.

The E.C. Ernst case presents a situation slightly more analogous to the present controversy. The Appellant in Ernst appealed from the entry of summary judgment in favor of the defendant. The Fifth Circuit reversed that order and remanded the case back to the district court. E.C. Ernst, Inc. v. General Motors Corp., 482 F.2d 1047 (5th Cir. 1973) "Ernst I". On remand, Appellant argued that the Circuit's reversal of the summary judgment precluded the defendant from raising the same issues as a defense. The district court allowed the defense and, following an adverse decision, Appellant again filed an appeal. In the second Ernst case the Fifth Circuit made it clear that Ernst I had "stopped short of expressing any opinion as to how the trier of the fact should resolve the issue ultimately ..." 537 F.2d at 107. They had reversed the district court in Ernst I because Appellant had "demonstrated to their satisfaction that genuine issues of triable fact were in existence." Id. Ernst I was binding on the district court only with respect to the existence of a genuine triable issue of fact. Having found that to exist, it remained the "imperative duty" of the district court to receive evidence on that issue. Id. at 108.

In Superior Oil, the Tenth Circuit agreed with our initial determination that there were no disputed issues of material fact on the question of contract interpretation. 604 F.2d at 1288, n. 12. Thus, our decision on Western Slope's Motion for Summary Judgment was not reversed for the reasons stated in either Braniff or Ernst, i.e., because of the existence of a "genuine triable issue of fact". Rather, the Tenth Circuit reversed because "on the facts of this case, the phrase `other conditions of sale' in Article 8.4 of the contract between the parties does not include vintaging ...." Id. at 1291. Having found no disputed issue of material fact, the decision of the Tenth Circuit was on the merits of Western Slope's claim. We are bound by their determination that vintaging was not a condition of sale contemplated by the parties.

There has also been some question raised regarding the posture of this case on remand vis-a-vis the public policy issue. In a footnote of a recent decision, the Tenth Circuit stated:

We have considered the concurring opinion in Superior Oil Co. v. Western Slope Gas Co., 604 F.2d 1281, 1291 (10th Cir. 1979). Contrary

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