Lenape Resources Corp. v. Tennessee Gas Pipeline Co.

LENAPE RESOURCES CORPORA- Compa- TION Pomfret Production d/b/a Inc., Enercorp Resources, ny, and d/b/a

Inc., Exploration and Production Tesoro Energy Compa-

Company, Pipeline Gulf

ny Corporation, and Coastal Oil & Gas

Petitioners, PIPELINE

TENNESSEE GAS

COMPANY, Respondent.

No. 94-0278.

Supreme Court of Texas.

Argued Dec. 1994. April

Decided 1996.

Rehearing Aug. Overruled Blair, Worth,

Duggins, B. Fort Fort Sloan Worth, Burdette, Worth, Fort H. Carter respondent.

ENOCH, Justice, opinion delivered Rehearing, in on the Court Mbtion for BAKER, CORNYN, SPECTOR, ABBOTT, Justices, join. grant motions for rehear-

We Petitioners’ judgment ing. opinion We our withdraw August 1995 and substitute follow- ing opinion. principal

The issue this ease whether proportionality restric- faith and tions of of the Uniform Com- Code, mercial Tex.Bus. & Com.Code gas purchase agree- apply to the Corpora- Lenape between Resources ment Pipeline Company. tion and Tennessee Gas appeals court of held that the The take-or- pay contract to section 286. We dis- 2.306. agree. part part We and affirm reverse appeals. judgment court of transports and stores natural Tennessee provide gas for distribution to customers who throughout gas natural to consumers Tennessee entered southern United States. (GPA) Agreement into the Gas Purchase Lenape’s predecessor 1979 with interest. GPA, take, agreed Under Tennessee taken, produced from gas reserves committed under GPA reserves include Fantina committed Yzaguirre Yzaguirre and the Jesus Gas Unit County. in Zapata Gas Unit August entering In into the GPA sought obtain as much Webre, Austin, produced Jane T. Arm- could be from the committed re- M.N. William Antonio, strong, III, Rudy England, plainly objec- this San A. serves. The reflects GPA Houston, Houston, Dwight Dalrymple, Specifically, provides A. tive. Le- Banack, Jr., Antonio, nape obligated is not to deliver to Tennessee Emerson San Charles Roberts, Antonio, Smith, predetermined quantities R. Ernest E. or to San III, Austin, Austin, Douglass, Frank Eliza- maintain level of delivera- predetermined Austin, Miller, Austin, Selby, bility; unitize its leases Lenape beth N. Steve field; petitioners. properties other in the same discretion, may Lenape, drill its sole Austin, Davis, Watkins, Thomas H. C.A. depths and horizons and new wells Austin, Bloch, Austin, R. Elizabeth G. John repair or wells. rework old Austin, Tetzlaff, Hathaway, R. Theodore Chi- IL, cago, IL, Cassling, beginning of the GPA term in Chicago, R. From Donald Hirsch, IL, Chicago, Lenape produced until Ralph Norman M. H. Corporation. a result of the acreage, one Oil & Gas As two wells on the committed farmout, low-producing stripper well. became “Sell- of which was a Tesoro and Coastal Despite production, low drilled three ers” under the GPA. Tesoro sought obligations wells, to be released from its acre- one bottomed on the committed 1980s, early In market under the GPA. A B units age and two inside the Guerra gas changed conditions for natural dramati acreage acreage originally outside cally. price and demand for natural The two wells on the committed GPA. Roland, Comment, Take-or-Pay plummeted. highly A B successful. Guerra units were Major the Natural Provisions: Problems for B A and wells The successful Guerra Maey’s Industry, Gas 18 St. L.J. vastly increase Tennessee’s take-or- (1986). produc Tennessee sent its Lenape pay obligations. Tennessee sued ers, including in Lenape, notice that it was seeking August the other Sellers stituting “emergency gas purchase poli under various theories that it was declaration cy,” whereby proposed Tennessee to reduce obligated pay of the to take or for purchases and limit its obli production resulting from the Gu- increased recognize any gations to take-or- and refused Specifically, erra A B wells. Tennessee pay obligations producers for who refused to sought a that: declaration amend their contracts as Tennessee demand (1) governed by section 2.306 the GPA is Mandell v. Hamman & ed. See Oil Ref. and antic- of the UCC and that current (Tex.App. — Houston gas production from the Guerra ipated denied) (Tennessee re Dist.] writ [1st faith and A and B wells1 is bad take-or-pay obligations duced its with prior unreasonably disproportionate to producer by emergency gas pur half under 2.306; production in of section violation policy). Again chase in 1985 and Ten (2) sought alternatively, governed by nessee to be released from its obli sec- if not gations by seeking under GPA first and unen- the GPA is void by asserting a amend the GPA and next lack forceable for indefiniteness and majeure depressed force defense based mutuality; conditions. market (3) alternatively, obligat- Tennessee is not light developments, Lenape pay quantities In of these ed to take or for production or had little incentive to increase faith and which do not tendered bad develop Lenape’s grew history new wells. lessors and course comport prior with impatient production and sued with the low performance; Lenape implied for breach of its covenant (4) inter- the GPA covers the Sellers’ develop underlying the committed the leases physically located est in the reserves produce paying acreage, for failure to originally dedicated to under the leases quantities, for of the leas- abandonment obligat- Tennessee is not the GPA and Exploration es. Tesoro and Production gas produced from purchase ed to Company options lease from the obtained leases; original outside the wells the lessors their law- lessors backed (5) permit pooling; the GPA does not against Lenape. Lenape the law- suit settled (6) Yzaguirre leases the Fantina Gas Unit agreed to unitize suit with its lessors Lenape’s pro- failure terminated adjacent part acreage with of the committed paying quantities, failure duce property. unitization formed the Guerra develop, reasonably and abandonment units, comprised of A and B each one-half longer thus are no of the leases and acreage acre- the committed and additional GPA; subject age acreage. committed outside the GPA’s (7) price unitization, for the did not intend Lenape entered into After non-regulated to escalate agreement Tesoro and Coastal farmout $300,000 gas produced in paid of the extent more than 1. There is no evidence in the record contrast, single year. production. In Tennessee claims of the increased remanded, protest $89 paid million for show claims it that if this cause were GPA, produced years under the GPA. it never that for the first twelve plus adjustment factor annual inflation growth factor. the UCC section 2.306 of Whether ques take-or-pay contract is applies to this addition, Lenape, asserted that jurisdiction. impression in this first tion of conduct, Tesoro, including their and Coastal’s (1) only if the take-or- applies Section Deceptive pooling,” violated the “bad faith (2) contract, and pay contract is an and Consumer Protection Trade Practices vary opted to have not otherwise Act. Tex.Bus.&Com.Code §§ 17.41-63. Tex. obligations by agreement. Chems., 2.306; Bus. & Com.Code Jon-T counterclaimed, alleging Lenape breach Co., 704 F.2d Freeport Chem. Inc. contract, anticipatory repudiation, and that Cir.1983). The GPA defines DTPA claims were asserted Tennessee’s Tennessee must take Tesoro and Coastal asserted simi- bad faith. capacity of the Sellers’ percentage for as a These counterclaims lar counterclaims. 3(a) Specifically, section gas. deliver are the DTPA claims have been resolved and provides: appeal. in this issue Quantity: partial summary granted trial court (a) agrees to sell and deliver Seller (1) Sellers, determining:

judgment for the Buyer agrees Buyer, and subject output not an contract the GPA is receive, pay for if available and and (2) 2.306; permits pool- taken, pro part rata of the not Seller’s (3) ing/unitization; and Tennessee could gas produced following quantities of underlying validity of the leases contest from the committed reserves: After a bench trial on the remain- the GPA. issues, ing judgment trial court rendered (ii) gas equal to gas A well all of remain- for the Sellers on Tennessee’s (85%) de- eighty-five percent of Seller’s ing Specifically, claims. the trial court livery capacity. (1) acted in bad found: the Sellers had not 1(f) of Delivery capacity defined in section forming drilling faith in the new wells or the GPA as: (2) units; Guerra A and B the GPA is part average pro rata of the Seller’s mutuality;

void for indefiniteness or lack of gas per day which can well amount (3) for unitization and obli- the GPA allows efficiently withdrawn the wells from gates purchase in- the Sellers’ lease(s) delivery of a in the course gas produced anywhere within the terest provided in sec- capacity test conducted as (4) units; pooled the GPA mandates 3(f) applicable rules and hereof under price non-regulated gas escalate in accor- prudent regulations and accordance 102(b)(2) of the Natural dance with practices, operating (5) Act; Policy escrow monies and Gas Agreement and by this which is covered attorneys’ paid fees should be to the Sellers. delivery ... is available for is an asserts appeals the trial The court of reversed de- simply because the contract summary judgment court’s on the section Lenape’s delivery capacity, in terms of fined issue, holding is an out- 2.306 that the GPA i.e., produce gas from capacity its natural put contract construction, acreage. This the covered proportionality restrictions of section 2.306. ignores the alluring simplicity, while exception of at 291-92. With the 870 S.W.2d gas production. realities of claims, volun- DTPA which were Tennessee’s by agreement parties, tarily resolved output contract is one which An the remainder appeals the court of affirmed buy buyer agrees to the seller’s entire judgment. parties All of the trial court’s take-or-pay production. Under a buy any produc We con- sought writ of error this Court. not have to buyer does first, provides for take-or-pay then those contract contentions tion. The sider the Sellers’ buyer: by the either performance alternative of Tennessee. 2, purchase specified quantity governed by vary can Article but producer agreement); of the UCC for the Chemco, Inc., Corp. Colorado Interstate Gas Co. v. the future. Prenalta (Colo.1993) 1232, 677, (parties to 854 P.2d v. Colorado Interstate 944 F.2d Gas (10th Cir.1991). take-or-pay gas may vary provisions Because of this alterna Weistart, by agreement); Re of the UCC performance, pay option tive under a Quantity quirements Output Contracts: payment contract is not a UCC, Variations Under the 1973 Duke L.J. Id.; gas. sale of Explo Diamond Shamrock (as 599, an to section Hodel, alternative 1159, v. ration Co. 853 F.2d contracting parties will mindful of the Cir.1988); Mandell, see also 822 S.W.2d modify Code’s invitation to its basic rules 164-65; Bruni, Killam v. Oil Co. agreement). (Tex.App. Antonio — San denied). Rather, payment writ it is a gap-filler, operates As a for the exclusive dedication of for a reserves requirements render contracts period fixed of time. International Minerals UCC, a contract for the definite. Under Llano, Inc., Corp. & Chem. 770 F.2d goods price sale of for the or more is $500 (10th Cir.1985), denied, cert. 475 U.S. writing not enforceable absent some evidenc- (1986); 106 S.Ct. 89 L.Ed.2d 310 ing a contract for the sale that has been al., Litigate: Enforcing Medina et Take or signed specifies quantity. and that Tex. Meaning Take-or-Pay the Plain 2.201(a). § & A contract does Bus. Com.Code Contracts, Clause in Natural Gas 40 Ark. in- not fail for indefiniteness (1986). buyer opts If L.Rev. a contract and there is a tended make any gas, take remains the well reasonably giving appro- certain basis for Thus, unprodueed. 2.204(c). actu remedy. priate Id. Section ally produced buyer purchased requirements contracts renders buyer’s large part by determined in the nom sufficiently quantity definite as to and en- by inations. a reading into such contracts forceable quantity good that is the actual faith gas production forces Other delimit particular party. requirements or of the Id. physics obviously a well. The laws of affect § 2.306 cmt. 2. Further, producer’s ability produce gas. regulatory constraints of the Texas Railroad quantity in the Section 2.306 fills may Commission limit the amount of unambig only term when a contract does not produced. say quantity be To the is uously specify quantity of the solely by determined or Sellers’ buyer. requirements or the seller delivery capacity oversimplifies thus 2.306(a). apply § Id. It does not when the physical gas production realities of and over- specifies quantity a contract either numeric quantity states the Sellers’ control over the determining a provides or a standard for gas produced. specific quantity. Riegel Corp. Fiber v. See Anderson 512 F.2d Gin Regardless of whether the take-or- Cir.1975) (contract for sale of cotton suffi pay contract is an ciently quantity may definite when be deter apply gas purchase 2.306 does not by acreage contract and mined from covered agreed agreement because the yield acreage); Fort Hill Lum estimated quantity obligations that differ from those Corp., Georgia-Pacific ber 261 Or. Co. imposed section 2.306. Section like (1972) (contract not in 493 P.2d many 2 of other of Article purchase definite when contract for UCC, gap-filler may varied for logged provided timber method determin parties’ agreement. Tex.Bus. & Com.Code ing quantity). Chems., 1.102(c); 1416; § Jon-T 704 F.2d requires Tennessee to Summers, The GPA White & Uniform Commercial (2d 1980); produced from the a set Code ed. see also Prenal ta, eighty-five committed reserves defined as (gas purchase 944 F.2d at 687 contracts delivery capacity. Le- goods percent Lenape’s and are are contracts for the sale of readily must either take delivery which Tennessee nape’s capacity is ascer- inde- quantity, pay depend often on number of measured as as once tainable delivery every through capac- prior output; normal three months terminate variables: specific prior pro- ity comparable output; of natural prior output; test. comparable must take for which Tennessee normal or portionality to either calculation: .85 multi- simple pro- mathematical prior output; and reasonableness of delivery capacity. plied Sellers’ Section into Reading factors portionality. these quantity— apply not fill 2.306 does in- take-or-pay obligations, Tennessee’s faith tender —because capacity delivery production crease in amount, as a specified determinable Sellers’ by these after the fact would measured delivery capacity. variables, injecting uncertainty into thus parties’ obligations under the GPA.

Tennessee- insists that unless section 2.806 terms, vary into the is read GPA to specify Not the contract does quantity provisions GPA’s effect waiver definiteness, but with sufficient good faith and standards reasonableness expresses agreement also GPA 1.102(c) UCC, contrary to section provide production increases 1.102(c)provides: Section the UCC. take-or-pay obligations. Tennessee’s obligations diligence, [T]he specifically provides prescribed by this reasonableness and care obligated to deliver that the are Sellers by agreement title be disclaimed any predetermined quantities to Tennessee parties may by agreement but the deter- predetermined or to maintain perfor- mine the standards deliverability. Additionally, the GPA level obligations mance of such is to be mea- pro- gives the to increase Sellers manifestly if such are not sured standards duction, thereby delivery capac- increase unreasonable. further ity, unitization. The GPA through 1.102(c). We do Tex.Bus. & Com.Code sole provides may, the Sellers in their any good agree that the GPA disclaims discretion, wells. not limit drill new It does or reasonableness standards. existing production to wells in discovered permit The GPA does the Sellers to in- Accordingly, anticipates reservoirs. delivery drilling capacity by crease wells new may drill in new new wells Sellers by unitizing the committed reserves. depths and horizons increase nothing in permits But Sellers capacity discovering new re- delivery to undertake these activities bad faith. serves. Any delivery capacity increase still sub- together These taken demon- ject obligation GPA, to both strate 1.201(19) (hones- defined in 1.203 as sections sophisticated players in the oil and indus- fact) 2.103(a)(2) (for merchants, ty in delivery try, expected production honesty in fact and observance reasonable To capacity significantly. increase could dealing fair in the commercial standards of limiting as read section 2.306 trade). The UCC Tennessee’s limits take-or- obligations take-or-pay pay obligations faith increases in par- here the contract the would eviscerate delivery capacity. bargained in 1979. ties Moreover, reading of Tennessee’s bargained for the exclusive render the term of the GPA gas produced from the defining right purchase “all uncertain. Instead of Tennessee’s also con- take-or-pay obligations in terms of fixed committed reserves.” Tennessee a encourage delivery capacity, production tracted increased percentage of Sellers’ Ten- Lenape Lenape right to devel- by giving the GPA re- nessee would have us read as unitize of its leases. portion op a new and to quiring Tennessee to wells may reasonably exchange for the exclusive dedication as be tendered reserves, gave Lenape’s access to proportionate normal or otherwise ensuring Le- Lenape take-or-pay prior quantity of a clause comparable output. The nape Further, gas production produet. producers a set market for its unmarketable Minerals, steady rely steady cash flow. International take-or-pay on the cash flow of 882; Medina, Litigate, 770 F.2d at Take or operating expenses contracts to cover as well 40 Ark.L.Rev. at 188. exploration costs of new Thus, take-or-pay wells. revision of Tennessee would have this Court rewrite relationship certainty that reduces the contract on Tennessee’s conces- uncertainty cash flow creates financial for the longer sion that it no will demand the exclu- gas producer discourage that will investment sive dedication of the reserves. Ten- Roland, gas industry. in the natural Com- any gas produced nessee concedes that ment, 57; 18 St. at 261 n. n. L.J. Mary’s may violation of section 2.306 be sold Johnson, see also Natural Gas Sales Con- Lenape parties. party may to third While a tracts, 83, 111 on Oil & Gas TeRms Inst, implications concede certain facts (1983) (guaranteed take-or-pay income from law, making under the here Tennessee is collateral). Altering clause used as mar- (waiv- obligation concession of a contractual injects producer-pipe- ket risk thus into the ing right its to exclusive dedication of re- instability relationship discourages line serves) exchange for a restriction on Le- Roland, industry. investment See nape’s rights (application under the GPA (take-or- Comment, 18 at 261 L.J. Mary’s St. production). section 2.306 to limit Tennes- pay provision adopted to minimize instabili- really see’s concession is not a concession. ty). simply way arguing It is another that it obligation should be relieved of its to take instability compounded by pay eighty-five percent Lenape’s compromising relationship the lessor-lessee delivery capacity. places upon as well. Texas law lessees an Applying take-or-pay implied obligation reasonably develop clause, urges, as Tennessee would fundamen- land covered the oil and lease. Grubb tally McAfee, alter the risk allocation of the take-or- v. Tex. S.W. (1919). Thus, gas purchase obligations clause contracts. to fulfill to its We lessors, recognized recently purpose gas producer that the “central drill must additional underlying take-or-pay reasonably prudent opera contracts” is to “allow wells as would a Koontz, risk fluctuations market demand to tor. 160 Tex. Clifton (1959). buyer.” Corp. Applying be allocated to the Exxon v. S.W.2d Gathering West Texas these circumstances would dissuade (Tex.1993). wells, In applying producer drilling contrary section 2.306 to new clause, producer’s obligations Tennessee retains the under an oil and result, producer benefits the exclusive dedication of Le- As a if a does lease. wells, nape’s essentially reserves under a of drill additional be liable to its refusal, Lenape longer first implied but no has a lessors for breach of the covenant to lease; gas. Any reasonably develop producer certain market for its natural in- production subject produce in crease will be to an does drill additional wells that large quantities, may determination of it after-the-fact whether the be unable to market Further, “unreasonably dispro- production. increased amount is the increased portionate” prior comparable questionable reasonably prudent normal or whether and, so, operator will drill if the relieve Tennessee additional wells take-or-pay obligation. producer its minimum has either no market or an uncer production. tain market for the increased Shifting pro- the market risk back to the Applying take-or-pay section 2.306 to this inevitably exploration ducer will chill may profound contract ramifications not Pierce, production. Reconsidering the Roles only producer-pipeline relationship for the Regulation Competition in the Natu- relationship but also for lessor-lessee Industry, ral 97 Harv.L.Rev. Gas gas exploration general. natural (1983). Why develop new wells if there is no sum, buyer? In the event of a decline in the we hold that section 2.306 of the market, producers may apply well be left with an UCC does not to rewrite the price to calculate the bargained-for requires provides mechanism contract. The GPA subject to eighty-five per- gas,” gas not pay to take or for “new natural capacity, Lenape’s delivery produc- regulations, cent of in the event simple readily for deregulated. price amount ascertainable price became clearly express- It mathematical calculation. deregulated in 1985. gas” was “new natural parties’ expectations that Tennessee’s es the result, gas from the produced all the As a any obligations would extend A No. 1 and No. 4 and wells Guerra delivery capacity, good faith increases in B classified as “new No. Guerra well signifi- though even such increases 8(a) of gas,” and section natural contrary apply To cant. governs price. calculation rewrites express terms of 8(a) follows: provides as Section GPA, also ef- term the but 8. Prices: bearing party shift in the fects fundamental uncertainty into injects the market risk (a) paid by Buyer price to be to Seller production industry. The the natural from the effective date hereof for take-or-pay gas purchase not sub- contract is hereunder, or for the delivered ject appeals to section 2.306. The court of quantity if available and holding erred otherwise.2 $2,067 Buyer, per taken shall be Mcf, escalating day on the first of Jan- II uary, day each 1979 and the first error, In its for Tennes- application writ this thereafter for the term of month appeals complains see first that the court of Agreement product obtained holding there was sufficient erred multiplying price effect hereun- finding support evidence to the trial court’s by the preceding month der for intended to include a double equivalent in- monthly annual unregu- price escalation factor adjustment applicable flation factor gas subject lated natural GPA. We month, is de- such as such factor for agree appeals. with the court of 102(b)(2) Natu- in Section fined on When the executed the GPA Policy Law ral Gas Act Public January price for natural 95-621. regulated by Regu- Energy Federal added) (emphasis latory gas produced Commission. All of language This is inconsistent because Yzaguirre from the Fantina and the Jesus adjustment is not “annual inflation factor” Yzaguirre price-regulated wells has remained 102(b)(2) 102(b)(2) of the NGPA. defined section of the Natural Gas Rather, adjustment fac- annual inflation 95-621, Policy No. Act of Pub.L. 101(a) 1989) (the in section of the NGPA.3 tor is defined (repealed Stat. 102(b)(2), “NGPA”). 8(c) specifically ref- the section requires Section of the GPA Section in- paragraph, quoted in the above highest price maximum erenced Tennessee to adjustment factor produced that an inflation by regulation allowed stead defines subject to regulations. unique also that is The GPA issue, price disposition under this section we The maximum lawful 2. Because of our opinion express need not address and no on output shall be— month application of section 2.306 standards requirements governed by sec- contracts 1977], (2) April [after of month the case tion. Btu’s, per price, the maximum lawful million pre- prescribed for the under this subsection 101(a)(1) provides that the "annual 3. Section equiv- ceding multiplied by monthly month adjustment shall be the sum inflation (A) factor” (A) equal the sum of alent of a factor quar- equal a factor to one hundredth of the adjustment applicable factor annual inflation terly percent change implicit price GNP in the month; (ii) .04, (B) plus ... for such deflator; (B) plus of 1.002. correction factor 20, April beginning case of month after 101(a)(1), § 92 NGPA Stat. 3356. 102(b)(2), 102(b)(2) NGPA 92 Stat. at 3358. 4. Section of the NGPA states: 574 unique adjustment inflation factor of sec- when there is unambiguous variance between incorporates

tion 102 (“annual the annual written words adjustment inflation adjustment factor”) (“§ inflation factor 102(b)(2)”), defined section figures the writ 101(a) NGPA, of the independent but also an ten words control. See Guthrie v. National growth and additional (Tex. Corp., 494, escalation factor. Homes 394 S.W.2d 496 1965). addition, In argues that terms stat Tennessee contends that the section in (“annual ed earlier a contract inflation question provides single for the annual infla- factor”) adjustment are over favored subse adjustment escalation factor defined (“§ 102(b)(2)”). quent Coker, terms See 650 101(a) NGPA, section of the though even Moreover, S.W.2d at 393. language used 8(a) section is not referenced in section of the parties (“factor,” “factors”, modi Sellers, hand, GPA. The on the other con- in”) fied “defined should be accorded its tend that provides the same section for the plain, grammatical meaning unless it defi application of the double escalation factor nitely appears parties’ intent would 102(b)(2) defined in section of the NGPA as thereby Lyons be defeated. See v. Mont specifically referenced in the GPA. (Tex.1985). gomery, 641, 701 S.W.2d 643 determine, Our first task is to as a application Each of these rules of law, 8(a) matter of whether section propounded by construction Tennessee leads ambiguous. GPA is If a written instrument complete negation of the line “defined is so worded given that it can be a certain or 102(b)(2) in Section of the Natural Policy Gas legal meaning definite interpretation, then Act contract, of 1978.” In construing a we ambiguous it is not and it can be construed give meaning strive to provision. to each Coker, as a matter of law. v. Coker Royalty Southland Co. v. Pan Am. Petrole (Tex.1983). S.W.2d If meaning its (Tex.1964). Corp., um 378 S.W.2d uncertain reasonably and doubtful or it is Moreover, we have stated that a court should susceptible meaning, to more than taking one construe contract from a utilitarian stand into present consideration circumstances point, bearing particular in mind the business particular executed, when writing was activity Thus, sought to be served. a court ambiguous then it is meaning and its must be need not embrace strained rules construc 394; resolved a finder of fact. Id. at see tion that ambiguity would avoid at all costs. Sage also Street Assocs. v. Northdale Constr. Reilly Rangers v. Management, Inc. 727 (Tex.1993) (trial 863 S.W.2d (Tex.1987). balance, S.W.2d On we properly court ambiguity jury submitted 8(a) conclude of the GPA is consent). when issue was tried law, ambiguous as a matter of so that In construing a written trial parol court’s consideration of evidence primary our concern is to ascertain the true proper. parties intentions of the expressed in the evidence, Coker, parol Based on written instrument. S.W.2d at trial court 393. If found that the ambiguous, the written instrument intended to escalating include two parol price the trier of fact factors look to evidence to non-regulated gas. escalation of the determine the Tennes intent. R & P Enters. LaGuarta, Kirk, Inc., see contends that the appeals court of Gavrel & erred holding (Tex.1980); that some supported evidence see also Para gon finding. disagree. We Resources Inc. v. National Fuel Gas Corp., Distribution 695 F.2d expert The Sellers’ testified that the term Cir.1983). appeals correctly The court of adjustment” “annual unique inflation has a 8(a) held ambiguous. that section meaning industry, in the encompassing both employs growth adjustment number of rules of and escalation factors. support interpretation addition, construction to only remaining living person 8(a) intended section participated escalate who negotiations, Charles gas price by only Faulk, single inflation price testified that the base stated adjustment 8(a) factor. argues came from section 102 of the 3(e) in the GPA NGPA, is defined section the to section serves” that reference 8(a) 102(b)(2) as follows: in is intentional. section Faulk, employee negotiated who Tennessee (e) shall The term “committed reserves” behalf, further testified that Tennessee’s gas in the located mean all of reserves ap- with and the reference was discussed lease(s) in Ex- the described and under attorneys that it proved Tennessee’s “B” outlined Exhibit “C” hibit agreement part was a of the standard used to the hereto which are attributable by Tennessee. interest therein. of Seller of this defini- Tennessee claims because appeals We therefore hold that the court of tion, pay to required take it is provision holding that the was did not err the committed produced only from below the ambiguous affirming trial court’s acreage gas produced and not from land price finding that the intended the disagree. into the tract. We unitized non-regulated to new natural escalate 102(b)(2) both factors included in 5(e) Agree- Production Section Gas the NGPA. production provides from ment any tract included in the unit

wells located on will the be considered Ill GPA: complains that Tennessee next al reserves 5. Reservations Seller: Seller right though gives to the Sellers prior rights following with sufficient unitize, it did afford the Sellers satisfy rights: to such purchase a proportion to force Tennessee gas produced ate share from unitized

acreage. lease(s) (e) its other To unitize with in the properties of Seller and of others above, As Lenape’s we note lessors sued to field, Agree- in which event this same terminate leases in the Fantina Yza- in the ment will cover Seller’s interest guirre gas By August unit. settlement on unit attributable to the reserves commit- 17,1989, however, parties agreed all hereunder. ted Yzaguirre Fantina leases remained intact added) committed (emphasis The GPA’s had remained intact at times. Le- comprises fifty percent of the new nape acreage, acreage unitized the committed form- units, ing dispute B that as consisting A and each units. Tennessee does the Guerra and the other owners of acreage of one-half of the committed between Sellers from unit, interest acreage. unit and interests “Sellers’ Fantina one-half new unit committed The attributable the reserves trial court found that because half of the Therefore, fifty percent. acreage, land units hereunder” is within the is GPA Ten- appeals correctly obligated fifty per- court of concluded purchase nessee was fifty per- obligated is eighty-five percent cent the Sellers’ percent eight-five cent deliv- delivery capacity from new Sellers’ wells. ery gas produced appeals capacity of wells court of the trial court’s affirmed anywhere on units. agree. finding. 870 S.W.2d 299-300. We specifically granted The GPA Sellers IV lease(s) power to “unitize other issue that we must consider last properties Seller[s] and of others may properly contest whether Tennessee The district court found that same field.” viability of the GPA under continued unitization bad Sellers’ done a termi 5 of that contract based on challenge and Tennessee does not underlying between the nation of leases finding. produce and the lessors for failure Sellers granted only required paying quantities. The trial court argues Sellers, holding summary judgment produced take or for whatever not entitled to establish “Committed re- Tennessee was from “committed reserves.” leases, longer underlying that the were no in leases force. The nation of the that releases appeals duty court of affirmed. 870 purchase gas pursuant S.W.2d at it from to its to agree. Again, 294-95. we the GPA. 5(a) relies on of the 5(a) unambiguous language of section

GPA, expressly provides: which GPA, however, Sellers, to grants Seller Reservation Seller: reserves Buyer, any the contractual to surrender following prior rights with sufficient longer lease no when deemed Sellers to satisfy rights: such capable producing gas paying quanti- be in (a) operate property any To free from undisputed Lenape ties. The record Buyer control in such manner as leases, any has never surrendered of the nor Seller, discretion, may in its sole deem Lenape any longer has to be no deemed lease advisable, limitation, including without capable quantities. producing paying in right, obligation, but never to drill new 5(a) provides only Section that “Should Seller wells, wells, repair and rework old and any lease ... terminate or surrender said plug any any well or surrender lease or lease ... shall be released from the terms of portion longer thereof when no deemed added). agreement.” (emphasis this There capable producing gas Seller to be in is no contention that the Sellers have affir- paying quantities under normal methods of matively any terminated or surrendered however, operation; provided, in the event provision lease. at in issue found any Seller should terminate or surrender section entitled “Reservations Sellers.” in “B” lease described Exhibit and outlined Thus, precluded attempt- hereto, in Exhibit “C” written notice of 5(a) ing prove under section given Buyer thirty same shall within longer the contract is no effect due to (30) days. Should Seller terminate or sur- underlying termination leases. lease, thereof, portion render or a express opinion We no on whether Tennessee Agreement, covered this said lease or prove longer could that the GPA was no portion shall released from the terms of upon any theory effect or claim based other Agreement effective as of the date of than one on section 5 of the based GPA. Upon such termination or surrender. Sell- n ; n n n n n request, Buyer agrees er’s to amend this agreement to effect such a release. apply does not We hold that section 2.306 provision, Under this agreement Tennessee maintains gas purchase longer is no parts force for at issue here. We reverse those lands on judgment reversing could show the oil and appeals’ court of the trial gas lease reverted summary had terminated or back to partial judgment court’s on section pursuant operation the landowners judgment 2.306 of and the final the UCC on produce attorneys’ lease’s terms failure escrow funds and fees and render paying quantities. settling their judgment lawsuit those issues accordance with however, against Lenape, Lenape’s judgment. lessors the trial court’s We affirm the agreed: judgment of the court of remainder of appeals.

to confirm and said declare that Fantina terms,

Yzaguirre leases all of their con- been from ditions and PHILLIPS, C.J., concurring files a leases, are, currently dates of the GONZALEZ, dissenting opinion, which binding upon Plaintiffs and ... [lessors] JJ„ OWEN, join. HECHT and Yzaguirre and that the Fantina leases are PHILLIPS, Justice, Chief delivered oil, subsisting valid mineral concurring dissenting opinion. leases ... and have all times been at since such dates of leases. II, III, join parts I of the Court’s IV opinion. Pur- Tennessee was not notified the lawsuit Because believe that Gas (“GPA”) prove Agreement It now to chase issue here is an the settlement. seeks event, namely contract which is to section occurrence of termi- Code, buyer such actual out- ments of the means how- 2.306 of Uniform Commercial may requirements as occur put or ever, join to reinstate I cannot in a decision quantity unreasonably except no I summary judgment. As the trial court’s estimate or disproportionate to stated below, explain I remand the ease to to a estimated in the absence of stated proceedings for further as to trial court prior out- comparable normal or otherwise gas the Sellers’ increased tender of whether or put requirements be tendered occurred bad faith or was unreason- either demanded. ably prior output. disproportionate to (Vernon 2.306(a) § Ann. Tex.Bus. &Com.Code 1994). Legislature made the Texas has The contracts applicable to mineral sales UCC open-quantity con Output are contracts to a it is be declaring that in which the is determined tracts (“A 2.107(a) § from the land. Id. severed a of certain seller’s of minerals or the like contract for sale commodity. quan their of Because of lack a gas) ... to removed (including oil and be term, historically tity output contracts “have goods realty a for the sale of from is contract problems: had two indefiniteness lack chapter_”)1 Henning this within mutuality.” Wallach, See & The type at in this case is that Law of Sales Under Uniform Commer The GPA issue 1992). ¶ (Rev. 3.08[2] ed. commonly agreement called cial of mineral sales Code hostility require “common-law to its es- “take-or-pay” contract. Distilled a contracts,” Hawkland, ments 1 sence, obligates Uniform take-or-pay a contract “[a] 2) (Art § 2-306:01 specified purchase a volume Commercial Code Series pipeline to (1995), pre-Code numerous and, evidenced price if it is to do specified unable refusing to such contracts due cases enforce so, pay for that volume.” Mobil Oil Ex- See, specified quantity. e.g., lack Southeast, Producing Inc. v. ploration & 869, & 105 Crane v. C. F. Cos., 229, Crane 211, Distrib. 498 U.S. United Cir.1901); Harrington City New Bros. v. (1991). 615, 627, 112 L.Ed.2d 636 S.Ct. York, (S.D.N.Y.1931); 51 F.2d Seal contracts, many take-or-pay “specified Evans, Ga.App. Div. test S. Dairies v. gas, but is volume” is not fixed (1961); 835, 120 S.E.2d 887 G.H. Baber gas equal particular to a instead a volume of (Ky.1957). Lay, 305 See also specified in the contract. The measurement (1921). Annotation, 14 A.L.R. 1300 purchase may expressed in obligation to or, as in percentage terms of a reserves provides a statu- Section 2.306 the UCC case, deliverability. percentage this tory saving output contracts. mechanism It the official comments solves what refer take-or-pay such a contract Whether “specific problem” requirement as the output contract is an is an the sale by providing output contracts Indeed, impression of first Texas. issue addressing cases appear there two term which measures the

[a] issue, have concluded that require- both of which the seller or 2-107; Mich.Comp.Laws adopted § every identi Ann. ch. 1. Almost other has state Ann. 336.2-107; 440.2107; Minn.Stat.Ann. stating provision § that a for the sale cal Miss. § 75-2-107; 400.2-107; minerals, including to be oil severed Code Mo.Ann.Stat. Ann. § § 30-2-107; Neb.Rev.Stat. land, goods 2- is a contract for the sale of from Mont.Code Ann. § § 107; 104.2107; N.H.Rev.Stat.Ann. 7-2-107; § Nev.Rev.Stat. UCC. AlaCode Alaska § 382-A:2-107; 12A:2-107; 47-2107; 45.02.107; § § § NJ.Stat.Ann. Stat. Ariz.Rev.Stat.Ann. § 55-2-107; N.Y.U.C.C.Law 4-2-107; 2107; 2- § § Cal.Com.Code N.M.Stat.Ann. Ark.Code § Ann. § 25-2-107; N.D.Cent.Code 4-2-107; 107; § Conn.Gen.Stat.Ann. N.C.Gen Stat. Colo.Rev.Stat.Ann. § 12A, 2-107; Or. 2-107; 41-02-07; Okla.Stat.Ann. 42a-2-107; Del.Code § § tit. tit. Ann. § § 2107; 672.107; 72.1070; 28:2-107; § § Pa.Cons.Stat.Ann. Fla.Stat.Ann. Rev.Stat. D.C.Code § § 6A-1-107; S.C.Code 11-2-107; § R.I.Gen.Laws Ga.Code Haw.Rev.Stat.Ann. Ann. Ann. Ann. § 57A-2-107; 28-2-107; 36-2-107; 490:2-107; § § S.D.Codified Code Laws Idaho IllAnN. § § 47-2-107; 5/2-107; Ind.Code Ann. 70A- para. § 26- Code ch. Tenn.Code Stat. Ann. Utah Ann. § 8.2-107; Wash.Rev.Code 554.2107; 2-107; 1-2-107; § Kan.Stat. Va.Code Code Ann. Iowa Ann. § 46-2-107; Wis. 355.2-107; 62A.2-107; W.Va.Code 84-2-107; § § Ky.Rev.Stat Ann. Ann. Ann. § § 2-107; Mass.GenXaws § 402.107. tit. Stat.Ann. Me.Rev.Stat.Ann. take-or-pay an output buyer delivery. contract is contract. does not take This is not a See United States v. removing gas Great Plains valid basis for con- Gasifica Assoc., (8th Cir.1987) 819 F.2d tracts the reach of section 2.306. Since issues) (applying Illinois law on the contract buyer’s obligation under the contract is (concluding that a contract “un dependent upon physical capacity the seller’s ambiguously require[s] pipelines pur time, is, point at given deliver project’s output”); chase the entire Ameri potential output, the seller’s I conclude that Exploration can v. Co. Columbia Gas output is an contract. GPA Corp., 310, Transmission F.2d 779 311 argue Sellers next that the is not an Cir.1985) law) (applying (stating Ohio that in output only contract because a finite amount nearly a contract identical to the one issue acreage, of exists committed here, “[t]he basic structure of the is contract output an whereas contract assumes that the contract”). output thus of a fixed-price that production can seller increase at will. I find Sellers contend that the GPA not an is nothing in éection 2.306 to that infi indicate output-contract, making inappli- production purchasing capability nite or is a cable. Their argument grounded first is output requisite for an contract. While the provision may that Buyer contract’s total volume of under the dedicated acre “take”, is, either that produced cause to be age produc does constitute the outer limit of purchase and then gas, “nominated” or GPA, subject that could be to the is, “pay”, compensate the Sellers for the acreage of or or a farm a forest various exclusive dedication reserves for the practical capacity on factory con limitations period. presence “pay” contract The stitute similar limits which not do render means, performance they alternative for impossible. contracts courts Other claim, quantity term is deter- not applied have non- to various solely by mined deliv- Seller’s or which, manufacturing sales contracts in ery capacity. clearly Yet the GPA states here, output regulated by easily cannot be “Buyer agrees purchase and re- simply increasing decreasing component or ceive, pay if or for available and taken See, Utils., parts. e.g., Orange & Rockland ... a gas equal well 110, Corp., Inc. v. Amerada Hess 59 A.D.2d (85%) eighty-five percent delivery of Seller’s (1977) oil); (utility 397 N.Y.S.2d 814 fuel Thus, capacity.” taking paying, whether Shear-Kaiser-Lockheed-Healy Dep’t v. Buyer obligated compensate is 679, Power, & Cal.App.3d Water 73 140 Cal. Sellers for measured (1977) concrete); Rptr. (aggregate 884 for delivery capacity of the Sellers’ wells.2 Philadelphia v. Corp. Niagara Mohawk “take-or-pay” aspect Corp., 176, sim- the GPA Power 207 A.D.2d 621 N.Y.S.2d that, (1995) ply also, nearly (hydroelectricity). reflects because of the 237 See State unique Corp., nature of the v. Dept. sale Fisheries J-Z 25 Sales (1980) 671, 390, gas, gas actually produced natural Wash.App. is not P.2d 610 393-94 “output” (discussing potential application does not become if the seller’s 2.306 to Moreover, gas purchase agreement subject type cited authorities Sellers and to a support argument ‘'pay general. applies the Court in of the statute that to mineral sales in courts, court, ing” purchasing convincing. including is not are See Other the Prenalta Co., Corp. agreements gas purchase Prenalta v. Colorado Interstate Gas held that and sales 677, (10th Cir.1991); containing take-or-pay F.2d Sham Diamond clause are Hodel, Prenalta, Exploration rock Co. v. See 944 F.2d at F.2d Article of the UCC. (5th Cir.1988); (holding, involving take-or-pay 1167-68 Mandell v. Hamman Oil 687-90. case Co., (Tex. contracts, Refining gov- gas purchase are 164-65 contracts denied) App. despite [1st Dist.] writ Article acknowl- erned 2 of UCC — Houston ("Take payment production; edging payments not a made contracts under the payment non-production.”); pursuant “pay” pay- is a Killam Oil alternative are not Bruni, (Tex. gas); Co. v. 806 S.W.2d for the Re- 267-68 ments sale and Universal denied). App. Corp. Pipe Antonio writ The lat E. sources Panhandle Line — San (5th Cir.1987) interpreta (applying ter three authorities an Article 2 involve F.2d Here, royalty containing tion however, in a UCC clause contract. of the to a clause). particular we must whether decide physics, also extent eggs fortune and but to some surplus salmon and car- contract for casses). aggressiveness exploring Sellers’ underlying developing the leases.

II committed reser- attributes of the physical a firm simply are not such voir its decision without The Court reaches take-or-pay obligation figure for an resolving whether the GPA is ever GPA from the ambit as to remove the Instead, it its decision on the contract. bases section 2.306. “gap-filler” that section 2.306 conclusion here, provision inapplicable even which is reasons, reject argu- For Sellers’ similar because the GPA is that various and the Court’s conclusion ment itself, parties, by provisions of the GPA gap.” “fill quantity obligations that “agreed to differ “does true that section 2.306 While it imposed from those section 2.306.” specifies contract either apply when the decide, Although I at 570. would S.W.2d provides for quantity or a standard numeric assume, merely the threshold rather than quantity,” 925 determining specific a S.W.2d issue, I 2.306 does would hold that section does, conclude, 570,1 as the Court at cannot “gaps” all the apply because the GPA has pur- requires Tennessee to that the “GPA normally output contract. that exist an eighty- quantity gas defined as chase a set outset, delivery percent Lenape’s capacity.” reject argument I five At the Sellers’ added). (emphasis There “gap” by is filled the 925 S.W.2d quantity that the here here, reservoir, quantity as nothing is “set” about physical attributes of the which increase in produced perhaps can several hundredfold limit volume of that amply actually occurred dem- much a of land that under the as tract GPA Indeed, rest of the physically quantity crop limits of a that onstrates. Court’s produced during year. opinion replete proving with statements can be a See is Co., delivery anything a “set capacity that but Tennell v. Esteve Cotton 546 S.W.2d 346 1976, out, quantity.” points As the Court (Tex.Civ.App. writ ref'd — Amarillo n.r.e.) delivery covering ca- (holding permits that a contract all of the Sellers to increase unitizing, pacity by drilling wells and produced cotton from a tract of land new obligated to provides a that are not during year governed was not Sellers any predetermined quantity or to because of the “entire deliver identification predetermined production” sufficiently specific). any This level delivera- was maintain may in- anticipates convincing. bility, not that argument is Even Tennell Sellers decided, correctly delivery capacity, and demonstrates this case differs from crease together crop production par a of all its taken case in that here the virtue capac- parties expected delivery did for the ties not contract “entire field significantly. 925 gas,” They ity S.W.2d anything or like it. contracted could increase Delivery capacity delivery capacity for at 570-571. under for 85% of Sellers’ twen then, quantity.” gas, anything but a “set ty years. That could all of the GPA Rather, argues, “moving it is a it, only on as Tennessee depending a fraction of terms, output "specifies very applies to agree I that if a contract a numeric its determining quantity provides specifies of what out- a standard for an estimate contract which specific quantity” for total amount of the put will be. commodity it is to be sold under that however, strongly disagree, with Court’s I manifestly not an to sec suggestion apply to 2.306 does not that section ordinary supply con but rather an tion "provides a deter- contract which standard for providing quantity tract for the sale of fixed specific quantity” mining on an 217, Fortney, goods. Cooper v. See ongoing life the contract. If basis over the (Tex.App. writ Dist.] [14th — Houston The same conclusion true, apply. never section 2.306 would that were n.r.e.). apply ref'd provide means will for some All contracts purported quanti which to measure to contract measuring specific quantity what the by output specified ty but in fact a fixed numeric ongoing is on an basis—how under the contract output, you in "I will sell for that as buyer payments due for agree else would the make my output widgets, we total which will Note, however, output? per widgets month.” target” had conjunc- output, This allowance for infinite least every retest at as often as requirement three that Tennessee months, or even more often certain delivery capacity, specific 85% of delivery provi- capacity circumstances. The enough any filling” good to displace “gap nothing sions GPA negate do requirements of section 2.306 which application of section 2.306. might apply. otherwise support

The Court claims that two cases agree clearly that the GPA sets out the specified conclusion that parties’ expectations and intent that delivery capacity a determin- any Moreover, not be limited to amount. GPA — —is able amount that takes the contract outside court finding unchallenged trial fact No. the reach of section 2.306. Neither so. does party, states: Riegel Corp. Fiber v. Anderson Gin parties negotiated When GPA Cir.1975), F.2d held that con- January 1978 and and executed it on grown tracts for the sale of cotton on a Buyer needed wanted to provided certain number of acres long obtain under term commitment or projected yield per acre were unenforcea- possible, dedication as much and the ble for lack definiteness. The court en- limit, intended that “simply by multiplying dorsed view reason, the volume of the commit- the number of acres stated the contracts ted reserves or amount of to be deliv- yield, times the estimated one derives a Seller(s) Buyer by ered therefrom to over quantity pounds term stated in of cotton.” 20-year of term the GPA. Similarly, Id. at n. 14. Fort Hill Lumber finding, trial Consistent this court Georgian-Pacific Corp., Co. v. 261 Or. part: concluded (1972), P.2d held that a contract If, unambiguous. The GPA as a whole is existing for all logged hemlock trees to be however, the GPA were to be considered period approximately certain area over a of ambiguous, court’s construction stated years requisite two contained the definite- expresses herein the true intentions of the logged ness the total “because area be parties at the time of the of execution therefore, possible, known ... and it is inGPA 1979. determine the volume of the hemlock limit, any ... The GPA does not rea- cases, total area.” both these the contract son, the of volume committed reserves or provided specif- determining a standard for amount of to be delivered therefrom to (of quantity logs) ic total corn Seller(s) Buyer by 20-year over the term Here, the contract. there is no such stan- of the GPA. Delivery capacity dard. measures “the pro part average Sellers’ rata amount conclude, however, “gap” I inherent gas per day well which can effi- be in all contracts and in this GPA —the ciently withdrawn from the wells on the lack of a certain term —can lease(s)” time the test is taken. Deliv- successfully by a of intent “filled” statement ery provides capacity standard no whatsoev- quantity. that there be no limit determining specific er for total supports The Code this conclusion. Sec- Thus, gas subject to the GPA GPA. provides tion 1.102 of Code “the quantity “gap” contains the same that all obligations good reasonableness and contain, “gap” contracts prescribed may by care this title not be UCC fills with the dual by par- agreement,” although disclaimed “the proportionality faith and con- reasonable may by agreement ties determine stan- tained section 2.306. performance dards which the of such obli- however, argue, gations The Sellers that there is is to be if such standards measured gap Thus, no quantity clearly manifestly because the GPA are unreasonable.” quan- may parties appli- communicates intent as to waive wit, 2.306; tity may, by they that there be no of section but “not limits on cation —to manifestly provisions, produce. amount of which could set the Sellers unreasonable” may by Lenape be sold good faith section 2.306 performance which standard attempt to have to third veiled are measured. and reasonableness parties’ contract. rewrite the this Court intentionally sets no lim A contract which However, GPA applying hard on increases its whatsoever applying than that contract no more rewrites by which ly performance sets standard freely any other UCC section of the is measured. good faith or reasonableness “conces- Tennessee’s bargained contract. of the obli prohibits the Code waiver Since moreover, sion,” the con- consistent with reasonableness, gations states: tract. Section of their own standard have not set Reserves Commitment compliance with these standards (a) measured, argument performance reject I commits to Sellers’ Seller from the Agreement gas produced parties by terms of the GPA displaced 2.306.4 committed reserves. (b) agrees other not to sell Seller ur- amici have The Sellers and numerous party parties, except contractors con- holding would gently suggested that such a reworking operations ducting drilling or ineluctably industry in bring the oil and Seller, any gas produced from the com- arguments, grinding to a halt. Their Texas during term hereof mitted reserves sincere, are rea- no doubt for several while Buyer. without the written consent persuasive. sons not First, applying I am not convinced and con- section 2.306 would make the GPA added.) (Emphasis it. applying

tracts like it less certain than not quantity is Having no limit whatsoever on Ill hardly ensuring certainty, except a means of Having the GPA is an out- concluded that Sellers, perhaps for who want to be certain applies, put contract to which section sky’s sold in a the limit on good faith and unrea- next consider how rising product. for their market sonably standards of that disproportionate outset, provision operate in this case. At the I applying

Nor do believe that section good faith I would consider the nature of fundamentally risk allo- 2.306 would alter the 2.306, specif- requirement with under section gas pur- cation of clause in good ic this faith standard focus whether chase contracts. The still has cer- Seller unreasonably dis- is further defined pumps tain for all natural market standard, good or proportionate whether good proportion in faith and in a reasonable unreasonably disproportionate faith are be, prior output. to estimated or This should separate two standards. cases, in almost all all the Seller below, produces. As discuss what is “rea- to out- good applicable faith The standard expecta- depend on the sonable” will section put requirements contracts under tions, any setting which almost oil and law, Code, as the common 2.306 of the very encompass must wide fluctuations business permits quantity variations for valid quantity. quantity and disallows variations reasons by speculation manipu- Finally, I do not the GPA’s caused or contract believe advantage suffices lation to take of favorable differ- exclusive dedication of the reserves price. market and contract application of section 2.306. ential between to excuse the Silkworth, Stacey Quantity generally Tennessee’s See Court mischaracterizes Contracts, Quantity 51 any produced Open “concession” that viola- Variation does, conclude, apply, enough 2.306 or whether the Court ableness under section 4. It is not as good faith does disclaim have set their own standard that, regardless or reasonableness standards compliance be these standards mea- applicability, increase in de- section 2.306's sured, thereby displacing Be- section 2.306. good livery capacity to the faith is still is no stan- the GPA's "no limits” standard cause obligation of section 1.203. The issue is whether all, applies. at I conclude that section 2.306 dard requirements good faith and reason- the dual 582 (1990).5 1983) Thus, (2d 1.33-12, § the MERCiAL at 75 ed. U.Pitt.L.Rev. Code, (“In good faith, for faith acting good

basic test here is whether addition to requirements to what extent in- buyer the Sellers would have or seller must quantity proffered keep creased the had also his demands within an amount not i.e., price equaled price, ‘unreasonably disproportionate’ market stated was there a valid business reason for the require- estimate normal ments.”); quantity independent price? increased As & Summers, White Uniform Com- “[wjhereas points out, (3d 1988) 3-8, good Silkworth at 167 ed. meroial Code (“An faith par- might yet test considers the conduct in good increase ties, speaks unreasonably prior test disproportionate reasonableness re- magnitude Weistart, quirements.”); Require- variation itself.” John C. at Output Id. 275. Quantity ments and Contracts: Var- UCC, iations Under the Duke L.J. When faced un with increases read, (“Properly operates section 2-306 an open-quantity der most courts good as codification of both the faith stan- recognized and commentators have a distinc an equitable dard and limitation on ex- proportionality tion between reasonable quantities tent to which can be increased See, good in applying section 2.306. quantity-determining party.”).6 e.g., Sheor-Kaiser-Lockheed-Healy, 140 Cal. (demand Rptr. at aggregate statutory language excess The clear of section 20%of over contract estimate imposes held unreason pro- standard reasonable ably disproportionate); Philadelphia Corp., portionality separate re- from the (declaratory judgment at 240 quirement good recognizing N.Y.S.2d faith. rea- proportionality under three contracts for sale sonable standard distinct hydroelectricity which did contain stated faith under court estimates, unreasonably dispro Orange “Obviously no and Rockland said: tendered); portionate prior output may language unreasonably [‘no dis- Utilities, Inc., Orange proportionate’] equivalent and Rockland of ‘lack (demand elementary N.Y.S.2d at 818 than more dou faith’ it is an [because] ble the estimated amount of fuel oil held given, rule of construction that effect must be unreasonably word, disproportionate). possible, every if See also clause and sen- Dept. Rockland, Corp., Orange State Fisheries v. J-Z Sales tence of a statute.” at (Wash.App.1980) (opining 610 P.2d N.Y.S.2d court concluded: that, “Thus, 2-306 applied, party even where one acts with com- % more than plete good contract estimate would be unrea the section the other limits sonably disproportionate); 1 party’s A risk with the accordance reason- AldeRMAN, expectations parties.” able Id. of the at 819. TRANSACTIONAL THE GUIDE TO UNIFORM COM- involving 5. Silkworth’s of numerous and 6. In cases decreases most analysis pre- quantity, applying variation cases leads courts section 2.306 have held that her post-Code quantity quantity-determining conclude: whether party, require- seller, ments be should held buyer The business reason factor and the contract See, e.g., good Atlantic faith standard. only factor lend context manipulation pre- Corp., Track Co. v. & Turnout Perini 989 F.2d good Code faith standard. courts and Many Gas, (1st Cir.1993); Empire 541, 544-45 commentators have stated that the primary Angelica Group, v. Inc. F.2d at 1337-38; Uniform good concern variation cases is quantity Inc., Sys., Ponderosa 232, F.2d faith. Courts have been reluctant to define Cir.1980) curiam). (per While some commenta- good faith; ... [n]evertheless, ... courts have tors have of criticized the treatment disparate held of valid business rea- presence supra, see Silkworth, at decreases, increases son absence and/or manipu- Output Contracts and the Owings, 268-70; Note, 2-306, lation constitute faith in Unreasonably Disproportionate Clause of§ open hand, contracts. On the other absence aof (1994), there 59 Mo.L.Rev. 1059-60 is no business reason of contract presence and/or here, need to resolve nor Ido any inconsistency bad constitute faith in manipulation open make comment on the standards any applicable contracts. The U.C.C. has codified decreases, since this case involves faith standard. an increase of tendered an quantities supra, (footnotes omitted). Silkworth, at 270 seller. unreasonably disproportionate im- is recognized new wells Having that section great compared to Sellers’ it is so separate of reasonable because poses requirements GPA. But whether prior output under the good faith for proportionality and magnitude disproportion here of the I would increases under depends on pro- under section 2.306 applicability each unreasonable in turn the address the con- expectations parties of the when to the GPA. viso an in- and whether such tract was executed proportionality, addressing reasonable reasonably could have been crease inquiry be or to what the first must whether anticipated. Orange and Rock- forecast or dependant parties’ it be on the extent must land, Objective indicia 397 N.Y.S.2d con- Orange and Rockland expectations. at that expectations of the reasonable expressed cluded that it could be considered, including the may also be time Instead, quantity. fixed for the reasonable capabilities pipe lines and of the size effect, “it proportionality limitation to take facilities, area, history of the other enough requirements demand formation, industry prac- local nature of the estimate; disproportionate to stated tices, deliverability estimates reserve unreasonably must be so view so forth. expectation parties.” Orange and Rockland, (emphasis at 819 397 N.Y.S.2d parties’ expectations should also added). agree. Applying the unreason- light general nature considered ably limitation to disproportionate disallow in industry. possibility greatly fuel that was requirements an increase in oil output, and the creased awareness estimate, greater than the contract 63% possibility, is an essential characteristic Orange and Rockland held: provides the gas industry, which the oil and must be consid had on context in which

Defendant no reasonable basis recognized long anticipate Texas courts which to forecast or an increase ered. particular magnitude. of this Indeed the contract that the existence oil contemplated suggests [a well’s] tract of land and “the amount speculative. v. output” highly Hatt Walk variations from the estimate would be on er, (Tex.Civ.App. quantities the downside.... of oil 33 S.W.2d [T]he — Dallas w.o.j.), in KMI ... writ dism’d utilized were not within the reasonable followed Prod. v. ACF Pe expectations the con- Continental Co. when Offshore (Tex. executed, accordingly tract was we troleum denied). “requirements” Dist.] writ App. [1st hold that those were un- — Houston reasonably disproportionate to the contract Moreover, parties obvi- sophisticated these estimates. ously Lenape’s duty as lessee were aware Id, omitted). (citation at 822 See also underlying reasonably develop the leases (stat- Summers, supra, § 3-8 at 167 & White GPA, Prod. Co. Exploration Sun see ing ‘unreasonably’ allows for “[t]he word (Tex.1989) Jackson, 202, 204 v. 783 S.W.2d interplay of almost factor a court Koontz, Tex. (discussing Clifton relevant,” suggesting properly considers and (1959)), duty Lenape’s as 325 S.W.2d anticipation in large that of increases re- from protect operator to the leasehold might party resisting quirements prevent duty to drainage, give rise to a which could prevailing the increase from under section under certain circum- drill an offset well 2.306). Thus, expectations parties’ Alexander, Amoco Prod. stances. See Co. light past in of should not be considered (Tex.1981). Especially urged by as performance under underly- light Lenape’s in duties under the of Tennessee, original light but also expecta- leases, Tennessee’s reasonable ing expectations of as well as the encompass possibility that to tions had agreement industry context in which their term, during twenty-year new any time was made. might Like- productive wells be drilled. wise, parties’ expectations argues reasonable the increase Tennessee industry encompassed reasonable from the would have of tendered Sellers practices relating production to the faith sale because the trial court ruled on sum- remand, gas. of On mary judgment would have that section 2.306 does opportunity put to all forward such rele- apply to GPA. Since the trial court concerning vant evidence the nature of the as a matter law decided of that section 2.306 industry impacts it as reasonable apply, opportunity did not there was no to expectations at the time the GPA was en- present arguments evidence about the tered into. Sellers’ to failure abide that section.

Given the nature the oil and indus- try relationship pro- of unreasonable Sellers counter that section 2.306 does portionality parties’ expectations, to it should only good-faith requirement contain the producers jury clear will not face a the UCC. The official comments indicate enforceability trial over the of a applies requirement that section to 2.306 every time a new well output general good contracts the faith re- is drilled or a successful strike is celebrated. Code, quirement of the codified section Only extraordinary will a cases fact issue 1.203, and further defined for merchants be raised as to whether a tendered 2.103(a)(2).7 Thus, section obli- the same unreasonably is disproportionate prior out- gation good applies faith to an put then, under section 2.306. Even through general contract whether it is course, issue, “[i]t fundamental that an application sales contracts of section normally question fact, which is can be 2.103(a)(2), conjunction with section proved conclusively so by the evidence at through good requirement faith law, question trial that it becomes rather 2.306, applicable section contracts. question than of fact.” Dixon v. South- observations, Based these the Sellers western Bell Tel. 607 S.W.2d originally contended in this Ten- Court that (Tex.1980). complained-of in- Whether the prove nessee was not denied its bad creased tendered in this ease faith, voluntarily but rather that Tennessee unreasonably disproportionate under sec- gave up right by its own act dismiss- as a 2.306 matter of is not raised in law ing all good faith claims in a this Court. Agreed Motion for Judgment.8 Partial Finally, I also remand to the trial correctly rehearing, point On out Sellers proceedings court for regarding further did faith not dismiss bad complained-of whether Sellers caused the in- against Lenape. claims under faith, crease to occur in bad agreed partial The motion for judgment i.e., for no valid business reason or Pipeline states: “Plaintiff Tennessee has Gas purpose manipulating the contract to take agreed to dismiss of its bad claims for advantage price disparity of a in their favor. faith or lack of faith that it If the increased did not occur in against [Tesoro and ... with the Coastal] apply prevent section 2.306 should of, exception expressly and it reserves forcing Sellers from itself, any might it claims that have under bad increase. Section 2.306 of the Uniform Commercial I agree Agreed

Tennessee contends and Judgment Code.” The Partial prevented trying good signed by judge trial issue likewise reflects official comments state that enforcement.” 1.203. & Com.Code Tex.Bus. 2.306(1) applies "specific problem” [of Good faith further defined for merchants require- absence of term in "honesty in fact and the observance of reason- general ments approach contracts] the of the Act dealing able of fair in the commercial standards "requires reading the of commercial back- 2.103(a)(2). Com.Code § trade." TexJBus. & ground language and intent into the agreement good perfor- and demands faith in the Application jointly 8. The for Writ of filed Error agreement.” mance of that TfeBus & Com.Code Tesoro, Coastal, Lenape by and Gulf states that § general good 2.306 cmt. 1. The Code's faith trial, with "on the eve of Tennessee dismissed requirement provides and reasonableness that prejudice § for bad faith under claims "[ejveiy duty imposes contract or within this title but retained claim under 2.306.” its obligation good performance an faith its or in regard to the increased good faith with agreement with Tesoro ers’ that Tennessee’s was subject to the Coastal, production of GPA. thus Lenape. not against Lenape good a to live went trial unusual, unique, very perhaps a This a 1.203, and the trial claim under section faith fluctuating market wildly It involves case. as the judge found no bad faith to formation in volatile even the conditions uncommon drilling and the the new of the new units use, longer no in industry, type of contract a wells. But large discovery replicated. seldom likely arise not to merely a case is because However, question central whether the being from prevent not the law again should by Ten- output complained the increased actually it to situation as fairly applied reason for a valid business nessee occurred instance, law I believe the In this occurred. speculation contract or as result of and/or that attempt prove to permits to manipulation by has the Sellers not been oc- either Sellers’ increased tender fully litigated. The record indicates that the unreasonably in or dis- curred bad faith was assumption that the case was tried under the Therefore, I output. prior proportionate any argument precluded had court appeals’ judgment court of would affirm the output a re- was an contract.9 As contract respects. in all sult, on judge the trial could have focused quan- in complained-of increase whether output oc-

tity under an contract tendered faith,

curred in bad whether under section Therefore, or 1.203.10 I would section this action to the trial court

remand Sell- proceedings

further on the issue sent partial summary up is reversed and judgment where the line that 9. Tennessee made output question, seeking ruling that was an motion output the GPA on the back for trial governed by good Ten- contract section 2.306. or faith claims whatever bad faith claims specifically argued agree- nessee that the GPA solely output might we have under output ment "meets the definition of an contract preserved. of the Uniform Commercial Code as the contract is indefinite and is mea- added.) judg- summary (Emphasis Given the (delivery capacity) output sured the future judge, rulings this ment statement Lenape, response, its in the seller.” in brief unchallenged by Sell- counsel for the which went argued output that the GPA was an ers, pro- the court I believe that the requires because it Tennessee to assumption that trial under the ceeded to acreage. specified entire effectively that the GPA was had ruled court summary judg- filed Tesoro and Coastal also output contract. motion, sought joined by Lenape, which ment ruling by the court that the GPA was not an During supports conclusion. The record this output contract to 2.306. Their brief trial, closing opening statements arguments not an contained was parties identified bad faith increase none of the that, was, output it is not contract and even if capacity output delivery an issue as specifying governed section 2.306. Without not) (or any way attempted to link tried decision, grounds denied of its trial court price changes for with market increase in granted Tennessee’s motion and Tesoro Moreover, only explicit question about gas. Coastal’s motion. during posed trial “good to a witness faith” (before opening During Hon. statements Lenape’s duty regard as a lessee its was in Barrow, Court, of this Charles W. sitting by designation), retired Justice good During pool cross- faith. lessors to Tennessee, counsel Coastal, Devine, Mr. Tesoro and examination indicating claims after court that various Resources, Lenape testi- president for vice senior voluntarily parties, had been dismissed operator is re- aware that an fied that he was stated: good quired pool and that his only thing previous left is a case question were opinion new units in the two Cadena, judge retired [the Hon. Carlos C. good oil and faith "as far formed in Appeals, Chief Justice of Fourth Court of But, course, any duty concerned.” leases are summary sitting by designation] grant ain by Lenape not at issue in lessors is owed judgment had knocked out our to claim record, Thus, review of the from this this case. that this contract. The [a]n com- issue of whether the conclude Code of the Uniform Commercial im- plained-of occurred obligation upon parties. increase poses a preserved appeal not been tried. sorrie- faith has We

Case Details

Case Name: Lenape Resources Corp. v. Tennessee Gas Pipeline Co.

Court Name: Texas Supreme Court

Date Published: Aug 16, 1996

Citation: 925 S.W.2d 565

Docket Number: 94-0278

Court Abbreviation: Tex.