Texas Gas Transmission Corporation v. Shell Oil Company Federal Power Commission v. Shell Oil Company

• Decision Date: 13 June 1960
• Docket Number: Nos. 167,170,s. 167
• Citation: 4 L.Ed.2d 1208,363 U.S. 263,80 S.Ct. 1122
• Parties: TEXAS GAS TRANSMISSION CORPORATION and Louisville Gas and Electric Company and Federal Power Commission, Petitioners, v. SHELL OIL COMPANY. FEDERAL POWER COMMISSION, Petitioner, v. SHELL OIL COMPANY
• Court: U.S. Supreme Court

363 U.S. 263

80 S.Ct. 1122

4 L.Ed.2d 1208

TEXAS GAS TRANSMISSION CORPORATION and Louisville Gas and Electric Company and Federal Power Commission, Petitioners,

v SHELL OIL COMPANY.

FEDERAL POWER COMMISSION, Petitioner,

v. SHELL OIL COMPANY.

Nos. 167, 170.

Argued April 20, 21, 1960.

Decided June 13, 1960.

Mr. Mathias F. Correa, New York City, for petitioners in No. 167.

Mr. Willard W. Gatchell, Washington, D.C., for petitioner in No. 170.

Mr. Oliver L. Stone, New York City, for respondent in both cases.

Mr. Justice BRENNAN delivered the opinion of the Court.

One of the series of orders issued by the Federal Power Commission after this Court's decision in Phillips Petroleum Co. v. State of Wisconsin, 347 U.S. 672, 74 S.Ct. 794, 98 L.Ed. 1035, required affected independent producers of natural gas to submit rate schedules in effect on June 7, 1954, the date Phillips was decided.¹ The respondent. Shell Oil Company, on November 18, 1954, submitted its contract dated May 1 1951, with Texas Gas Transmission Corporation,² as a rate schedule on June 7, 1954, for gas from its Chalkley Field, Cameron Parish, Louisiana. The Commission, on March 13, 1957, accepted the contract as a rate schedule but ordered a hearing for the purpose of determining and fixing the price effective thereunder on June 7, 1954.³

At the hearing, Texas Gas contended that paragraph 1 of Article VI of the contract specifying the price of 8.997 cents per thousand cubic feet (Mcf.) for the period which included June 7, 1954, established that price for the date. ⁴ This was the price at which Shell was billing Texas Gas for gas at the time. However, Shell contended that when Texas Gas, prior to June 7, 1954, began paying 12.5 cents per Mcf. to Atlantic Refining Company, for gas produced in nearby Acadia Parish, Shell became entitled to receive the same price under the so-called 'favored nation' clause of the Shell contract. That clause, paragraph 3 of Article VI, provides that '(i)f at any time after December 31, 1951, (Texas Gas) shall enter into a contract providing for the purchase by it of gas' at a higher price (than that currently being paid under this—the Shell contract), the price currently being paid will be increased to equal the 'price payable under such other contract.'⁵

When Texas Gas and Shell made the contract of May 1, 1951, Atlantic Refining Company was selling gas to the former from Acadia Parish production under a contract concluded in 1943 for a 25-year term. The Atlantic contract specified a price effective for the first five years and provided that during succeeding five-year periods, 'prices to be paid will be determined at the beginning of each period. * * *' 'The price to be paid * * * is to be agreed upon * * * after a survey of prevailing prices for gas being sold in similar quantities in the southwestern part of Louisiana.' The contract further provided that '(i)n the event that the parties are unable to agree upon the price * * * such determination shall be submitted to arbi- tration'; the arbitrators to be selected as provided in the agreement.⁶ Negotiations between Atlantic and Texas Gas as to the price to be effective for the five-year period beginning September 1, 1953, terminated with a letter agreement dated February 17, 1954, which recited: '(I)t is hereby agreed that the price to be paid * * * between September 1, 1953, and August 31, 1958, both inclusive, shall be 12.2 cents net' plus .3 cent for severance tax, or 12.5 cents. It is this letter agreement which Shell contends triggered the Shell contract's 'favored nation' clause.

The Commission's examiner issued his decision on August 9, 1957. He held that in making the Atlantic letter agreement Texas Gas 'enter(ed) into a contract providing for the purchase by it of gas' within the meaning of the Shell 'favored nation' clause and that this had escalated the Shell price to 12.5 cents per Mcf. The Com- mission reversed the examiner's decision and determined that the effective price on June 7, 1954, was 8.997 cents per Mcf., the price fixed in paragraph 1 of Article VI. 18 F.P.C. 617. Shell's petition for rehearing was denied. 19 F.P.C. 74. The Court of Appeals for the Third Circuit, on review, vacated the Commission's order. 263 F.2d 223. We granted the separate petitions for certiorari of Texas Gas and Louisville Gas and Electric Company in No. 167, and of the Federal Power Commission in No. 170, being particularly moved to do so by the contention made in both petitions that the Court of Appeals exceeded the appropriate scope of judicial review of the Commission's determination. 361 U.S. 811, 80 S.Ct. 68, 4 L.Ed.2d 59.

We may assume with the petitioners that the Court of Appeals did not treat the Commission's order as one which it was required to accept if reasonably supported in the record, and instead considered that it could examine de novo the question of the proper interpretation to be given the Shell 'favored nation' clause. The petitioners' argument that the Court of Appeals exceeded the allowable limits of judicial review is based upon the premise that the Commission's interpretation of the 'favored nation' clause reflects the application of its expert knowledge and judgment to a highly technical field, so that the Court of Appeals was required to accept the Commission's interpretation if it had "warrant in the record' and a 'reasonable basis in law," citing Unemployment Compensation Commission of Territory of Alaska v. Aragon, 329 U.S. 143, 153—154, 67 S.Ct. 245, 250, 91 L.Ed. 136. But the record nowhere discloses that the Commission arrived at its interpretation of the 'favored nation' clause on the basis of specialized knowledge gained from experience in the regulation of the natural gas business, or upon the basis of any trade practice concerning 'favored nation' clauses. On the contrary the opinions of the examiner and the Commission show that both treated the question as one to be determined simply by the application of ordinary rules of contract construction. The examiner stated that '(t)he language (of the 'favored nation' clause) is clear enough to reveal the intent of the parties without resort to parole evidence or self-serving memoranda. * * * (I)ts plain meaning is * * * Shell sought to cause its selling price to rise to that called for by any other contract Buyer made for gas after an agreed date. * * * The language was evidently broad; not narrowly technical in character.' The examiner concluded that 'elemental principles of contract law * * * too commonly known to the legal profession to require citations in support thereof' compelled the decision he reached. The Commission, in turn, relying for authority entirely upon court decisions and texts, construed the 'favored nation' clause to be applicable only when Texas Gas entered into a 'new' contract after December 31, 1951, and held that the February 17, 1954, 'agreement with Atlantic does not constitute a new contract as required by Shell's escalation clause, but merely represents action taken under a pre-existing contract between Texas Gas and Atlantic.' 18 F.P.C., at 618—619. It is apparent that the Commission rested its determination upon a construction of the words of the contract as it supposed a court would interpret them.⁷

'The grounds upon which an administrative order must be judged are those upon which the record discloses that its action was based.' Securities & Exchange Commission v. Chenery Corp., 318 U.S. 80, 87, 63 S.Ct. 454, 459, 87 L.Ed. 626. Therefore, since the Commission professed to dispose of the case solely upon its view of the result called for by the application of canons of contract construction employed by the courts, and did not in any wise rely on matters within its special competence, the Court of Appeals was fully justified in making its own independent determination of the correct application of the governing principles. See Federal Communications Commission v. RCA Communications, Inc., 346 U.S. 86, 91, 73 S.Ct. 998, 97 L.Ed. 1470. There applies here what the Court said in Chenery: 'Since the decision of the Commission was explicitly based upon the applicability of principles (of contract interpretation) announced by courts, its validity must likewise be judged on that basis.' 318 U.S. at page 87, 63 S.Ct. at page 459.

In the circumstances, considerations of the scope of review of administrative determinations need not deter us from reviewing the decision of the Court of Appeals and deciding the proper construction of the 'favored nation' clause. We proceed to do so since the question of interpretation of the clause was presented in both petitions, our grant of certiorari was not limited to exclude it, and the question has been briefed and argued.

The question to be decided is: did the parties to the Shell contract mean that an agreement of the nature of the Atlantic letter agreement of February 17, 1954, should constitute the 'enter(ing) into a contract (by Texas Gas) providing for the purchase by it of gas * * *'? We first consider the nature of the letter agreement. The pricing provisions of the Atlantic contract specify a price for the first five-year period, and provide that prices for the four succeeding five-year periods should be determined by agreement of the parties, or failing such agreement, by arbitration.⁸ In either case the determination is to be made 'after a survey of prevailing prices for gas being sold in similar quantities in the southwestern part of Louisiana.' Pursuant to this provision a letter agreement dated October 29, 1948, and a modification agreement dated February 16, 1949, established prices for the five-year period from September 1, 1948, to August 31, 1953. The letter agreement of February 17, 1954, setting the price for the 1953—1958 period was thus the second such agreement.

Shell urges that the letter agreement is in actuality an entirely new contract which incorporates by inferential reference the terms...