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Gulf Oil Corp. v. Federal Power Commission

filed: September 7, 1977.

GULF OIL CORPORATION, PETITIONER,
v.
FEDERAL POWER COMMISSION, RESPONDENT, PHILADELPHIA GAS WORKS, TEXAS EASTERN TRANSMISSION CORPORATION, MILTON CLARK, FREDERICK W. ROSE, AND ST. REGIS APARTMENT, LTD., ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED (PGW'S CUSTOMERS), WASHINGTON URBAN LEAGUE, PUBLIC SERVICE ELECTRIC AND GAS COMPANY, CONNECTICUT PUBLIC UTILITIES CONTROL AUTHORITY, MASSACHUSETTS DEPARTMENT OF PUBLIC UTILITIES, RHODE ISLAND DIVISION OF PUBLIC UTILITIES AND CARRIERS, RHODE ISLAND ATTORNEY GENERAL AND RHODE ISLAND CUSTOMERS' COUNCIL (NEW ENGLAND), PUBLIC SERVICE COMMISSION OF THE STATE OF NEW YORK, THE BROOKLYN UNION GAS COMPANY, PHILADELPHIA ELECTRIC COMPANY, INTERVENORS. CONNECTICUT PUBLIC UTILITIES CONTROL AUTHORITY, MASSACHUSETTS DEPARTMENT OF PUBLIC UTILITIES, RHODE ISLAND DIVISION OF PUBLIC UTILITIES AND CARRIERS, RHODE ISLAND ATTORNEY GENERAL, AND RHODE ISLAND CONSUMERS' COUNCIL, PETITIONERS, V. FEDERAL POWER COMMISSION, RESPONDENT, PHILADELPHIA GAS WORKS, GULF OIL CORPORATION, BAY STATE GAS COMPANY, BOSTON GAS COMPANY, BRISTOL AND WARREN GAS COMPANY, CAPE COD GAS COMPANY, COMMONWEALTH GAS COMPANY, THE CONNECTICUT GAS COMPANY, CONNECTICUT NATURAL GAS CORPORATION, FALL RIVER GAS COMPANY, THE HARTFORD ELECTRIC LIGHT COMPANY, TOWN OF MIDDLEBOROUGH, MUNICIPAL GAS AND ELECTRIC DEPARTMENT, NEW BEDFORD GAS AND EDISON LIGHT COMPANY, NORTH ATTLEBORO GAS COMPANY, CITY OF NORWICH, DEPARTMENT OF PUBLIC UTILITIES, PEQUOT GAS COMPANY, PROVIDENCE GAS COMPANY, SOUTH COUNTY GAS COMPANY, THE SOUTHERN CONNECTICUT GAS COMPANY, TIVERTON GAS COMPANY, PUBLIC SERVICE ELECTRIC AND GAS COMPANY, MILTON CLARK, FREDERICK W. ROSE AND ST. REGIS APARTMENTS, LTD. (PGW'S CUSTOMERS), ALGONQUIN GAS TRANSMISSION COMPANY, PHILADELPHIA ELECTRIC COMPANY, INTERVENORS



ON PETITIONS FOR REVIEW OF OPINIONS AND ORDERS OF THE FEDERAL POWER COMMISSION.

Seitz, Chief Judge, Aldisert and Rosenn, Circuit Judges. Aldisert, Circuit Judge, dissenting.

Author: Rosenn

Opinion OF THE COURT

ROSENN, Circuit Judge.

These petitions raise numerous questions concerning an order by the Federal Power Commission ("FPC") requiring Gulf Oil Corporation ("Gulf") to deliver to the pipelines of the Texas Eastern Transmission Company ("Texas Eastern") large quantities of natural gas. Gulf urges that the FPC order be set aside, several New England states ("New England")*fn1 ask that the order be modified, and a group of intervenors*fn2 argue that the Commission's order should be enforced in full. Finding no merit in either Gulf's or New England's petition, we affirm the Commission's order without modification.

I. BACKGROUND

This dispute grows out of a certificate of public convenience and necessity issued to Gulf by the FPC in 1964. That certificate followed a 1963 "Precedent Agreement" between Gulf and Texas Eastern wherein they agreed to enter into a "Gas Purchase Contract" upon the receipt by each of an appropriate certificate from the FPC.

Upon issuance of the certificates, Gulf commenced performance in accordance with the terms of the contract and the certificate. Within a few years, however, Gulf discovered that it had vastly overestimated the reserves of its West Delta Block 27 Field located in Plaquemines Parish, Louisiana, the field from which Gulf had expected to draw most of the natural gas for the Texas Eastern contract. In 1971, citing the mistake in its reserve estimate, Gulf applied to the Commission for a certificate amendment increasing the price at which it supplied gas to Texas Eastern. In Opinion Nos. 692 and 692-A, issued in 1974, the FPC denied Gulf's application for an amendment and Gulf did not seek judicial review of the Commission's decision.

Since 1973, Gulf's deliveries to Texas Eastern have fallen short of Texas Eastern's demands and since 1974, short of the contract specified quantities. On November 7, 1975, the FPC issued the show cause order which initiated this proceeding. After a hearing, the Administrative Law Judge concluded that Gulf was obligated to deliver greater quantities of gas than it had been and he ordered certain performance and refunds on the part of Gulf. The Commission, in Opinion No. 780, agreed with the conclusions of the Administrative Law Judge. Gulf and a number of other parties petitioned for rehearing but in Opinion No. 780-A the Commission held to its prior decision. This appeal followed.

On review, we are empowered to "affirm, modify, or set aside [the Commission's] order in whole or in part," Section 19(a) of the Natural Gas Act of 1938, 15 U.S.C. § 717r (1970). The scope of our review is defined by the Administrative Procedure Act, 5 U.S.C. § 706 (1970).*fn3

II. GULF'S DELIVERY OBLIGATIONS

The first question before us concerns the quantity of gas which Gulf is obligated to deliver. The Commission found that under the certificate of public convenience and necessity, Gulf is obligated to deliver 625,000 MCF (thousand cubic feet) of gas per day to Texas Eastern except when Texas Eastern demands less. Gulf maintains that its obligation, if any, is limited to 500,000 MCF per day.

Although our concern is with the meaning of the certificate, see Sunray Mid-Continent Oil Co. v. FPC, 364 U.S. 137, 152-54, 80 S. Ct. 1392, 4 L. Ed. 2d 1623 (1960), it is to the Gulf-Texas Eastern contract that we must turn. The reason is that the certificate alone has little substance. At its core is the incorporation by reference of Gulf's application; the application in turn refers to the terms of the precedent agreement and the gas purchase contract. The scope of the certificate, therefore, is in large part defined by the terms of the contract.*fn4

Several provisions of the contract are relevant to this issue. The first is Article II, para. 1(a), which provides that after a start-up period ending on November 1, 1968, the "Daily Contract Quantity" will be established at 500,000 MCF per day. The second relevant provision is Article I ("Scope of Agreement"), para. 4:

Seller [Gulf] warrants and agrees that there will be provided under the terms of this Agreement a quantity of gas sufficient to enable Seller to have available for delivery hereunder on any day or days a volume not less than one hundred twenty-five per cent (125%) of the Daily Contract Quantity . . . .

Article II ("Quantity of Gas") contains two additional provisions of importance. Under paragraph 1(b), Texas Eastern agreed to purchase or pay for if available and not taken

a quantity of gas equal to eighty per cent (80%) of the sum of [the] Daily Contract Quantity . . . multiplied by the number of days in [the] year . . . .

Paragraph 1(c) gives Texas Eastern the right

to purchase from Seller hereunder at any time, and from time to time, quantities of gas greater than the Daily Contract Quantity . . .; provided that Seller shall not be obligated to deliver in any day a quantity of gas in excess of one hundred twenty-five per cent (125%) of [the] Daily Contract Quantity.

Another relevant provision, Article XII states:

This Agreement shall . . . remain in full force and effect for a term of twenty-six (26) years from the date of initial deliveries of gas hereunder, or to the date on which four billion four hundred thirty-seven million six hundred seventy-five thousand (4,437,675,000) MCF of gas . . . has been delivered to Buyer[,] whichever shall first occur.

Gulf insists that if these provisions of the contract are read together, it becomes clear that some sort of "swing" in deliveries is contemplated. In Gulf's view, Texas Eastern is entitled to receive and Gulf is obligated to provide no more than the Daily Contract Quantity ("DCQ") - 500,000 MCF - except on those "infrequent days when customers create a peak demand on [Texas Eastern's] system." On days when Texas Eastern experiences a light demand, on the other hand, Texas Eastern need take no more than 80 percent of the DCQ. Thus, according to Gulf, the provisions of para. 1(b) and para. 1(c) of Article II are, in a sense, reciprocal - the contract contemplates that "swings" one way or another over the course of the contract will ultimately balance out so that the delivery of the 4,437,675,000 MCF*fn5 (or 4.4 TCF) will be completed on or about the 26th anniversary of the Agreement. The conclusion which Gulf draws is that the contract does not entitle Texas Eastern to receive the full 125 percent of the DCQ - 625,000 MCF - day after day on a regular basis.

The FPC responds to Gulf's argument by first noting that since 1973 Texas Eastern has consistently demanded delivery of 625,000 MCF every day. The Commission's view is that Gulf's obligation to deliver 125 percent of the DCQ is contingent on nothing but Texas Eastern's demand; once the demand is made, the obligation becomes operative.

In our own analysis of the contract, we find one important factor supporting Gulf's interpretation: the use of the term "Daily Contract Quantity." These three words standing alone imply that 500,000 MCF is the normal daily quantity of gas which Gulf must deliver and Texas Eastern is required to buy. Arrayed against this single factor, however, are other factors which militate against Gulf's theory. First is the unequivocal and unconditional warranty contained in Article I, "Scope of Agreement": "Seller warrants . . . to have available for delivery . . . on any day or days a volume not less than one hundred twenty-five percent . . . of the Daily Contract Quantity." (Emphasis supplied.) Moreover, if the 80 percent DCQ provision and the 125 percent DCQ provision were intended to be reciprocal, as Gulf contends, the mention of one without the other in the Scope of Agreement would be most unlikely.

We believe that Article II, "Quantity of Gas," lends further support to the Commission's interpretation. Nowhere in that Article is Gulf's daily obligation limited to the DCQ. On the contrary, the article speaks only of Texas Eastern's right to purchase "at any time, and from time to time" as much as 125 percent of the DCQ.

Another important consideration also militates against Gulf's contention that the contract established a "swing" in Gulf's gas delivery obligations rather than an absolute obligation to deliver 125 percent of the DCQ upon demand. Such a construction of the contract is unreasonable since it would render the parties' rights and obligations uncertain and indefinite. A contract should be construed, if possible, so as to sustain it rather than convert it into something vague and unenforceable and we will not strain the language of a vital provision of this contract to create an ambiguity where none exists. See H. K. Porter Company v. Wire Rope Corp. of America, Inc., 367 F.2d 653 (8th Cir. 1966); Ness v. National Indemnity Company of Nebraska, 247 F. Supp. 944 (D.C. Alaska 1965).

We recognize that the question is close. We are particularly disturbed by the failure of the FPC and the intervenors to explain satisfactorily the use of the words "Daily Contract Quantity." Nevertheless, when we weigh that term against the other factors, particularly the warranty of 125 percent of the DCQ, we are persuaded that the Commission's interpretation is more harmonious with the contractual language than is the interpretation urged by Gulf. We therefore accept the Commission's interpretation and we will affirm the Commission's holding that Gulf is obligated to deliver 625,000 MCF every day unless Texas Eastern demands less until the contract expires.*fn6

III. ARBITRATION

On November 20, 1975, two weeks after the Commission issued the show cause order, Gulf by letter to Texas Eastern invoked the arbitration clause of the agreement:

Any dispute arising between Seller and Buyer out of this Agreement shall be determined by a board of three arbitrators to be selected for each such controversy so arising . . . . Such board shall determine the matters submitted to it pursuant to the provisions of this Agreement. The action of a majority of the members of such board shall govern and their decision in writing shall be final and binding on the parties hereto.

Gulf requested arbitration on the issue whether Gulf's delivery obligations were wholly or partially excused by (1) commercial impracticality, (2) mutual mistake, or (3) force majeure.*fn7 In the proceeding before the FPC, Gulf requested that the Commission reserve its rulings on these issues until it had received the decision of the arbitration board. Gulf now seeks review of the Commission's refusal to defer to the arbitrators.

Gulf's argument is that its certificate obligation is co-extensive with its contractual obligation, that the extent of its contractual obligation is to be determined by arbitration, and, therefore, that the Commission cannot possibly decide whether Gulf is complying with its certificate until the arbitration board decides whether Gulf's performance is adequate under the contract. Gulf contends that the Federal Arbitration Act, 9 U.S.C. §§ 1-14 (1970),*fn8 evidences a strong Congressional policy favoring arbitration of contract disputes, J. S. & H. Construction Co. v. Richmond County Hospital Authority, 473 F.2d 212 (5th Cir. 1973), and that regulatory agencies are not exempt from this policy. William E. Arnold Co. v. Carpenters Dist. Council, 417 U.S. 12, 16-17, 40 L. Ed. 2d 620, 94 S. Ct. 2069 (1974). In granting a certificate based on the contract, Gulf maintains, the Commission effectively gave its approval to the contract's arbitration clause. In Gulf's view, the Commission should not now be permitted to deny the validity of arbitration as the means for resolving contract disputes. We disagree with Gulf's analysis.

By its terms, the arbitration clause of the contract applies only to disputes "arising between Seller and Buyer out of this Agreement," whereas the instant case is a dispute between Gulf and the FPC arising out of the certificate. We discern no inconsistency in the Commission's approval of arbitration as a means of resolving disputes between Gulf and Texas Eastern and the Commission's refusal to defer to arbitration for the resolution of disputes between Gulf and the FPC.

Gulf's argument, in essence, is that since the scope of Gulf's certificate obligation is defined by the contract and the contract calls for questions of interpretation to be decided by arbitration, it follows that Gulf's obligation under the certificate is to be decided by arbitration. Although we accept the premises of this argument, our reading of the arbitration clause and the responsibilities of the Commission under the Natural Gas Act do not allow us to agree with the conclusion.

The FPC is charged with the public responsibility to enforce the certificate, and in the performance of its duty, the Commission necessarily must resort to the terms of the contract. But this does not mean that the Commission becomes in any sense a party to the contract bound by the mutual obligations between the parties themselves. The reciprocal promises between Gulf and Texas Eastern to resolve their disputes by arbitration are inapplicable to the Commission's duty to enforce the certificate of public convenience.

We are not persuaded by the cases which Gulf cites as authority for the contrary conclusion.*fn9 Each of these cases involves the division of responsibility between a court and arbitrator where the parties had previously agreed to arbitrate the very dispute before the court. In contrast, the issue in the instant case is the interpretation of Gulf's public service obligation under its certificate, the interpretation of which can only be within the FPC's exclusive jurisdiction and which is not subject to arbitration. None of the cases cited by Gulf concerns the question whether a regulatory agency seeking to enforce a certificate issued by it must defer to arbitration merely because the certificated party has agreed in a sales contract with a customer to arbitrate disputes between them. Moreover, none involves a governmental agency which has an independent interest as a regulatory body in the enforcement of the terms of its certificate of public convenience.

The futility of the procedure which Gulf proposes also concerns us. Although Gulf claims the right to arbitrate the issues of contract interpretation, it does not contend that the results would in any sense be binding on the Commission. Gulf urges only that the Commission should not have decided this case without the benefit of the arbitrators' previous resolution of the same issues. We fail to see the purpose to be served, however, in a lengthy delay of FPC action in this urgent matter pending arbitration when the FPC, even under Gulf's view, would ultimately be free to ignore completely the arbitration results. Deferral to arbitration under these circumstances would unnecessarily expend precious time, effort, and money.

For these reasons, we will affirm the refusal of the FPC to defer to arbitration.

IV. COMMERCIAL IMPRACTICABILITY

Gulf contends that the contract is limited to the gas which it is commercially practicable to deliver. As part of this argument, Gulf insists that the contract as a whole evidences the intention of the parties to deal only with gas found in the southern Louisiana area in which Delta Block 27 is located. Gulf also maintains that even if its delivery obligations are unconditional on the face of the contract, the Commission's order that Gulf perform the contractual deliveries is erroneous under two principles of law:*fn10 (1) even facially unconditional obligations are subject to economic limitations; and (2) "where performance has been rendered impracticable, even though not impossible, and such impracticability was the result of unforeseen events, as here, a party will be excused from performance."

The first question to be resolved is whether the contract itself limits the sources of gas to the southern Louisiana area. Gulf points to the specific reference in the preamble of the contract to southern Louisiana and to the provision in Article III that delivery will take place in Plaquemines Parish, Louisiana, close to Delta Block 27. Gulf's interpretation of the contract, however, is inconsistent with the single most important provision of the contract - the provision by which Gulf "warrants" the delivery of the contract quantities of gas without regard to service. The importance of this provision is underscored by the history of the contract. Thus, although Gulf could have dedicated to the contract the specific gas producing lease of West Delta Block 27, Gulf purposefully chose not to do so. As Gulf emphasized in its application for the certificate of public convenience,

The agreement with Texas Eastern does not commit or dedicate to the contract any specific gas producing leases or fields, and no specific commitment or dedication is intended.

Gulf itself reiterated its understanding of the contract in its 1971 application for an amendment to the certificate:

The Gas Purchase Contract is what is known as a warranty contract which does not involve the dedication of specific leases to the performance of the agreement but warrants delivery of a stated volume at a specified rate per day.

Furthermore, the FPC's finding and order accompanying the issuance of the certificate require that we not interpret the contract as limited to gas from West Delta Block 27. The Commission, although recognizing that Gulf expected to draw most of the gas from Delta Block 27, noted that "Gulf further indicated that it had additional gas available to fulfill the overall contractual requirement." By accepting the certificate which was based on this finding, Gulf became bound by the Commission's interpretation. Cf. Sunray Mid-Continent Oil Co. v. FPC, supra, 364 U.S. at 156; Atlantic Refining Co. v. PSC of New York, 360 U.S. 378, 389, 79 S. Ct. 1246, 3 L. Ed. 2d 1312 (1959).

Against this overwhelming evidence that Gulf intended to warrant the deliveries of contract quantities without regard to source and that the certificate is predicated on that warranty, Gulf relies only upon the reference in the preamble to southern Louisiana and the delivery point provision of Article III. In our view, these references are a slender reed on which to rest and neither they nor other aspects of the contract support Gulf's position.

First, a recital in a preamble, although part of the contract, must give way in case of conflict with the operative provisions of a contract. Fidelity Bank v. Lutheran Mutual Life Ins. Co., 465 F.2d 211, 214 (10th Cir. 1972); Kogod v. Stanley Co. of America, 88 U.S. App. D.C. 112, 186 F.2d 763, 765 (1950). Thus, although we perceive no conflict between the recital of gas reserves in southern Louisiana and the warranty of deliveries regardless of source, a conflict, if any, must be resolved in favor of the warranty. Secondly, the provision for delivery at a point near the area from which Gulf concededly anticipated it would draw most of the gas is hardly very remarkable and proves very little. Even without the warranty provision, we would not interpret language which purports to do no more than establish a delivery point as actually creating an implied condition on the seller's entire obligation to perform. In the context of this warranty contract, of course, such an interpretation is impossible. We conclude, therefore, that the contract on its face obligates Gulf to deliver the specified contract quantities of gas regardless of where the gas is drawn.

The next question is whether Gulf's delivery obligation, although unconditional on the face of the contract, is subject to economic limitations. Gulf cites Dillon v. United States, 140 Ct. Cl. 508, 156 F. Supp. 719, 722 (1975), holding that contract to deliver hay at Ft. Reno Oklahoma, which the parties contemplated would be grown in nearby Vinita, Oklahoma, did not obligate the seller to purchase hay in Nebraska and ship it to Oklahoma at his expense, and Mitchell Canneries, Inc. v. United States, 111 Ct. Cl. 228, 77 F. Supp. 498, 502 (1948), reaching a similar result with respect to blackberries not available where contemplated due to a crop failure.

Reliance on these cases is misplaced for three reasons: First, and most important, neither case involves a warranty contract. Second, in both cases the sellers were relieved of their delivery obligations only upon a showing of extreme hardship, whereas Gulf has shown no particular hardship at all in the instant case, as we discuss below. Third, in both Dillon and Mitchell Cannaries, the extreme economic hardship to the sellers resulted from forces of nature clearly beyond the sellers' control, not an error on the part of the sellers in estimating their supplies. We, therefore, do not believe that Gulf's obligation can be excused by analogy to either Dillon or Mitchell Cannaries.

Finally, we turn to Gulf's argument that its performance is excused by the doctrine of commercial impracticability. In support of this contention, Gulf cites a number of cases which hold that if, due to unforeseen circumstances, the cost of performance of a contract becomes so excessive and unreasonable as to make performance impracticable, performance may be excused. See, e.g., Mineral Park Land Co. v. Howard, 172 Cal. 289, 156 P. 458 (1916); Cosden Oil & Gas Co. v. Moss, 131 Okla. 49, 267 P. 855 (1928); Carozza v. Williams, 190 Md. 143, 57 A.2d 782 (Ct. App. 1948). Relying on these authorities, Gulf asserts that "No one entertained the thought that Gulf would be required to deliver gas from far off places at unknown but obviously 'exorbitant' costs." We do not dispute Gulf's statement of the legal doctrine only its application to this case.

We believe, first of all, that a warranty by its very nature precludes relief on a theory of commercial impracticability resulting from the unavailability of gas.

In essence a warranty is an assurance by one party to an agreement of the existence of a fact upon which the other party may rely; it is intended precisely to relieve the promisee of any duty to ascertain the facts for himself. Thus, a warranty amounts to a promise to indemnify the promisee for any loss if the fact warranted proves untrue.

Paccon, Inc. v. United States, 185 Ct. Cl. 24, 399 F.2d 162, 166-67 (1968), quoting Dale Constr. Co. v. United States, 168 Ct. Cl. 692, 699 (1964). Accord, Metropolitan Coal Co. v. Howard, 155 F.2d 780, 784 (2d Cir. 1946) (L. Hand, J.); The Fred Smartley, Jr., 108 F.2d 603, 606-07 (4th Cir. 1940). Gulf's warranty "that there will be provided . . . a quantity of gas sufficient to enable Seller to have available for delivery [the contract quantities of gas]" whether it is a warranty of fact or of performance, is subject to the same rule: By warranting, rather than merely promising, the availability of sufficient quantities of gas, Gulf assumed for itself the entire risk that future conditions would raise the cost of gas. As the Restatement says,

Since it is possible for a party to contract to assume the risk of every chance occurrence, a fair interpretation of a contract may indicate an intention to be bound to perform or to pay damages for nonperformance whatever contingencies occur.

Restatement of Contracts, § 288, comment b at 427 (1932). Gulf's warranty indicates just such an intention to be bound. The defense of impracticability is inconsistent with an express warranty, Chemetron Corp. v. McLouth Steel Corp., 381 F. Supp. 245, 257 (N.D. Ill. 1974), aff'd 522 F.2d 469 (7th Cir. 1975); cf. United States v. Hathaway, 242 F.2d 897, 899-901 (9th Cir. 1957), and ...


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