Appendix — Lively Exploration Co. v. Valero Transmission Co.

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NO.

IN THE

Supreme Court of the Mnited States

OCTOBER TERM, 1989

LIVELY EXPLORATION COMPANY, ET AL.,

Appellants

VALERO TRANSMISSION COMPANY,

Appellee

On Appeal From The Court of Appeals For The

Fourth Supreme Judicial District of Texas

APPENDIX TO THE

JURISDICTIONAL STATEMENT

JESSE P. LUTON, JR.

ScoTT, DouGLass & LUTON

4300 NCNB Center

700 Louisiana Street

Houston, Texas 77002

(713) 228-6337

Counsel for Appellants

December 7, 1989

Alpha Law Brief Co., Inc.— 8748 Westpark — Houston, Texas 77003 — 789-2000

Y»>

INDEX

APPENDIX TO THE

JURISDICTIONAL STATEMENT

OPINIONS AND ORDERS

Lively Exploration Co. v. Valero Transmission Co., Appeal

No. 04-87-00380-CV (Tex. App.—San Antonio, March 31,

1988, withdrawn May 18, 1988) ..................0:.

Lively Exploration Co. v. Valero Transmission Co., 751

S.W.2d 649 (Tex. App.—San Antonio 1988, writ denied)

Order of the Supreme Court of Texas Denying Lively

Exploration Company's Application for Writ of Error,

pe Er era rr reine Be, Taam seas, ae

Order of the Supreme Court of Texas Overruling Lively

Exploration Company’s Motion for Rehearing of the

Application for Writ of Error, September 13, 1988 .....

JUDGMENT APPEALED FROM

Judgment of the San Antonio Court of Appeals in Lively

Exploration Co. v. Valero Transmission Co., Appeal No.

Deeeen-w, ee BE, BOO ok cca lec See wass cleo es

NOTICE OF APPEAL

Notice of Appeal to the Supreme Court of United States,

filed with the Texas Supreme Court and the Texas Court

of Appeals, September 25, 1989 .....................

BRIEFS IN TEXAS COURT OF APPEALS AND

TEXAS SUPPREME COURT

Lively’s Motion for Rehearing in Texas Court of Appeals,

eS re nr re rr ree

Lively’s Application for Writ of Error to the Texas Supreme

Sen Ge Ti SOE sea eos sd na W ou swe ed tet ee ses

Lively’s Motion for Rehearing by the Texas Supreme Court,

ee NE ee I ten nae et aee sakes as ae kan na'a as

Page

STATUTES AND RULES

Natural Gas_Policy Act of 1938, 15 U.S.C. $$ 717-717w

ti. ) errr rerrrr re rey ps re AR 137

Natural Gas Policy Act of 1978, 15 U.S.C. §§ 3301-3432

COBB) occ cnn nuance co uusuasl cnueeeey eee 169

28 USC. 81287 6 occs ccs ckcnSuess sheleee yn eee 285

Railroad Commission of Texas Gas Market Demand Rule,

16 Tex. Admin. Code §§ 3.30 and 3.34 ............006- 286

Tex. RB. Anp. P. 1388. .5 cick 6 cn ee eeee 304

COURT OF APPEALS

FOURTH SUPREME JUDICIAL DISTRICT

OF TEXAS

SAN ANTONIO

OPINION

Appeal No. 04-87-00380-CV

LIVELY EXPLORATION COMPANY, ET AL..,

Appellants

VALERO TRANSMISSION COMPANY,

Appellee

Appeal from the 112th District Court of Sutton County

Trial Court No. 2,930

Honorable Bob Parks, Judge Presiding

Opinion by: Alfonso Chapa, Associate Justice

Sitting: Carlos C. Cadena, Chief Justice, Concur in

Result. Blair Reeves, Associate Justice, Concur

in Result. Alfonso Chapa, Associate Justice.

Delivered and filed: March 31, 1988.

AFFIRMED

This is an appeal of part of a final judgment following

a jury trial. The judgment arose from a suit filed by

appellant Lively Exploration Company (Lively) against

appellee Valero Transmission Company (Valero) for a

breach of a gas purchase contract. Lively alleged that

Valero breached its obligations under the contract by

failing to take delivery of and pay for the Daily Contract

Quantity of natural gas during certain contract years or

pay for such Daily Contract Quantity of natural gas,

whether taken or not. In accordance with the findings of

the jury, among other things, the judgment ordered that

Lively take nothing on its claim for breach of the take-or-

pay provisions of the contract. It is this part of the judg-

ment which is sought to be reversed by this avpeal. We

affirm.

The issues before us are:

1) whether the court erred in admitting evidence of

the Railroad Commission’s Gas Market Demand Rule;

2) whether the court erred in including an instruction

on the Gas Market Demand Rule;

3) whether the court erred in its definition of the term

“deliverability”;

4) whether the court’s instructions to Special Issue No.

2 were prejudicial comments on the weight of the

evidence;

5) whether the court erred in conditionally submitting

Special Issue No. 3;

6) whether there was no evidence to support the jury

findings on the breach of contract;

7) whether there was insufficient evidence to support

the jury findings on the breach of contract; and

8) whether the jury findings on the breach of contract

were against the great weight and preponderance of the

credible evidence.

In the first two points of error, Lively contends that the

trial court erred in admitting evidence of the Texas Rail-

road Commission’s Gas Market Demand Rule and then

including the said rule in the charge. Although Lively does

not contend the evidence is irrelevant or immaterial, it

argues that “the gas market demand rule does not affect

the rights and obligations of the parties to the contract

by relieving Valero of its obligation to pay for this mini-

mum quantity of gas provided by the contract.”

Lively alleged that Valero breached that part of the

contract which had a “take-or-pay” provision:

5.3. Subject to the other provisions hereof, Buyer

agrees to purchase and pay for (or, if Buyer's per-

formance hereunder is not excused by other pro-

visions of this agreement, pay for, if available, whether

taken or not) during the days of each contract year

of the term hereof a Daily Contract Quantity of gas

from Seller's Lands and Leases in the Contract Area

equal to ninety percent (90%) of Seller's daily

Deliverability of gas hereunder... .

The obligations of Valero under the “take-or-pay” pro-

vision of the contract are clearly controlled by the “Daily

Contract Quantity” and the “Deliverability” of the gas.

Under Article I of the contract and entitled “Defini-

tions” we find the following:

(e) The term “Daily Contract Quantity” means

the quantity of gas per day, averaged over each con-

tract year, which Buyer is required to take from

Seller hereunder at the point of delivery specified in

this Agreement.

(j) The term “Deliverability” means that quantity

of gas which Seller has available for delivery from

the Lands and Leases to Buyer during each day, in

conformity with the requirements of this Agreement,

at a constant rate of flow, whem Seller’s wells and

facilities are not produced in excess of their maxi-

mum efficient rate of flow, but not exceeding the

maximum (including overproduction) rate of flow

permitted by the laws, rules and regulations of the

Railroad Commission of Texas or other govern-

mental regulatory agency having jurisdiction. Buyer

agrees to make nominations, or to cooperate with

Seller in the making of nominations, for well allow-

ables (to be fixed or permitted by rules, regulations

or orders of the Texas Railroad Commission) suffi-

cient to cover the daily quantities which from time to

time Buyer is entitled and elects to take hereunder

up to the maximum quantity which in accordance

with good engineering and gas production practice

can be produced from Seller's wells in the field.

(Emphasis added)

Further, the contract includes a clause subjecting the

agreement as follows:

AGREEMENT SUBJECT TO LAWS

13.1 This Agreement is made subject to all valid

applicable federal and state laws or city ordinances,

and to the orders, rules and regulations of any duly

constituted federal or state regulatory body or author-

ity having jurisdiction.

Evidence is admissible if it is “relevant and material;

it must tend to prove or disprove some issue in the case.”

Dallas Railway & Terminal Company v. Oehler, 156 Tex.

488, 296 S.W.2d 757, 759 (1956); Sims v. Dempsey-

-Tegler & Company, Inc., 487 S.W.2d 824, 827-28 (Tex.

Civ, App.—San Antonio 1972, no writ). It is uncontra-

dicted that the Texas Railroad Commission has regula-

tory jurisdiction over drilling, production, transportation,

and use of natural gas in Texas. It is also uncontradicted

that the Gas Market Demand Rule which was applicable

to Lively and Valero, was promulgated by the Texas

Railroad Commission as a tool to avoid “waste” by deter-

mining the overall quantity of natural gas which should

_be produced in Texas in a given month and to assure

fairness in the proration between the different producers.

Thus, the rule was relevant and material towards the

issue of the quantity of gas which Lively had available

for delivery, or in terms of the contract, Lively’s “daily

Deliverability of gas.”

Since the application of the Gas Market Demand Rule

tended to disprove that there was a breach of the “take-

or-pay” provision, it was admissible. Dallas Railway &

Terminal Company v. Oehler, 296 S.W.2d at 759.

Next, Lively does not contend that the application of

the Gas Market Demand Rule to Lively and Valero in

the charge was erroneous, but that the charge should not

have included the rule because it did not relieve Valero

of its contractual obligation. Lively apparently views the

inclusion of the Gas Market Demand Rule in the evidence

and charge as evidence of and instructions about an im-

permissible affirmative defense of Valero. However, the

real issue here is whether the rule was relevant and

material to prove or disprove that there was a breach of

the “take-or-pay” provision of the contract as alleged by

Lively. Having concluded that the Rule was relevant and

material, we fai! to see how its inclusion in the charge

was harmful error. The first two points are overruled.

In the next two points of error, Lively complains of

the court’s definition of “Deliverability.”

An appellant cannot complain that the court has

adopted his definition in the charge. MacF adden Publica-

tions v. Wilson, 121 S.W.2d 430, 433 (Tex. Civ. App.—

El Paso 1938, writ ref'd). A party may not complain of

error for the first time on appeal, State v. Lackey, 576

S.W.2d 685, 688-89 (Tex. Civ. App.—San Antonio 1979,

writ ref'd n.r.e.) and an objection to an instruction must

be specific and clearly pointed out, or it is waived. South-

western Bell Telephone Co. v. Ramsey, 542 S.W.2d

466, 467 (Tex. Civ. App.—Tyler 1976, writ ref’d n.r.e.).

The record reflects that the definition of “Deliver-

ability” in the charge was the same one submitted by

Lively. Further, although Lively made a general objec-

tion to Special Issue No. 2, no specific or clear objection

was leveled at the definition of “Deliverability,” which

was identical to the one submitted to the court by Lively

and also found in the contract. The points of error are

overruled.

Lively next complains that the instructions to Special

Issue No. 2 were prejudicial comments on the weight

of the evidence. We disagree.

An impermissible comment on the weight of the evi-

dence occurs, when after examining the entire charge, it

is determined that the judge assumed the truth of a

material controverted fact, or exaggerates, minimizes, or

withdraws some pertinent evidence from the jury’s con-

sideration. The comment must also be one that probably

caused the rendition of an improper judgment. Alvarez

v. Missouri-Kansas-Texas Railroad Co., 683 $.W.2d 375,

377 (Tex. 1984); Hirdler v. Boyd, 702 S.W.2d 727,

730 (Tex. App.—San Antonio 1985, writ ref'd n.r.e.).

Incidental comments are permissibie when necessary or

proper as part of an explanatory instruction or definition.

Board of Regents of North Texas State University v.

Denton Construction Co., 652 S.W.2d $88, 595 (Tex.

App.—Fort Worth 1983, writ ref'd n.t.e.); Hirdler v.

Boyd, 702 S.W.2d 730.

The first instructions that Lively complains of are:

The term market demand means that amount of

gas needed for current consumption.

You are instructed that the production, transpor-

tation, or use of gas in a manner, in an amount,

or under conditions which constitute waste is un-

lawful and is prohibited.

You are instructed that the term “waste” includes

the production of gas in excess of transportation

or market facilities or reasonable market demand

for the type of gas produced.

Although Lively does not contend the instructions are

an inaccurate statement of the law, it contends the instruc-

tions were irrelevant. Lively however, fails to explain

how the instructions probably caused the rendition of

an improper judgment.

The instructions complained of are relevant in explain-

ing the basis of the Gas Market Demand Rule which

we have already concluded was relevant and material.

We hold that the instructions were relevant, not a com-

ment on the weight of the evidence, and did not cause

the rendition of an improper judgment.

The next instruction to Special Issue No. 2 which

Lively complains of is:

You are instructed that the Contract provides that

subject to its other provisions, Valero shall have the

right to purchase such quantity of gas per day as

Valero may from day to day elect to purchase up to

the total quantity per day which the wells are cap-

able of producing when produced at their respective

maximum efficient rates of flow, in Lively’s sole

judgment reasonably exercised, or at. their respective

allowable rates of flow under applicable orders, rules,

regulations or laws, whichever is the lesser rate of

flow.

Lively asserts that the instruction was unnecessary,

constituted a comment on the weight of the evidence,

and caused the rendition of an improper judgment.

It is uncontradicted that the instruction tracked Article

V, $5.2 of the contract which had been received in

evidence. But Lively contends that an unnecessary in-

struction may amount to a reversible error, and cites

First International Bank in San Antonio v. Roper Corp..,

686 S.W.2d 602 (Tex. 1985) and Lemos v. Montez.

680 S.W.2d 798 (Tex. 1984). However, both of these

cases involve causes of action Whose issues and instruc-

tions are specifically set out in the Texas Pattern Jury

Charges which were approved with vigor by the Supreme

Court. In Lemos, the Supreme Court rejected any addi-

tions to the correct definition of unavoidable accident

in the Pattern Jury Charge stating:

This Court has not indicated to the bench and bar

that the definition should be embellished with the

addendum.

Lemos v. Montez, 680 S.W.2d at 801.

In First International Bank of San Antonio, the Su-

preme Court again rejected any additions to the Texas

Pattern Jury Charge special issue and instructions on

design defects by stating:

We explicitly approved the Texas Pattern Jury

Charges special issue and instruction on design de-

fect, but again stated that additional instructions

which single out balancing factors are improper

and comments on the case.

First International Bank in San Antonio v. Roper Corp..,

686 S.W.2d at 604.

This case however, does not involve approved issues

and instructions of the Texas Pattern Jury Charges and

must be viewed accordingly. Lively complains that this

unnecessary instruction diverted the attention of the jury

from the central issue. In deciding whether this instruc-

tion was unnecessary and probably caused a rendition

of an improper judgment, we must consider the charge

as a whole. Alvarez v. Missouri-Kansas-Texas Railroad

Co., 683 S.W.2d at 377; Hirdler v. Boyd, 702 S.W.2d

at 730.

We note that the instruction complained of is only

one of a number of exp!aiatory instructions generally

tracking those parts of the contract which the judge felt

were necessary to aid the jury in answering Special Issue

No. 2. Lively contends that the initial language of the

instruction could hove misled the jury away from the real

obligations of Valero under the “take-or-pay” provision.

To see clearly what adverse effect, if any, this particular

instruction had on Special Issue No. 2, we must view

the entire set of instructions as set out in the charge:

SPECIAL ISSUE NO. 2

Do you find that Valero failed to take or pay for

an amount of gas equal to the Daily Contract Quan-

tity (DCQ)?

(Answer “yes” or “no”.)

Answer 10.

INSTRUCTION NO. 2

You are instructed that the total quantity of gas

which Valero was obligated, if not excused under

the Contract, to take and pay for, or pay for if not

taken, for each of the Contract Years, is that volume

of gas equal to the Daily Contract Quantity in effect

during the Contract Year multiplied by the number

of days during the Contract Year for which such

Daily Contract Quantity was in effect.

You are instructed that the term “Daily Contract

Quantity” is defined by the Contract to be that

quantity of gas equal to ninety percent (90%) of

Lively’s daily Deliverability under the Contract.

You are instructed that the Contract provides that

subject to its other provisions, Valero shall have the

right to purchase such quantity of gas per day as

Valero may from day to day elect to purchase up

to the total quantity per day which the wells are

capable of producing when produced at their respec-

tive maximum efficient rates of flow, in Lively’s sole

judgment reasonably exercised, or at their respective

allowable rates of flow under applicable orders, rules,

regulations or laws, whichever is the lesser rate of

flow.

You are also instructed that Lively’s daily “De-

liverability” is defined by the Contract to be that

quantity of gas which Lively had available for

delivery from the Lands and Leases to Valero during

each day in conformity with the requirements of

the Contract, at a constant rate of flow, when Lively’s

wells were not produced in excess of their maximum

efficient rate of flow, but not in excess of the maxi-

mum (including overproduction) rate of flow per-

mitted by the laws, rules and regulations of the

Railroad Commission of Texas or other governmental

regulatory agency having jurisdiction.

The term market demand means that amount of

gas needed for current consumption.

You are instructed that in the production, trans-

portation, or use of gas in a manner, in an amount,

or under conditions which constitute waste is un-

lawful and is prohibited.

You are instructed that the term “waste” includes

the production of gas in excess of transportation or

market facilities or reasonable market demand for

the type of gas produced.

You are instructed that the word “ratably” means

proportionately. Under the Gas Market Demand

Rule Valero shall nominate on Form T-3 a total

quantity of gas equal to its downstream market

demand plus shrinkage, line loss, plant fuel, and

compressor use. Valero shall ratably apportion its

actual take from all gas wells connected to its

system so that takes from various gas producing

properties shall be made without discrimination in

favor of one producer or person as against another

in the same fieid and without unjust or unreasonable

discrimination between fields.

You are instructed that under the Gas Market

Demand Rule, Lively is required to submit the

following information to the Railroad Commission:

(1) Form P-4 Producer’s Certificate of Compli-

ance (on which the gatherer, the first pur-

chaser, and the initial nominator shall be

named).

(2) Form G-10 Gas Well Status Report (semi-

annually unless otherwise required by special

field rules).

(3) Form G-7 Producer’s Forecast (monthly as

required by Statewide Rule 30 and in ac-

cordance with instructions on Form G-7).

Lively shall forecast a total quantity of gas

not to exceed the amount of gas Lively ex-

pects to consume plus the amount of gas

Lively expects to deliver to Valero as indi-

cated by information provided by Valero

pursuant to the Market Demand -Rule.

We readily note that the instruction complained of was

not unduly stressed, and is found in the middle of nu-

merous instructions. The instruction complained of speaks

of “rights to purchase” of Valero and not of “obligations”

of Valero which is the basis of this cause of action.

Further, the very first instruction of the series sets out

clearly that portion of the contract which Lively asserts

has been breached and which clearly sets out the “obli-

gations” of Valero. Considering the entire set of instruc-

tions of Special Issue No. 2 and the entire charge, we

hold that the complained of instruction was not a comment

on the weight of the evidence, and probably did not ccuse

the rendition of an improper judgment. The point of

error is overruled.

Lively next contends the court erred in conditionaliy

submitting Special Issue No. 3. The complaint is based

on the contention that Special Issue No. 2 was merely an

evidentiary issue and the controlling issue was Special

Issue No. 3. We disagree.

We note with interest Lively’s statement in its brief

under the title “Preliminary Statement”:

Lively alleged that Valero breached it’s obligations

under the contract by failing to take delivery of and

pay for the Daily Contract Quantity of natural gas

. or pay for such Daily Contract Quantity of

natural gas, whether taken or not... .

Thus, Lively admits that whether Valero failed to take

and pay or just failed to pay the Daily Contract Quantity

of gas was critical to their cause of action.

Special Issue Nos. 2 and 3 with the conditional instruc-

tion read:

SPECIAL ISSUE NO. 2

Do you find that Valero failed to take or pay for

an amount of gas equal to the Daily Contract

Quantity (DCQ)?

Answer Special Issue No. 3 only if you answered

Special Issue No. 2 “yes,” otherwise go to Special

Issue No. 4. .

SPECIAL ISSUE NO. 3

What sum of money, if any, if paid now in cash,

do you find to be due and owing to Lively under the

Contract?

Where the court submits the controlling issues raised

by the pleadings and the evidence, the case shall not be

reversed because of the failure to submit other various

phases or different shades of the same issue. TEx. R. Civ.

P. 279; Holmes v. J.C. Penney Co., 382 S.W.2d 472,

473 (Tex. 1964). The court here fairly submitted Special

Issue No. 2, which was the controlling issue, and properly

conditionally submitted Special Issue No. 3, which was

the damage issue. The point of error is overruled.

In the last three points of error, Lively contends there

is no evidence or insufficient evidence to support the jury’s

answer to Special Issue No. 2, and that the jury’s answer

to Special Issue No. 2 was against the great weight and

preponderance of the evidence. Lively, after conceding

that the evidence of the Gas Market Demand Rule sup-

ports the jury finding in Special Issue No. 2, contends it

has no probative value as a matter of law because the

Gas Market Demand Rule does not abrogate Valero’s

obligations under the contract. Therefore, Lively would

have us ignore this evidence. We disagree.

A no evidence point is a question of law and we can

consider only that evidence and the reasonable inference

therefrom which viewed in its most favorable light sup-

port the jury finding and we must reject all evidence or

reasonable inferences to the contrary. Glover v. Texas

General Indemnity Co., 619 S.W.2d 400, 401 (Tex.

1981); McClure v. Allied Stores of Texas, Inc., 608

S.W.2d 901, 904 (Tex. 1980). In determining the suffi-

ciency of the evidence “the court of appeals must consider

and weigh all the evidence, and should set aside the ver-

dict only if it is so contrary to the overwhelming weight

of the evidence as to be clearly wrong and unjust.” Cain

v. Bain, 709 §.W.2d 175, 176 (Tex. 1986); Pool v. Ford

Motor Co., 715 S.W.2d 629 (Tex. 1986). However, we

must always remain cognizant that it is for the jury to

judge the credibility of the witnesses, to assign the weight

to be given their testimony, and to resolve any conflicts

or inconsistencies in the evidence. Town & Country

Mobile Homes, Inc. v. Bilyeu, 694 S.W.2d 651, 656 (Tex.

App.—-Fort Worth 1985, no writ); Precision Homes, Inc.

v. Cooper, 671 S.W.2d 924, 929 (Tex. App.—Houston

[14th Dist.] 1984, writ ref’d n.r.e.). Therefore, in deter-

mining the sufficiency of the evidence, appellate courts

must recognize from the verdict of the jury what the jury,

in their discretion, chose to believe. In so doing, we must

accept the jury’s resolution of any conflicts or inconsis-

tencies in the evidence and not attempt to substitute our

judgment for theirs. Pool v. Ford Motor Co., 715 S.W.2d

at 634.

The record reflects extensive testimony pertaining to

the Gas Market Demand Rule and its direct effect upon

the “Daily Contract Quantity” and “Deliverability” clauses

of the contract. The testimony disclosed essentially that

the rule was promulgated by the Texas Railroad Commis-

sion, who had regulatory jurisdiction over the critical

aspects of the contract, and that Valero purchased from

Lively the maximum “Daily Contract Quantity” of gas

which was legally “Deliverable” by Lively under the dic-

tates of the Gas Market Demand Rule. Lively attempted

to establish that “Deliverability” under the contract was

strictly based on G-10 volumes and that the Gas Market

Demand Rule had no application to Valero’s obligations

under the contract.

The jury verdict clearly reveals that the jury chose to

believe Valero’s theory and that there was no breach of

the “take-or-pay” clause as alleged by Lively. Considering

all the evidence under the appropriate standards of re-

view, we cannot conclude that the verdict “is so contrary

to the overwhelming weight of the evidence as to be

clearly wrong and unjust.” Cain v. Bain, 709 S.W.2d at

176. The last points of error are overruled.

The judgment of the trial court is affirmed.

/s/ ALFONSO CHAPA,

Associate Justice

PUBLISH.

LIVELY EXPLORATION COMPANY,

et al., Appellants,

. -

VALERO TRANSMISSION COMPANY,

Appellee.

No. 04-87-00380-CV.

Court of Appeals of Texas,

San Antonio.

May 18, 1988.

Writ of Error June 16, 1988.

Natural gas producer sued purchaser for amounts alleg-

edly due under “take-or-pay” provisions of contract. Fol-

lowing jury trial before the 112th District Court, Sutton

County, Bob Parks, J., judgment was entered, inter alia,

ordering that producer take nothing on its claim for

breach of contract provision. Producer appealed. The

Court of Appeals, Chapa, J., held that: (1) Texas Rail-

road Commission’s gas market demand rule was materia!

and relevant to issues and thus was properly admitted into

evidence and included in jury charge; (2) court’s instruc-

tions with respect to controlling special issue, in which

jury was asked whether purchaser failed to take or pay

for amount of gas equal to its contract obligations, were

not prejudicial comments on weight of evidence; (3) court

did not err in conditionally submitting special jury issue

on damages; and (4) jury findings were sufficient under

no evidence or insufficiency of evidence tests.

Affirmed.

Jesse P. Luton, Jr., James P. Pennington, Scott, Doug-

lass & Luton, Houston, Frank Douglass, Christopher

Fuller, Scott, Douglass & Luton, Austin, for appellants.

J. Clifford Gunter, Carrin F. Patman, Laura B. Herring,

Gregory C. King, Bracewell & Patterson, Houston, for

appellee.

Before CADENA, C.J. and REEVES and CHAPA, JJ.

ON APPELLANT’S MOTION FOR REHEARING

CHAPA, Justice.

Appellant’s motion for rehearing is denied, however,

the opinion of this Court dated March 31, 1988, is with-

drawn, and the following opinion is substituted.

This is an appeal of part of a final judgment following

a jury trial. The judgment arose from a suit filed by appel-

lant Lively Exploration Company (Lively) against ap-

pellee Valero Transmission Company (Valero) for breach

of a gas purchase contract. Lively alleged that Valero

breached its obligations under the contract by failing to

take delivery of and pay for the Daily Contract Quantity

of natural gas during certain contract years or pay for

such Daily Contract Quantity of natural gas, whether

taken or not. In accordance with the findings of the jury,

among other things, the judgment ordered that Lively take

nothing on its claim for breach of the take-or-pay provi-

sions of the contract. It is this part of the judgment which

is sought to be reversed by this appeal. We affirm.

The issues before us are:

1) whether the court erred in admitting evidence of the

Railroad Commission’s Gas Market Demand Rule;

2) whether the court erred in including an instruction

on the Gas Market Demand Rule;

3) whether the court erred in its definition of the term

“deliverability”;

4) whether the court’s instructions to Special Issue

No. 2 were prejudicial comments on the weight of the

evidence;

5) whether the court erred in conditionally submitting

Special Issue No. 3;

6) whether there was no evidence to support the jury

findings on the breach of contract;

7) whether there was insufficient evidence to support

the jury findings on the breach of contract; and

8) whether the jury findings on the breach of contract

were against the great weight and preponderance of the

credible evidence.

In the first two points of error, Lively contends that the

trial court erred in admitting evidence of the Texas Rail-

road Commission’s Gas Market Demand Rule and then

including the said rule in the charge. Although Lively

does not contend the evidence is irrelevant or immaterial,

it argues that “the gas market demand rule does not affect

the rights and obligations of the parties to the contract

by relieving Valero of its obligation to pay for this mini-

mum quantity of gas provided by the contract.”

Lively alleged that Valero breached that part of the

contract which had a “take-or-pay” provision:

5.3 Subject to the other provisions hereof, Buyer

agrees to purchase and pay for (or, if Buyer’s per-

formance hereunder is not excused by other provi-

sions of this agreement, pay for, if available, whether

taken or not) during the days of each contract year

of the term hereof a Daily Contract Quantity of gas

from Seller’s Lands and Leases in the Contract Area

equal to ninety percent (90% ) of Seller's daily De-

liberability of gas hereunder. .. .

The obligations of Valero under the “take-or-pay” pro-

vision of the contract are clearly controlled by the “Daily

Contract Quantity” and the “Deliverability” of the gas.

Under Article I of the contract and entitled “Defini-

tions” we find the following:

(e) The term “Daily Contract Quantity” means

the quantity of gas per day, averaged over each con-

tract year, which Buyer is required to take from

Seller hereunder at the point of delivery specified in

this Agreement.

(j) The term “Deliverability” means that quantity

of gas which Seller has available for delivery from

the Lands and Leases to Buyer during each day, in

conformity with the requirements of this Agreement,

at a constant rate of flow, when Seller’s wells and

facilities are not produced in excess of their maxi-

mum efficient rate of flow, but not exceeding the

maximum (including overproduction) rate of flow

permitted by the laws, rules and regulations of the

Railroad Commission of Texas or other governmental

regulatory agency having jurisdiction. Buyer agrees

to make nominations, or to cooperate with Seller

in the making of nominations, for well allowables

(to be fixed or permitted by rules, regulations or

orders of the Texas Railroad Commission) sufficient

to cover the daily quantities which from time to time

Buyer is entitled and elects to take hereunder up to

the maximum quantity which in accordance with

good engineering and gas production practice can be

produced from Seller’s wells in the field. (Emphasis

added )

Further. the contract includes a clause subjecting the

agreement as follows:

AGREEMENT SUBJECT TO LAWS

13.1 This Agreement is made subject to all valid

applicable federal and state laws or city ordinances,

and to the orders, rules and regulations of any duly

constituted federal or state regulatory body or author-

ity having jurisdiction.

Evidence is admissible if it is “relevant and material;

it must tend to prove or disprove some issue in the

case.” Dallas Railway & Terminal Company v. Oehler,

156 Tex. 488, 296 S.W. 757, 759 (1956); Sims v.

Dempsey-Tegler & Company, Inc., 487 S.W.2d 824,

827-28 (Tex. Civ. App.—San Antonio 1972. no writ).

It is uncontradicted that the Texas Railroad Commission

has regulatory jurisdiction over drilling, production, trans-

portation, and use of natural gas in Texas. It is also un-

contradicted that the Gas Market Demand Rule which

was applicable to Lively and Valero, was promulgated by

the Texas Railroad Commission as a tool to avoid “waste”

by determining the overall quantity of natural gas which

should be produced in Texas in a given month and to

assure fairness in the proration between the different pro-

ducers. Thus, the rule was relevant and material towards

the issue of the quantity of gas which Lively had available

for delivery, or in terms of the contract, Lively’s “daily

Deliverability of gas.”

Since the application of the Gas Market Demand Rule

tended to disprove that there was a breach of the “take-

or-pay” provision, it was admissible. Dallas Railway &

Terminal Company v. Oehler, 296 S.W.2d at 759.

Next, Lively does not contend that the application

of the Gas Market Demand Rule to Lively and Valero

in the charge was erroneous, but that the charge should

not have included the rule because it did not relieve Va-

lero of its contractual obligation. However, the real issue

here is whether the rule was relevant and material to

prove or disprove that there was a breach of the “take-or-

pay” provision of the contract as alleged by Lively. Hav-

ing concluded that the rule was relevant and material, we

fail to see how its inclusion in the charge was harmful

error. The first two points are overruled.

In the next two points of error, Lively complains of

the court’s definition of “Deliverability.”

An appellant cannot complain that the court has

adopted his definition in the charge. MacFadden Publica-

tions v. Wilson, 121 S.W.2d 430, 433 (Tex. Civ. App.

—El Paso 1938, writ ref'd). A party may not complain

of error for the first time on appeal, State v. Lackey, 576

S.W.2d 685, 688-89 (Tex. Civ. App.—San Antonio

1979, writ ref'd n.r.e.) and an objection to an instruction

must be specific and clearly pointed out, or it is waived.

Southwestern Bell Telephone Co. v. Ramsey, 542 S.W.2d

466, 467 (Tex. Civ. App.—Tyler 1976, writ ref'd n.r.e.).

The record reflects that the definition of “Deliver-

ability” in the charge was the same one submitted by

Lively. Further, although Lively made a general objec-

tion to Special Issue No. 2, no specific or clear objection

was leveled at the definition of “Deliverability” which

was identical to the one submitted to the court by Lively

and also found in the contract. The points of error are

overruled.

Lively next complains that the instructions to Special

Issue No. 2 were prejudicial comments on the weight of

the evidence. We disagree.

An impermissible comment on the weight of the

evidence occurs, when after examining the entire

charge, it is determined that the judge assumed the truth

of a material controverted fact, or exaggerates, minimizes,

or withdraws some pertinent evidence from the jury’s

consideration. The comment must also be one that prob-

ably caused the rendition of an improper judgment.

Alvarez v. Missouri-Kansas-Texas Railroad Co., 683 S.W.

2d 375, 377 (Tex. 1984); Hirdler v. Boyd, 702 S.W.2d

727, 730 (Tex. App.—San Antonio 1985, writ ref’d

n.r.e.). Incidental comments are permissible when neces-

sary or proper as part of an explanatory instruction or

definition. Board of Regents of North Texas State Uni-

versity v. Denton Construction Co., 652 S.W.2d 588, 595

(Tex. App.—Fort Worth 1983, writ ref'd n.r.e.); Hirdler

v. Boyd, 702 S.W.2d at 730.

The first instructions that Lively complains of are:

The term market demand means that amount of

gas needed for current consumption.

You are instructed that the production, transpor-

tation, or use of gas in a manner, in an amount, or

under conditions which constitute waste is unlawful

and is prohibited.

You are instructed that the term “waste” includes

the production of gas in excess of transportation or

market facilities or reasonable market demand for

the type of gas produced.

Although Lively does not contend the instructions are

an inaccurate statement of the law, it contends the in-

structions were irrelevant. Lively however, fails to explain

how the instructions probably caused the rendition of an

improper judgment.

The instructions complained of are relevant in explain-

ing the basis of the Gas Market Demand Rule which we

have already concluded was relevant and material. We

hold that the instructions were relevant, not a comment

on the weight of the evidence, and did not cause the

rendition of an improper judgment.

The next instruction to Special Issue No. 2 which

Lively complains of is:

You are instructed that the Coniract provides that

subject to its other provisions, Valero shall have the

right to purchase such quantity of gas per day as

Valero may from day to day elect to purchase up

to the total quantity per day which the wells are

capable of producing when produced at their respec-

tive maximum efficient rates of flow, in Lively’s sole

judgment reasonably exercised, or at their respective

allowable rates of fiow under applicable orders, rules,

regulations or laws, whichever is the lesser rate of

flow.

Lively asserts that the instruction was unnecessary,

constituted a comment on the weight of the evidence, and

caused the rendition of an improper judgment.

It is uncontradicted that the instruction tracked Article

V, § 5.2 of the contract which had been received in evi-

dence. But Lively contends that an unnecessary instruc-

tion may amount to a reversible error, and cites First

International Bank in San Antonio v. Roper Corp., 686

S.W.2d 602 (Tex. 1985) and Lemos v. Montez, 680

S.W.2d 798 (Tex. 1984). However, both of these cases

involve causes of action whose issues and instructions

are specifically set out in the Texas Pattern Jury Charges

which were approved with vigor by the Supreme Court.

In Lemos, the Supreme Court rejected any additions to

the correct definition of unavoidable accident in the

Pattern Jury Charge stating:

This Court has not indicated to the bench and bar

that the definition should be embellished with the

addendum.

Lemos v. Montez, 680 S.W.2d at 801.

In First International Bank of San Antonio, the Su-

preme Court again rejected any additions to the Texas

Pattern Jury Charge special issue and instructions on

design defects by stating:

We explicitly approved the Texas Pattern Jury

Charges special issue and instruction on design de-

fect, but again stated that additional instructions

which single out balancing factors are improper and

comments on the case.

First International Bank in San Antonio v. Roper Corp.,

686 S.W.2d at 604.

This case however, does not involve approved issues

and instructions of the Texas Pattern Jury Charges and

must be viewed accordingly. Lively complains that this

unnecessary instriction diverted the attention of the jury

from the central issue. In deciding whether this instruction

was unnecessary and probably caused a rendition of an

improper judgment, we must consider the charge as a >

whole. Alvarez v. Missouri-Kansas-Texas Railroad Co..,

683 S.W.2d at 377; Hirdler v. Boyd, 702 S.W.2d at 730.

We note that the instruction complained of is only one

of a number of explanatory instructions generally tracking

those parts of the contract which the judge felt were

necessary to aid the jury in answering Special Issue No. 2.

Lively contends that the initial language of the instruc-

tion could have misled the jury away from the real obli-

gations of Valero under the “take-or-pay” provision. To

see clearly what adverse effect, if any, this particular

instruction had on Special Issue No. 2, we must view the

entire set of instructions as set out in the charge:

SPECIAL ISSUE NO. 2

Do you find that Valero failed to take or pay for

an amount of gas equal to the Daily Contract Quan-

tity (DCQ)?

(Answer “yes” or “no”.)

Answer no.

INSTRUCTION NO. 2

You are instructed that the total quantity of gas

which Valero was obligated, if not excused under

the Contract, to take and pay for. or pay for if not

taken, for each of the Contract Years, is that volume

of gas equal to the Daily Contract Quantity in effect

during the Contract Year multiplied by the number

of days during the Contract Year for which such

Daily Contract Quantity was in effect.

You are instructed that the term “Daily Contract

Quantity” is defined by the Contract to be that quan-

tity of gas equal to ninety percent (90% ) of Lively’s

daily Deliverability under the Contract.

You are instructed that the Contract provides that

subject to its other provisions, Valero shall have the

right to purchase such quantity of -gas per day as

Valero may from day to day elect to purchase up

to the total quantity per day which the wells are

capable of producing when produced at their respec-

tive maximum efficient rates of flow, in Lively’s sole

judgment reasonably exercised, or at their respective

allowable rates of flow under applicable orders, rules,

regulations or Jaws, whichever is the lesser rate of

flow.

You are also instructed that Lively’s daily “Deliver-

ability” is defined by the Contract to be that quantity

of gas which Lively had available for delivery from

the Lands and Leases to Valero during each day

in conformity with the requirements of the Contract,

at a constant rate of flow, when Lively’s wells were

not produced in excess of their maximum efficient

rate of flow, but not in excess of the maximum

(including overproduction) rate of flow permitted

by the laws, rules and regulations of the Railroad

Commission of Texas or other governmental regula-

tory agency having jurisdiction.

The term market demand means that amount of

gas needed for current consumption.

You are instructed that in the production, trans-

portation, or use of gas in a manner, in an amount,

or under conditions which constitute waste is un-

lawful and is prohibited.

You are instructed that the term “waste” includes

the production of gas in excess of transportation or

market facilities or reasonable market demand for

the type of gas produced.

You are instructed that the word “ratably” means

proportionately. Under the Gas Market Demand

Rule Valero shall nominate on Form T-3 a total

quantity of gas equal to its downstream market de-

mand plus shrinkage, line loss, plant fuel, and com-

pressor use. Valero shall ratably apportion its actual

take from all gas wells connected to its system so that

takes from various gas producing properties shall

be made without discrimination in favor of one pro-

ducer or person as against another in the same field

and without unjust or unreasonable discrimination

between fields.

You are instructed that under the Gas Market

Demand Rule, Lively is required to submit the fol-

lowing information to the Railroad Commission:

(1) Form P-4 Producer’s Certificate of Compliance

(on which the gatherer, the first purchaser, and

the initial nominator shall be named).

(2) Form G-10 Gas Well Status Report (semi-annu-

ally unless otherwise required by special field

rules).

(3) Form G-7 Producer’s Forecast (monthly as re-

quired _by Statewide Rule 30 and in accordance

with instructions on Form G-7). Lively shall

forecast a total quantity of gas not to exceed

the amount of gas Lively expects to consume

plus the amount of gas Lively expects to deliver

to Valero as indicated by information provided

by Vaiero pursuant to the Market Demand Rule.

We readily note that the instruction complained of was

not unduly stressed, and is found in the middle of numer-

ous instructions. The instruction complained of speaks

of “rights to purchase” of Valero and not of “obligations”

of Valero which is the basis of this cause of action.

Further, the very first instruction of the series sets out

clearly that portion of the contract which Lively asserts

has been breached and which clearly sets out the “obli-

gations” of Valero. Considering the entire set of instruc-

tions of Special Issue No. 2 and the entire charge, we

hold that the complained of instruction was not a com-

ment on the weight of the evidence, and probably did

not cause the rendition of an improper judgment. The

point of error is overruled.

Lively next contends the court erred in conditionally

submitting Special Issue No. 3. The complaint is based

on the contention that Special Issue No. 2 was merely an

evidentiary issue and the controlling issue was Special

Issue No. 3. We disagree.

We note with interest Lively’s statement in its brief

under the title “Preliminary Statement”:

Lively alleged that Valero breached it’s obligations

under the contract by failing to take delivery of and

pay for the Daily Contract Quantity of natural gas

. or pay for such Daily Contract Quantity of

natural gas, whether taken or not... .

Thus, Lively admits that whether Valero failed to take

and pay or just failed to pay the Daily Contract Quantity

of gas was critical to their cause of action.

Special Issue Nos. 2 and 3 with the conditional in-

struction read:

SPECIAL ISSUE NO. 2

Do you find that Valero failed to take or pay for

an amount of gas equal to the Daily Contract Quan-

- tity (DCQ)?

Answer Special Issuc No. 3 only if you answered

Special Issue No. 2 “yes,” otherwise go to Special

Issue No. 4. -

SPECIAL ISSUE NO. 3

What sum of money, if any, if paid now in cash,

do you find to be due and owing to Lively under

the Contract?

Where the court submits the controlling issues raised

by the pleadings and the evidence, the case shall not

be reversed because of the failure to submit other

various phases or different shades of the same issue.

Tex. R. Civ. P. 279: Holmes v. J.C. Penney Co., 382

S.W.2d 472, 473 (Tex. 1964). The court here fairly

submitted Speciai Issue No. 2, which was the controlling

issue, and properly conditionally submitted Special Issue

No. 3, which was the damage issue. The point of error is

overruled.

In the last three points of error, Lively contends there

is no evidence or insufficient evidence to support the jury’s

answer to Special Issue No. 2, and that the jury’s answer

to Special Issue No. 2 was against the great weight and

preponderance of the evidence. Lively, after conceding

that the evidence of the Gas Market Demand Rule sup-

ports the jury finding in Special Issue No. 2, contends it

has no probative value as a matter of law because the

Gas Market Demand Rule does not abrogate Valero’s

obligations under the contract. Therefore, Lively would

have us ignore this evidence. We disagree.

A no evidence point is a question of law and we

can consider only that evidence and the reasonable

inference there from which viewed in its most favor-

able light support the jury finding and we must reject

all evidence or reasonable inferences to the contrary.

Glover v. Texas General Indemnity Co., 619 $.W.2d 400,

401 (Tex. 1981); McClure v. Allied Stores of Texas, Inc.,

608 S.W.2d 901, 904 (Tex. 1980). In determining the

sufficiency of the evidence “the court of appeals must

- consider and weigh all the evidence, and should set aside

the verdict only if it is so contrary to the overwhelming

weight of the evidence as to be clearly wrong and unjust.”

Cain v. Bain, 709 S.W.2d 175, 176 (Tex. 1986); Pool

v. Ford Motor Co., 715 S.W.2d 629 (Tex. 1986). How-

ever, we must always remain cognizant that it is for the

jury to judge the credibility of the witnesses, to assign

the weight to be given their testimony, and to resolve any

conflicts or inconsistencies in the evidence. Town &

Country Mobile Homes, Inc. v. Bilyeu, 694 S.W.2d 651,

656 (Tex. App.—Fort Worth 1985, no writ); Precision

Homes, Inc. v. Cooper, 671 S.W.2d 924, 929 (Tex. App.

—Houston [14th Dist.] 1984. writ refd n.r.e.). There-

fore, in determining the sufficiency of the evidence, ap-

pellate courts must recognize from the verdict of the jury

what the jury, in their discretion, chose to believe. In so

doing, we must accept the jury’s resolution of any conflicts

Or inconsistencies in the evidence and not attempt to

substitute our judgment for theirs. Pool v. Ford Motor

Co., 715 S.W.2d at 634.

The record reflects extensive testimony pertaining to

the Gas Market Demand Rule end its direct effect upon

the “Daily Contract Quantity” and “Deliverability” clauses

of the contract. The testimony disclosed essentially that

the rule was promulgated by the Texas Railroad Com-

mission, who had regulatory jurisdiction over the critical

aspects of the contract, and that Valero purchased from

Lively the maximum “Doaily Contract Quantity” of gas

which was legally “Deliverable” by Lively under the dic-

tates of the Gas Market Demand Rule. Lively attempted

to establish that “Deliverability” under the contract was

strictly based on G-10 volumes and that the Gas Market

Demand Rule had no application to Valero’s obligations

under the contract.

The jury verdict clearly reveals that the jury chose to

believe Valero’s theory and that there was no breach of

the “take-or-pay” clause as alleged by Lively. Consider-

ing all the evidence under the appropriate standards of

review, we cannot conclude that the verdict “is so con--

trary to the overwhelming weight of the evidence as to

be clearly wrong and unjust.” Cain v. Bain, 709 S.W.2d

at 176. The last points of error are overruled.

The judgment of the trial court is affirmed.

SUPREME COURT OF TEXAS

P. O. Box 12248

Supreme Court Building

Austin, Texas 78711

John T. Adams, Clerk

june 7, 1989

Mr. Jesse P. Luton, Jr.

Scott, Douglass & Luton

4300 RepublicBank Center

700 Louisiana

Houston TX 77002

Mr. Jaines P. Pennington

Scott, Douglass & Luton

4300 RepublicBank Center

700 Louisiana Street

Houston TX 77002

Mr. Frank Douglass

Mr. Steve Selby

Scott, Douglass, & Luton

First City Bank Bldg., 12th Floor

Austin TX 78701

Mr. Christopher Fuller

Scott, Douglass & Luton

Twelfth Floor

First Cit) Bank Building

Austin 1 X 78701

Mr. J. Clifford Gunter, III

Bracewell & Patterson

2900 Pennzoil Place

South Tower

Houston TX 77002

Ms. Carrin F. Patman

Bracewell & Patterson

2900 Pennzoil Place

South Tower

Houston TX 77002

Ms. Laura B. Herring

Bracewell & Patterson

2900 South Tower Pennzoil Place

Houston TX 77002

Mr. Gregory C. King

Bracewell & Patterson

2900 South Tower Pennzoil Place

Houston. TX 77002

RE: Case No. C-7676

STYLE: LIVELY EXPLORATION COMPANY ET AL.

v. VALERO TRANSMISSION COMPANY

Dear Counsel:

Today, the Supreme Court of Texas denied the

above referenced application for writ of error with

the notation, Writ Denied.

Respectfully yours,

John T. Adams, Clerk

By /s/ BLANCA E. MORIN

Deputy

SUPREME COURT OF TEXAS

P. O. Box 12248

Supreme Court Building

Austin, Texas 78711

John T. Adams, Clerk

September 13, 1989

Mr. Jesse P. Luton, Jr.

Scott, Douglass & Luton

4300 NCNB Center

700 Louisiana

Houston TX 77002

Mr. James P. Pennington

Scott, Douglass & Luton

4300 NCNB Center

700 Louisiana Street

Houston TX 77002

Mr. Frank Douglass

Mr. Steve Selby

Scott, Douglass, & Luton

First City Bank Bldg., 12th Floor

Austin TX 78701

Mr. Christopher Fuller

Scott, Douglass & Luton

First City Bank Bldg., 12th Floor

Austin TX 78701

Mr. J. Clifford Gunier, Hl

Bracewell & Patterson

2900 Pennzoil Place

South Tower

Houston TX 77002

Ms. Carrin F. Patman

Bracewell & Patterson

2900 Pennzoil Place

South Tower

Houston TX 77002

Ms. Laura B. Herring

Bracewell & Patterson

2900 South Tower Pennzoil Place

Houston TX 77002

Mr. Gregory C. King

Bracewell & Patterson

2900 South Tower Pennzoil Place

Houston TX 77002

RE: Case No. C-7676

STYLE: LIVELY EXPLORATION COMPANY ET AL.

v. VALERO TRANSMISSION COMPANY

Dear Counsel:

Today, the Supreme Court of Texas overruled

petitioner's motion for rehearing of the application

for writ of error in the above styled case.

Respectfully yours,

John T. Adams, Clerk

By /s/ BLANCA E. MORIN

Deputy

COURT OF APPEALS

FOURTH SUPREME JUDICIAL DISTRICT

OF TEXAS

SAN ANTONIO

JUDGMENT

Appeal No. 04-87-00380-CV

LIVELY EXPLORATION COMPANY, ET AL.,

Appellants

VALERO TRANSMISSION COMPANY,

Appellee

Appeal from the 112th District Court of Sutton County

Trial Court No. 2,930

Honorable Bob Parks, Judge Presiding

JUDGMENT

After hearing this cause and examining the record, the

Court finds that the court below committed no reversible

error. It is therefore ORDERED that the judgment be

AFFIRMED.

It is further ORDERED that Appepllants LIVELY

EXPLORATION COMPANY, LEA ROY ALDWELL,

INDIVIDUALLY, LEA ROY ALDWELL, WINNIE

LEA McPHERSON AND MARJORY REBA JOHAN-

SEN, AS TESTAMENTARY TRUSTEES UNDER THE

WILL OF GEORGE L. ALDWELL, DECEASED, JON

A. SONNEN, J. HOWARD MARSHALL, ED FAR-

RELL, ELIZABETH STANDISH, THE DESANA COR-

PORATION, JESSEE L. DALLY, CHESTER H. KEN-

LEY, CAROLYN H. JOSEPH, INDEPENDENT EX-

ECUTRIX OF THE ESTATE OF GIFFORD E. JO-

SEPH, DECEASED, H.B. LIVELY, B. JACKSON BAN-

DY, ROBERT L. BANKS, THEO B. BEAN, WILLIAM

R. GIFFORD, CHARLIE GILL, JR., HENRY GUN--

DERS AND WIFE, ELAINE GUNDERS, KENNETH

L. HEWITT, KALLMAN NASHNER, FRANK PACE,

JR., MARTIN B. SERETEAN, RAY B. VAUGHTERS

AND THEODORE L. WILKINSON, pay all costs of

appeal, and the cash deposit filed with the District Clerk

in lieu of cost bond be used for and subjected to such

costs and this decision be certified to the trial court.

Entered this 31st day of March, 1988.

In the Court of Appeals for the

Fourth Supreme Judicial District of Texas

San Antonio, Texas

APPEAL NO. 04-87-00380-CV

LIVELY EXPLORATION COMPANY, ET AL,

Appellants,

VALERO TRANSMISSION COMPANY,

Appellee.

NOTICE OF APPEAL TO THE SUPREME

COURT OF THE UNITED STATES

Notice is hereby given that Lively Exploration Com-

pany, Lea Roy Aldwell, Individually, Lea Roy Aldwell,

Winnie Lea McPherson and Marjory Reba Johansen, as

Testamentary Trustees under the Will of George L.

Aldwell, Deceased, Jon A. Sonnen, J. Howard Marshall,

Ed Farrell, Elizabeth Standish, The Desana Corporation,

Jessee L. Dally, Chester H. Kenley, Carolyn H. Joseph,

Independent Executrix of the Estate of Gifford E. Joseph,

Deceased, H. B. Lively, B. Jackson Bandy, Robert L.

Banks, Theo B. Bean, William R. Gifford, Charlie Gill,

Jr., Henry Gunders and wife, Elaine Gunders, Kenneth

L. Hewitt, Kallman Nashner, Frank Pace, Jr., Martin B.

Seretean, Ray B. Vaughters and Theodore L. Wilkinson,

the appellants above-named, hereby appeal to the Supreme

Court of the United States from the final judgment of

the Court of Appeals for the Fourth Supreme Judicial

District of Texas, San Antonio, Texas, affirming the

judgment of the trial court, entered in this action on

May 18, 1988.

This appeal is taken pursuant to 28 U.S.C, § 1257(2).

SCOTT, DOUGLASS & LUTON

By: /s/ JESSE P. LUTON, JR.

Jesse P. Luton, Jr.

State Bar No. 12708000

James P. Pennington

State Bar No. 15758520

4300 NCNB Center

700 Louisiana Street

Houston, Texas 77002

(713) 228-6337

Frank Douglass

State Bar No. 06049000

1200 First City Bank Building

Austin, Texas 78701

(512) 476-6337

Attorneys for Appeliants

CERTIFICATE OF SERVICE

I hereby certify that the above and foregoing Notice of

Appeal to the Supreme Court of the United States was

served on the appellee by certified mail, return receipt

requested, by depositing it in a United States post office

or mailbox, with first-class postage prepaid, on the 22nd

day of September, 1989, addressed as follows:

J. Clifford Gunter, III

Bracewell & Patterson

2900 South Tower Pennzoil Place

Houston, Texas 77002-2781

/s/ JESSE P. LUTON, JR.

Jesse P. Luton, Jr.

APPEAL NO. 04-87-00380-CV

IN THE COURT OF APPEALS

FOR THE

FOURTH SUPREME JUDICIAL DISTRICT OF TEXAS

SAN ANTONIO, TEXAS

LIVELY EXPLORATION COMPANY, ET AL.,

Appellants,

VALERO TRANSMISSION COMPANY,

Appellee.

Appeal from the District Court of

Sutton County, Texas, 112th Judicial District

APPELLANTS’ MOTION FOR REHEARING

April 12, 1988

SCOTT, DOUGLASS & LUTON

Frank Douglass

Christopher Fuller

1200 First City Bank Building

Austin, Texas 78701

(512) 476-6337

Jesse P. Luton, Jr.

James P. Pennington

4300 RepublicBank Center

Houston, Texas 77002

(713) 228-6337

Attorneys for Appellants

APPEAL NO. 04-87-00380-CV

IN THE COURT OF APPEALS

FOR THE

FOURTH SUPREME JUDICIAL DISTRICT OF TEXAS

SAN ANTONIO, TEXAS

LIVELY EXPLORATION COMPANY, ET AL.,

- Appellants,

VALERO TRANSMISSION COMPANY,

Appellee.

Appeal from the District Court of

Sutton County, Texas, 112th Judicial District

APPELLANTS’ MOTION FOR REHEARING

TO THE COURT OF APPEALS:

‘Lively Exploration Company, Lea Roy Aldwell, Indi-

vidually, Lea Roy Aldwell, Winnie Lea McPherson and

Marjory Reba Johansen, as Testamentary Trustees under

the Will of George L. Aldwell, Deceased, Jon A. Sonnen,

J. Howard Marshall, Ed Farrell, Elizabeth Standish, The

Desana Corporation, Jessee L. Dally, Chester H. Kenley,

Carolyn H. Joseph, Independent Executrix of the Estate

of Gifford E. Joseph, Deceased, H.B. Lively, B. Jackson

Bandy, Robert L. Banks, Theo B. Bean, William R.

Gifford, Charlie Gill, Jr., Henry Gunders and wife, Elaine

Gunders, Kenneth L. Hewitt, Kallman Nashner, Frank

Pace, Jr., Martin B. Seretean, Ray B. Vaughters, and

Theodore L. Wilkinson (collectively referred to as “Live-

ly” or “Appellants”) make this motion for a rehearing

of the decision of the Court rendered on March 31, 1988,

and show:

1. Point of Error: The Court erred in holding that

the obligations of Valero under the “take-or-pay”

provision of the contract are controlled by the defi-

nitions of “Daily Contract Quantity” and “Deliver-

ability” set forth in Article I of the contract.

2. Point of Error: The Court erred in holding that

Article XIII, € 13.1 of the contract provides a basis

for the application of the Gas Market Demand Rule

in determining the obligations of Valero under the

“take-or-pay” provision of the contract.

3. Point of Error: The Court erred in holding that

the Gas Market Demand Rule was relevant and

material towards the issue of the quantity of gas

which Lively had available for delivery, or in terms

of the contract, Lively’s “daily Deliverability of gas.”

4. Point of Error: The Court erred in holding that

the application of the Gas Market Demand Rule

tended to disprove that there was a breach of the

“take-or-pay” provision of the contract.

5. Point of Error: The Court erred in holding that

Lively does not contend that the application of the

Gas Market Demand Rule to Lively and Valero in

the charge was erroneous.

6. Point of Error: The Court erred in holding that

the Gas Market Demand Rule was relevant and

material to prove or disprove that there was a breach

of the “take-or-pay” provision of the contract as

alleged by Lively.

7. Point of Error: The Court erred in holding that

the inclusion of the Gas Market Demand Rule in

the charge was not harmful error.

8. Point of Error: The Court erred in overruling

Appellants’ Points of Error One and Two.

Argument and Authorities

These points of Error 1-8 will be argued together,

since all of them relate to the application of the Texas

Gas Market Demand Rule to the obligations of Valero

to take or pay for gas under the contract between Lively

and Valero which is the subject of this appeal.

The Court’s opinion bases its rulings involved in the

above points of error and its application of the Gas

Market Demand Rule to the obligations of Valero under

the “take-or-pay” provision of the contract on (1) the

general definitions of “Daily Contract Quantity” and

“Deliverability” as set forth in Article I of the contract

and (2) the clause in Article XIII, € 13.1 making the

contract “subject to all valid applicable federal and state

laws or city ordinances, aid to the orders, rules anc

regulations of any duly constituted federal or state regu-

latory body or authority having jurisdiction.”

By giving controlling effect to the general definitions

of “Daily Contract Quantity” and “Deliverability” in

Article I and the general regulatory clause in Article

XIII, 4 13.1, the Court ignores, gives no effect to, and

writes out of the contract the “take-or-pay” provision in

Article V, €5.3 of the contract. That portion of the

contract, which is the only part of the contract dealing

with Valero’s “take-or-pay” obligations, expressly states

what “Daily Contract Quantity” shall mean for “take-or-

pay” purposes and how “Sellers’ Deliverability shall be

determined” for “take-or-pay” purposes under the contract.

it states that for “take-or-pay” purposes “Daily Contract

Quantity” shall be “equal to ninety percent (90%) of

Sellers’ daily Deliverability of gas hereunder.” It then

states that “Sellers’ Deliverability shall be determined and

established by Buyer by testing the actual ability of Sellers’

wells to deliver into Buyer's facilities at the point of

delivery.”*

It is Appellants’ position that the trial court and this

Court should have held as a matter of law that this “take-

or-pay” provision is complete in itself and binding upon

the parties to the contract and that Valero has an obliga-

tion to pay for the minimum quantity of gas expressly

provided for therein if not taken by Valero for any reason,

including the Gas Market Demand Rule. The error com-

mitted by the trial court and this Court was in permitting

that clear and unambiguous prov... of the contract to

be construed by the jury and including in the instructions

to the jury with respect to that issue definitions and other

matters pertaining to the Gas Market Demand Rule and

Railroad Commission regulatory authority. The trial

court’s actions caused the jury to believe that it could

only answer Special Issue 2 “No” and that to do otherwise

would violate the law.

Other courts, and even the Railroad Commission itself,

have recognized that the Gas Market Demand Rule does

* Emphasis added throughout.

not affect contractual rights and obligations between

parties such as “take-or-pay” provisions. The most recent

Texas appellate decision recognizing this involved Valero.

Valero Transmission Co. v. Mitchell Energy Corp., 743

S.W.2d 658 (Tex. App.—Houston [Ist Dist.] 1987, no

writ). The contract there, like the one here, contained

“minimum purchase and take requirements,” a force

majeure clause, and a provision comparable to Article

XIII, € 13.1 in this contract. 7d. at 660. There, as here,

Valero failed to take the minimum quantities of gas re-

quired by the contract and sought to defend its breach

of the contract by relying on the Gas Market Demand

Rule. Valero’s attorneys there, who also are Valero’s

attorneys in this case, argued there, as they did here, that

Valero “has taken gas under the contract in accordance

with its market demand and that any contractual re-

quirement that it purchase additional amounts would

constitute a violation of Texas law.” Jd. at 661. Valero’s

attorneys also argued there, as they did here, that “there

was no market demand for the gas” because the contract

price was too high in relation to the market, that the

gas would have to be sold by Valero at a price of over

$4 per unit, and that “there is no existing market for

$4 gas.” Id. They argued, as they did in this case, “that

any contractual requirement that it [Valero] take and

pay for gas in excess of its market demand violates the

law.” Id. =

The Houston Court of Appeals flatly rejected Valero’s

arguments on the grounds that (1) “the Railroad Com-

mission has no authority to abrogate contract rights,”

(2) the Railroad Commission’s rules do not “purport

to affect contract rights,” (3) “Valero has not proven

that complying with the contract would violate the

law,” and (4) the force majeure clause did not relieve

Valero of the obligation to perform under the contract

because “a sudden or significant change in price, or

the fact that one of the parties may gain or lose during

a particular period of the contract, is not sufficient to

constitute an extraordinary, unforeseeable event that

would excuse performance under the force majeure

clause.” Jd. at 662-664. Citing this Court’s opinion in

Alamo Clay Products, Inc. v. Gunn Tile Co., 597 S.W.2d

388 (Tex. Civ. App.—San Antonio 1980, writ ref‘d

n.r.e.), the Court stated:

An economic downturn in the market for a product

is not such an unforeseeable occurrence that would

justify application of the force majeure provision,

and a contractual obligation cannot be avoided

simply because performance has become more eco-

nomically burdensome than a party anticipated. /d.

at 663.

Lively here seeks only what Mitchell Energy sought

there—to require Valero to comply with its contractual

obligations. However, here Lively is not seeking to re-

guire Valero to take and pay for a minimum quantity

of gas as required in the “take-or-pay” provision of

the contract. Valero’s alternative pay obligation in this

contract clearly is not violative of any law or the Gas

Market Demand Rule, because it does not require pro-

duction but payment in lieu of production. Resources

Investment Corp. v. Enron Corp., 669 F.Supp. 1038,

1041 (D. Colo. 1987): Kaiser-Francis Oil Co. v. Pro-

ducers’ Gas Co., No. 83-C-400-B (N.D. Okla. June 19,

1985) (Appendix to Brief for Appellants at A42);

International Minerals & Chemical Corp. v. Llano, Inc.,

770 F.2d 879 (10th Cir. 1985).

This Court's opiaion ignores, gives no effect to, and

writes out of the contract the “take-or-pay” provision in

Article V, € 5.3. This is a key provision of the contract.

as Mr. Lively testified that he would not have executed

the contract if that provision had not been included

(S.F. 121). In ignoring the “take-or-pay” provision of

the contract, this Court has violated long-established

rules of construction as fellows:

(1)

(2)

(3)

parties to an instrument intend every clause to

have some effect and purpose and in some

measure to evidence their agreement, and _ this

purpose should not be thwarted — Woods y. Sims,

154 Tex. 59, 273 S.W.2d 617, 620 (1954):

Pinehurst v. Spooner Addition Water Co., 432

S.W.2d 515 (Tex. 1968); Reynolds v. Me-

Cullough, 739 S.W.2d 424, 428 (Tex. App.—

San Antonio 1987, no writ); Restatement of the

Law of Contracts § 230 (1932):

a contract should be construed in a manner which

gives effect to all of its provisions — Coker vy.

Coker, 650 S.W.2d 391 (Tex. 1983); Universal

C.1.T. Corp. v. Daniel, 150 Tex. 513. 243 S.W.

2d 154 (1951); Sun Oil Co. vy. Burns, 125 Tex.

549, 84 $.W.2d 442 (1935): Williams v. J & C

Royalty Co., 254 $.W.2d 178 (Tex. Civ. App.—

San Antonio 1952, writ ref’d);

courts should avoid the adoption of a construc-

tion of a contract which would render meaning-

less any provision of that contract—LaGuarta.

Gavrel & Kirk, Inc., 596 SW.2d 517 (Tex.

1980); Mattison, Inc. v. W.F. Larson, Inc., 529

S.W.2d 271 (Tex. Civ. App.—Amarillo 1975,

writ ref'd n.r.e.): and

(4) if clauses in a contract are in apparent conflict.

they should be reconciled by a reasonable inter-

. pretation, “that is, such a construction as_ will

make the agreement fair, customary, and such as

prudent businessmen would naturally execute” —

Stone v. Robinson, 180 S.W. 135, 136 (Tex.

Civ. App.—Amarillo 1915, writ ref'd).

This court has adopted a construction of the contract

in the light of a rule that was adopted by the Railroad

Commission several years after the contract was entered

into. The Court bases its action in part upon a general

regulatory clause (Article XIII, @ 13.1) that appears

in every natural gas contract. The Court's hoiding in

that respect would eliminate “take-or-pay” liability under

all natural gas contracts. The Court’s opinion renders

meaningless and gives no effect to the “take-or-pay”

provision of the contract. It places a legal stamp of

approval on Valero’s manipulation of its nominations

and takes of gas under the contract in a manner that

was clearly never intended by the parties and completely

relieves Valero of any liability under the “take-or-pay”

provision of the contract.

No other ccurt has ever held that the “take-or-pay”

provision in a natural ges contract is not to be given

effect because of the Texas Gas Market Demand Rule.

This Court’s holding not only is contrary to the clear

and unambiguous language of the “take-or-pay” pro-

vision of the contract but also is a direct contradiction

of the history of the Texas Gas Market Demand Rule

and the Railroad Commission’s stated intent that the

Gas Market Demand Rule “shail not affect existing

contractual rights and obligations between parties.” (12

Tex. Reg. 536 (1987); Brief for Appellants at 12-14.)

Further, this Court’s action nullifies a provision that has

been recognized as a standard provision in gas contracts

for over thirty years and has been upheld by the courts

consistently as being conscionable and fair and as prop- ~

erly apportioning the risks between the buyer and seller

of gas. 4 H. Williams & C. Meyers, Oil & Gas Law

§$ 724.5 (1983); Universal Resources Corp. v. Panhandle

Eastern Pipeline Co., 813 F.2d 77 (Sth Cir. 1987).

II.

9. Point of Error: The Court erred in holding that

the trial court properly submitted to the jury Special

Issue No. 2 and Instruction No. 2 containing the

definition of the term “Deliverability” from Article

I(j) of the contract.

10. Point of Error: The Court erred in holding that

Lively waived their objection to Special Issue No. 2

and Instruction No. 2 containing the definition of

“Deliverability” from Article I(j) of the contract.

11. The Court erred in holding that the instructions to

Special Issue No. 2 were relevant, were not a com-

ment on the weight of the evidence, and did not

cause the rendition of an improper judgment.

12. The Court erred in holding that considering the

entire set of instructions to Special Issue No. 2 and

the entire charge, the instruction contained in the

third paragraph of the instruction to Special Issue

No. 2 was not a comment on the weight of the

evidence and probably did not cause the rendition

of an improper judgment.

13. The Court erred in overruling Appellants’ Points

of Error Three, Four, and Five.

Argument and Authorities

These points of error will be argued together, as they

all relate to the trial court’s submission of. and_ this

Court’s opinion with respect to, Special Issue No. 2 and

Instruction No. 2 to the extent not discussed under I

above.

Plaintiff made extensive objections to Special Issue

No. 2 and Instruction No. 2 in the triai court. Those

objections were: (1) the issue should not be submitted

because it was not a controlling issue and its submission

deprived plaintiff of the unconditional submission of

the controlling Special Issue No. 3; (2) the inclusion

of the language of Article V. © 5.2 of the contract in

Instruction No. 2 was an error because there had been

no evidence presented to warrant iis submission and it

could serve only to mislead and confuse the jury by

leading the jury to believe that it relates to Valero’s

minimum take under the contract and possibly lead to

an erroneous verdict on Special Issue No. 2 and possibly

also on Special Issue No. 3; (3) the part of the in-

struction pertaining to waste was error because there

was no evidence to warrant the submission of these

instructions pertaining to waste and they could only

mislead and confuse the jury and possibly result in an

erroneous verdict; (4) these instructions were mean-

ingless abstract statements of the law without reference

to or connection with any evidence oy issue in this

case; (5) the instruction with respect to Valero’s ob-

ligation under the Gas Market Demand Rule was an

error because there was na evidence in the trial of

the case that the Gas Market Demand Rule has affected

any issue being presented to the jury for determination:

(6) the Gas Market Demand Rule should have no

bearing on the determination of the issue the jury was

being asked to answer, and its inclusion in any form

in the instruction could serve only to mislead and confuse

the jury and possibly result in an erroneous verdict:

(7) the instructions concerning the Gas Market De-

mand Rule are meaningless abstract statements of law

without any reference to or connection with any issue

in this case; and (8) there was no evidence that com-

pliance with the Gas Market Demand Rule in any way

affected Valero’s ability to perform its obligations under

the contract and particularly its pay obligation under

the “take-or-pay” clause (S.F. 1675-1681).

Just as the Court felt it was necessary to look at the

entire Instruction No. 2 to determine whether it or any

part thereof had an adverse effect on the jury, the Court

should consider Plaintiffs’ entire objections to Special

Issue No. 2 and Instruction No. 2 to determine their

sufficiency on the question of waiver. Appellants re

spectfully submit that when viewed in their entirety the

extensive objections were sufficient and that there was

no waiver that would preclude the consideration by this

Court of the points of error contained in the Brief for

Appellants and this motion.

The fundamental error was in the trial court’s sub-

mission of Special Issue No. 2 and Instruction No. 2.

That issue and instruction should not have been sub-

mitted for the reasons objected to by Appellants in the

trial court. The trial court’s submission totally confused

and mislead the jury by causing them to believe that

Valero was not required to take or pay for more gas

under the contract than its market demand and that if

the jury answered Special Issue No. 2 “Yes” it would

itself be causing a violation of the law. Therefore, Special

Issue No. 2 and Instruction No. 2, with all of their

implications, ramifications, and meanings, confused and

mislead the jury and resulted in an erroneous verdict

and judgment.

The trial court’s submission of Special Issue No. 2

and Instruction No. 2 tainted the entire submission to

the jury. The erroneous and superfluous instructions_ to

the jury concerning the Gas Market Demand Rule, waste,

ratable take, maximum rate of flow permitted by the

Railroad Commission, and information to be supplied

the Railroad Commission (1) confused and misled

the jury by causing them to believe that because of

the Gas Market Demand Rule there could be no liability

of Valero to Lively under the contract; (2) constituted

an impermissible comment that tilted or nudged the

jury in favor of Valero, in violation of the Supreme

Court’s holding in Lemos v. Montez, 680 S.W.2d 798,

801 (Tex. 1984): and (3) improperly shifted to the

jury the determination of a question of law as to the

applicability and effect, if any, of the Gas Market De-

mand Rule on the “take-or-pay” obligation of Valero

under the contract.

“It is fundamental that only issues of fact should be

submitted to the jury,” and an instruction which shifts

to the jury the determination of a legal issue that should

have been determined by the trial court is improper and

requires reversal. See Knutson v. Ripson, 346 §.W.2d 424,

426 (Tex. Civ. App.—Amarillo 1961), aff'd 163 Tex.

312, 354 S.W.2d 575 (1962); Foerster v. Peoples, 362

S.W.2d 918 (Tex. Civ. App.—-Amarillo 1962, no writ):

Barton v. Davis, 441 S.W.2d 299, 301 (Tex. Civ. App.—

El Paso |969, writ ref’d n.r.e.); Emmord’s Inc. v. Ober-

miller, 526 S.W.2d 562, 566 (Tex. Civ. App.—Corpus

Christi 1975, writ ref’d n.r.e.).

As discussed in I above, as a matter of law the Gas

Market Demand Rule does not affect private contract

rights. The trial court’s failure to so hold, its further

action in submitting this legal question to the jury for

determination, and its action in confusing and misleading

the jury by the contents of, and the undue emphasis of

matters in, Instruction No. 2 resulted in the rendition of

an improper judgment, which should be set aside.

III.

15. Point of Error: The Court erred in holding that the

trial court fairly submitted Special Issue No. 2, which

was the controlling issue, and properly conditionally

submitted Special Issue No. 3, which was the dam-

age issue.

16. Point of Error: The Court erred in overruling Appel-

lants’ Point of Error Six.

Argument and Authorities

As heretofore discussed, the submission of Special Issue

No. 2 and Instruction No. 2 was improper for various

reasons and confused and misled the jury. As a result of

the jury's answer to Special Issue No, 2, the jury was

never given the opportunity to determine whether any

money was owing to Lively by Valero under the “take-or-

pay” provision of the contract. That was the ultimate and

controlling issue to be determined by the jury with respect

to Valero’s take-or-pay liability.

The trial court should not have submitted Speci2l Issue

No. 2 but should have submitted only Special Issue No. 3:

What sum of money, if any, if paid now in cash, do

you find to be due and owing under the Contract?

The submission of that ultimate and controlling issue

would have permitted the jury to consider in deciding

that issue all proper evidentiary issues and matters, in-

cluding whether Valero had failed to take or pay for the

Daily Contract Quantity under the contract. The trial

court’s conditional submission of the ultimate and con-

trolling issue in the case, predicated on a response to an

evidentiary issue which should not have been submitted,

deprived Lively of its right to have the ultimate and con-

trolling issue with respect to one of its grounds for

recovery determined by the jury. Blanton v. E. & L Trans-

port Co., 146 Tex. 377, 207 S.W.2d 368 (1948); Mont-

gomery v. Gay, 212 S.W.2d 941 (Tex. Civ. App.—Fort

Worth 1948, no writ); 3 R. McDonald, Texas Civil Prac-

tice in District and County Courts §§ 12.16.1 and 12.16.

2(b) (rev. 1983).

In effect, Lively’s entire take-or-pay cause of action was

conditionally submitted. The conditional submission of

Special Issue No. 3 was extremely prejudicial to Lively,

constituted harmful error, and led to the rendition of an

improper judgment.

18.

19.

20.

ai.

22.

IV.

Point of Error: The Court erred in holding that

Lively conceded that the evidence of the Gas Market

Demand Rule supports the jury finding in Special

Issue No. 2.

Point of Error: The Court erred in holding that there

was evidence to support the jury’s finding on take-

or-pay liability.

Point of Error: The Court erred in holding that

legally incorrect evidence can be relied upon to sup-

port the jury’s finding on take-or-pay liability.

Point of Error: The Court erred in not holding that

the jury’s finding on take-or-pay liability was against

the great weight and preponderance of the evidence.

Point of Error: The Court erred in overruling Appel-

lants’ Points of Error Seven, Eight, and Nine.

Point of Error: The Court erred. in affirming the

judgment of the trial court.

Argument and Authorities

These points of error will be argued together; as they

ail involve the consideration of the evidence with respect

to the central issue in this case—Valero’s take-or-pay

liability.

The evidence presented by both parties in the trial court

conclusively established that Valero failed to take or pay

for a quantity of gas equal to the Daily Contract Quantity.

Under the clear and unambiguous terms of the contract,

the Daily Contract Quantity “was equal to ninety per-

cent (90%) of Seller’s daily Deliverability hereunder,”

and “Sellers Deliverability shall be determined and estab-

lished by Buyer by testing the actual ability of Sellers’

wells to deliver into Buyer's facilities at the points of

delivery.” (Article V, € 5.3).

The only evidence presented to show that Valero failed

to take or pay for the Daily Contract Quantity was based

entirély on Valero’s invalid argument that as a result

of the Gas Market Demand Rule Valero had no liability

under the “take-or-pay” provision of the contract (S.F

1449). However, Valero itself recognized that there 1s

nothing in the Gas Market Demand Rule that prevents

Valero from paying for a deficiency when a deficiency

exists by operation of the “take-or-pay” provision (S.F

840).

Contrary to the Court's statement, Lively did not con-

cede “that the evidence of the Gas Market Demand Rule

supports the jury finding in Special Issue No. 2.” Instead,

it was and is Lively’s position that there was no evidence

to support tiat finding and that the Gas Market Demand

Rule has no legal effect upon Valero’s obligation to pay

Lively for the minimum quantity it was obligated to take

or pay for under the contract. That is an alternative

obligation which is not affected or excused by the Gas

Market Demand Rule.

Valero’s position with respect to the Gas Market De-

mand Rule is incorrect as a matter of law because (1)

it is contrary te the clear and unambiguous language in

the “take-or-pay” provision of the contract and (2) it is

based upon the contention that the Gas Market Demand

Rule abrogates Valero’s obligations under the contract

to take or pay for a minimum quantity of gas each Con-

tract Year. When, as here, the Court is barred by rules

of law from giving weight to the only evidence offered

to prove a vital fact, a “no evidence” point of error must

be sustained. Royal Indemnity Co. v. Little Joe’s Catfish

Inn, Inc., 636 S.W.2d 530, 531 (Tex. App.—San Antonio

1982. no writ); R. Calvert, “No Evidence” and “Insuffi-

cient Evidence” Points of Error, 38 Tex. L. Rev. 361.

363-365 (1960).

¥.

23. Point of Error: The Court's action in applying the

Texas Gas Market Demand Rule so as to relieve

Valero of its take-or-pay obligations and liability

under the contract is invalid because the Texas Gas

Market Demand Rule as applied by the Court is

pre-empted by the Natural Gas Policy Act.

24. Point of Error: The Court’s action in applying the

Texas Gas Market Demand Rule so as to relieve

Valero of its take-or-pay obligations and liability

under the contract is invalid because the Texas Gas

Market Demand Rule as applied by the Court

violates the Commerce Clause of the United States

Constitution.

Argument and Authorities

The Court’s action in applying the Texas Gas Market

Demand Rule so as to relieve Valero of its take-or-pay

obligaiions and liability under the contract is invalid be-

cause the Texas Gas Market Demand Rule as applied

by the Court is pre-empted by the Natural Gas Policy

Act of 1978 (“NGPA”), 15 U.S.C. §§ 3301 et seg., and

violates the Commerce Clause of the United States Con-

stitution, U.S. Const. art. I, § 8, cl. 3.

In 1978, Congress passed the NGPA, which “has been

justly described as ‘a comprehensive statute to govern

future natural gas regulation.” Public Service Commis-

sion of the State of New York v. Mid-Louisiana Gas Co.,

463 U.S. 319 (1983). As stated by the United States

Supreme Court in Transcontinental Gas Pipe Lie Corp.

v. State Oil and Gas Board of Mississippi, 474 U.S. 409

(1986) (“Transco”):

[T]he NGPA reflects a congressional belief that a

new system of natural gas pricing was needed to

balance supply and demand. See S Rep No. 95-436,

at 10. The new federal role is to “overse[e] a national

market price regulatory scheme.” Haase, 16 Houston

L Rev, at 1079; see S Rep No. 95-436, at 21 (NGPA

implements “a new commodity value pricing ap-

proach”). The NGPA therefore does not constitute

a federal retreat from a comprehensive gas policy.

Indeed. The NGPA in some respects expanded fed-

eral control, since it granted FERC jurisdiction over

the intrastate market for the first time. See the Act’s

$$ 311 and 312, 15 USC §§ 3371 and 3372 [15

USCS §§ 3371 and 3372].

In Transco, the Supreme Court held that a ratable take

order requiring gas purchasers to purchase gas without

discrimination in favor of one producer against anuther

in the same source of supply is pre-empted by the Natural

Gas Act and the NGPA. In view of that holding, the

Court stated that “we need not reach the question of

whether, absent federal occupation of the field, Missis-

sippi’s action would nevertheless run afoul of the Com-

merce Clause.” Jd. at 425. The Court said that “Missis-

sippi’s action directly undermines Congress’ determination

that the supply, the demand and the price of high-cost

gas be determined by market forces.” Jd. at 422. The

Court stated further:

In light of the NGPA’s unification of the interstate

and intrastate markets, the contention that Congress

meant to permit the States to impose inconsistent

regulations is especially unavailing. Second, Mis-

sissippi’s order would have the effect of increasing

the ultimate price to consumers. Take-or-pay pro-

visions are standard industrywide. See Pierce, 68

Va L Rev, at 77-78; H R Rep No. 98-814, pp 23-25.

133-134 (1984). Pipelines are already committed

to purchase gas in excess of market demand. Mis-

sissippi’s rule will require Transco to take delivery

of noncontract gas; this will lead Transco not to

take delivery of contract gas elsewhere, thus trigger-

ing take-or-pay provisions.

Id. at 423. The Court thus recognized the validity of

take-or-pay provisions of gas contracts where pipelines

are committed to purchase gas in excess of market de-

mand.

Following the Supreme Court's holding in Transco,

the United States District Court, Southern District of

Texas, Houston Division, in McGoldrick Oil Company,

et al v. United Gas Pipe Line Company, Civil Action

No. H-84-4971, by order of September 17, 1987, a

copy of which is attached hereto as Appendix A, held:

The Texas Gas Market Demand Rule, governing

ratable production, is preempted under Trans-conti-

nental Gas Pipeline Corp. v. State Oil and Gas

Board of Mississippi, ___U.S.____, 106 S. Ct. 709

(1986). Although states may regulate the produc-

tion of natural resources in order to achieve a state-

wide public benefit, such as conservation, the Texas

rule is relied on by United solely to free itself of

a contractual obligation. If the rule were enforced

to free pipelines of their obligations under take-or-

pay contracts, its effect would be contrary to the

public interest sought to be served by the federal

regulation: gas prices would remain high in spite

of an oversupply.

In a Memorandum on Denial of Modification of the

above order, a copy of which is attached hereto as

Appendix B, that Court stated as follows:

United Gas Pipe Line’s motion to modify the

order of September 17, 1987, will be denied. The

September order modified an earlier June memoran-

dum, making it consistent with Transcontinental Gas

Pipe Line Corporation v. State Oil and Gas Board

of Mississippi, ius See a Gh. Te

(1986).

Had United wanted to limit its takes of gas under

its contract with McGoldrick during periods when

gas was in surplus supply, it could have negotiated

a market out clause. The contract was drafted by

sophisticated attorneys for clients with substantial

experience in gas production and marketing. A/llega-

tions that United in good faith believed that the

contract's incorporation of the Texas Gas Market

Demand Rule was to work as a substitute for a

market out clause which could be invoked when

the price and demand for gas dropped are dis-

ingenuous. United signed a contract for mandatory

minimum purchases of gas during a time of inflated

gas prices, gambling that the economy would remain

favorable to suppliers. Even if United lacked the

capacity immediately to take and rese!l McGoldrick’s

gas, it was not commercially impracticable for

United to pay for the gas, as it was contractually

obligated to do.

The court’s September order did not invalidate

_ the Texas ratable production scheme. As Transco

has instructed, the statute remains enforceable to

achieve certain state goals such as preservation of

resources, protection of correlative rights, and waste

prevention. Congress’ intent to move towaid a less-

regulated national gas market cannot be interpreted

aS an invitation to the states to impose additional

regulations. Transco at 717. The Texas Gas Market

Demand Rule, as applied to purchasers such as

United, is preempted. 106 S. Ct. at 718.

In ANR Pipeline Co. v. Corporation Commission of

Oklahoma, 643 F.Supp. 419 (W.D. Okla. 1986), the

Court held the Oklahoma statute and the Oklahoma

Corporation Commission Rule 1-305 to be “unconstitu-

tional! as applied to the plaintifjs” in that case. Id. at 424.

That statute and rule, like the Texas Gas Market De-

mand Rule, provided for ratable purchases of gas by

pipelines from a common source of supply on a system-

wide basis and established a priority schedule for the

purchase of gas when production exceeded that pur-

chasers market demand.

In Schneidelwind v. ANR Pipeline Co., 56 U.S.L.W.

4249 (U.S. March 22, 1988), the United States Supreme

Court held that a Michigan statute “regulates in a field

the NGA has occupied to the exclusion of state law,

and that it is therefore preempted.” /d. at 4251. The

statute required a public utility exercising or claiming

the right to transport natural gas for public use to

obtain approval from the Michigan Public Service Com-

mission before issuing long term securities. Referring to

the “comprehensive scheme of federal regulation” in the

Natural Gas Act, the Court stated that “while the NGA

does not expressly grant FERC preissuance authority

over the securities of natural gas companies, FERC

achieves the regulatory ends of such review with regard

to rates and facilities through the exercise of its express

regulatory responsibilities.” Jd. at 4254. In view of its

conclusion that the Michigan statute “is pre-empted by

the NGA,” the Court stated that “we need not decide

whether. absent federal occupation of the field, Act 144

violates the Commerce Clause. See Transcontinental Gas

Pipe Line Corp. v. State Oil and Gas Bd. of Mississippi,

474 U.S. 409, 425, (1986).” Id. at 4254.

While these cases involved interstate pipelines, no

valid reason exists for distinguishing between interstate

and intrastate pipelines insofar as the holdings of these

cases are concerned. As recognized in Transco, the NGPA

resulted in “unification of the interstate and intrastate

markets,” and now there is a “national natural gas mar-

ket.” 474 U.S. at 423-424. That this is the case is further

evidenced by the fact that Section 105 of the NGPA

covers “sales under existing intrastate contracts.”

The authority given by the NGPA to FERC to regu-

late the price of “all first sales of natural gas irrespective

of its interstate or intrastate character” was upheld in

State of Oklahoma v. Federal Energy Regulatory Com-

mission, 661 F.2d 832 (10th Cir. 1981), cert. denied,

457 U.S. 1105 (1982). The Court there held that “the

enactment of the NGPA is a constitutionally acceptable

exercise of Congress’ Commerce Clause power.” 661

F.2d at 838. The basis of the Court’s holding, among

other things, was that Congress may regulate wholly

intrastate activities which have “a substantial economic

effect on interstate commerce or when the intrastate

activity is necessary to effectuate the interstate regu!a-

tion”; “Congress had a rational basis for determining

that the unregulated intrastate market imposed a burden

on interstate commerce”; and “Congress may pre-empt

state conservation regulations which interfere with or

burden interstate commerce.” /d. at 834-835.

In considering the validity of state ratable take rules

such as the Texas Gas Market Demand Ruie, there is no

longer any valid reason for differentiating between inter-

State and intrastate pipelines. Both pipelines purchase

from the same producers, the same fields, and even the

same wells, and the maximum price of the first sales to

them is regulated by FERC irrespective of the destination

of the gas. Therefore, the Texas Gas Market Demand

Rule as applied by this Court is not only pre-empted by

the NGPA but also runs afoul of and violates the Com-

merce Clause of the United States Constitution.

Even if, as Valero contends, the definition of “Deliver-

ability” in Article I1(j) of the contract can be construed

as limiting Valero’s takes of gas to its market demand

under the Texas Gas Market Demand Rule, that portion

of the agreement would be unenforceable here since

during the Contract Years in question the Gas Market

Demand Rule as so applied is pre-empted by the NGPA

and violates the Commerce Clause. “Parties, by contract.

cannot impair the validity of a law, nor control or limit

the provisions of statute.” McFarland v. Haby, 589 S.W.

2d 521, 524 (Tex. Civ. App.—Austin 1979. writ ref'd

n.r.e.); Gorman v. Gause, 565 $.W.2d 855 (Tex. Comm'n

App. 1933, judgmt adopted).

For all of the reasons set forth herein, Appellants

respectfully submit that this Court erred in affirming

the judgment of the trial court.

WHEREFORE, Appellants request that Appellants’

motion for rehearing be granted and that Appellants

have the relief prayed for in the Prayer for Relief set

forth in the Brief for Appellants filed herein.

Respectfully submitted,

SCOTT, DOUGLASS & LUTON

By: /s/ JESSE P. LUTON, JR.

Jesse P. Luton, Jr.

State Bar No. 12708000

James P. Pennington

State Bar No. 15758520

4300 RepublicBank Center

700 Louisiana Street

Houston, Texas 77002

(713) 228-6337

Frank Douglass

State Bar No. 06049000

Christopher Fuller

State Bar No. 07353050 |

1200 First City Bank Building

Austin, Texas 78701 |

(512) 476-6337 |

Attorneys for Appellants |

CERTIFICATE OF SERVICE

I hereby certify that the above and foregoing Appel-

lants’ Motion for Rehearing was served on the Appellee

or its attorney by delivery of a true copy by certified mail,

return receipt requested, by depositing it, postpaid, in an

official depository under the care and custody of the

United States Postal Service on the 12th day of April,

1988, enclosed in a wrapper addressed as follows:

J. Clifford Gunter, ITT

Carrin F. Patman

Laura B. Herring

Gregory B. King

Bracewell & Patterson

2900 South Tower Pennzoil Place

Houston, Texas 77002

/s/ JESSE P. LUTON, JR.

Jesse P. Luton, Jr.

APPENDIX A

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

CIVIL ACTION NO. H-84-4971

McGOLDRICK OIL COMPANY, et al.,

Plaintiffs,

UNITED GAS PIPE LINE COMPANY,

Defendant.

ORDER

McGoldrick’s motion for reconsideration is denied in

part and granted in part.

1. The Texas Gas Market Demand Rule, governing

ratable production, is preempted under Transcontinental

Gas Pipeline Corp. v. State Oil and Gas Board of Mis-

sissippi, U.S.____, 106 S. Ct. 709 (1986). Although

states may regulate the production of natural resources

in order to achieve a state-wide public benefit, such as

conservation, the Texas rule is relied on by United solely

to free itself of a contractual obligation. If the rule were

enforced to free pipelines of their obligations under take-

or-pay contracts, its effect would be contrary to the

public interest sought to be served by the federal regu-

lation: gas prices would remain high in spite of an

oversupply.

The Texas ratable production rule conflicts with the

Natural Gas Policy Act objective of securing fair prices

for consumers. Just as Mississippi’s action in Transco

undermined Congress’s determination that the supply, the

demand, and the price of high-cost gas be determined by

market forces, the Texas regulation could have the identi-

cal effect of distorting the market by decreasing the supply

of gas.

2. United’s affirmative defenses of physical and legal

impossibility, commercial impracticability, lack of mutual

assent, mistake, and penalty are not viable. Performance

has not been made impossible, just unprofitable.

Substantial frustration and commercial impracticality

have not excused performance under take-or-pay

clauses where the parties are knowledgeable bargain-

ing entities. The negotiating parties are expected to

have an awareness of market conditions as change-

able rather than stable an the experience with regula-

tory agencies so that prospective regulation is as-

sumed,

Forest Oil Corp. v. El Paso Natural Gas Co., No. 86-

1948-W (W.D. Okla., May 6, 1987). Challenger Min-

erals, Inc. v. Southern Natural Gas Co., No. 84-C-357-E

(N.D. Okla., Sept. 9, 1986); Forest Oil Corp. v. El Paso

Natural Gas Co., No. 86-1948-W (W.D. Okla., May 6,

1987); Northern Indiana Pub. Serv. Carbon County Coal,

799 F.2d 265 (7th Cir. 1986); Coquina Oil Corporation

v. Transwestern Pipeline Company, No. 86-562-M (D.

N.M., Sept. 19, 1986); Universal Res. Corp. v. Panhandle

E. Pipe Line Co., 813 F.2d 77 (Sth Cir. 1987).

3. McGoldrick’s antitrust claims in Counts I and IT of

the amended complaint allege the same facts and a viola-

tion of the same statute; the only difference is the nature

of the alleged injury. Because summary judgment was

based on a finding that there was no refusal to deal, both

claims fail.

4. McGoldrick’s motion for a judgment under Rule

54(b) is granted.

Signed on September 17, 1987, at Houston, Texas.

By: /s/ LYNN N. HUGHES

Lynn N. Hughes

United States District Judge

APPENDIX B

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

CIVIL ACTION NO. H-84-4971

McGOLDRICK OIL COMPANY, et al.,

Plaintiffs,

UNITED GAS PIPE LINE COMPANY,

Defendant,

MEMORANDUM ON DENIAL OF

MODiFICATION

United Gas Pipe Line’s motion to modify the order of

September 17, 1987, will be denied. The September order

modified an earlier June Memorandum, making it con-

sistent with Transcontinental Gas Pipe Line Corporation

v. State Oil and Gas Board of Mississippi, _-U.S.____,

106 S. Ct. 709 (1986).

Had United wanted to limit its takes of gas under its

contract with McGoldrick during periods when gas was

in surplus supply, :t could have negotiated a market out

clause. The contract was drafted by sophisticated attor-

neys for clients with substantial experience in gas produc-

tion and marketing. Allegations that United in good faith

believed that the xontract’s incorporation of the Texas

Gas Market Demand Rule was to work as a substitute for

a market out clause which could be invoked when the

price and demand for gas dropped are disingenuous.

United signed a contract for mandatory minimum pur-

chases of gas during a time of inflated gas prices, gambl-

ing that the economy would remain favorable to suppliers.

Even if United lacked the capacity immediately to take

and resell McGoldrick’s gas, it was not commercially

impracticable for United to pay for the gas, as it was con-

tractually obligated to do. The court’s September order

did not invalidate the Texas ratable production scheme.

As Transco has instructed, the statute remains enforceable

to achieve certain state goals such as preservation of re-

sources, protection of correlative rights, and waste pre-

vention. Congress’ intent to move toward a less-regulated

national gas market cannot be interpreted as an invitation

to the states to impose additional regulations. Transco at

717. The Texas Gas Market Demand Rule, as applied to

purchasers such as United, is preempted. 106 S. Ct. at 718.

United’s claim that by compelling it to pay for gas which

it cannot take, the cost of gas to consumers will go up,

is at odds with simple economics; when a commodity is

in abundant supply, absent artificial controls, it can be

purchased by consumers at a lower price. Higher con-

Sumer prices may ultimately occur when the oil industry

revives and suppliers pass on to their customers the costs

of their unfavorable contracts with producers. This effect

may not, however, be invoked to vitiate an arms length,

long-term supply contract; indeed, no supply contract

would survive a price change. Every error of judgment

in supply contracts raises the cost of the commodity to

customers,

Signed on December 9th, 1987, at Houston, Texas.

By: /s/ LYNN N. HUGHES

Lynn N. Hughes

United States District Judge

NO. C-7676

IN THE

SUPREME COURT OF TEXAS

AUSTIN, TEXAS

LIVELY EXPLORATION COMPANY, ET AL.,

Petitioners

Vv.

VALERO TRANSMISSION COMPANY,

Respondent.

PETITIONERS’ APPLICATION FOR

WRIT OF ERROR

Scott, Douglass & Luton

Frank Douglass

Christopher Fuller

1200 First City Bank Building

Austin, Texas 78701

(512) 476-6337

Jesse P. Luton, Jr.

James P. Pennington

4300 RepublicBank Center

700 Louisiana Street

Houston, Texas 77002

(713) 228-6337

Attorneys for Petitioners

June 15, 1988

COMPLETE LiST OF THE PARTIES

Pursuant to Rule 131(a) of the Texas Rules of Ap-

pellate Procedure, a complete list of the names of all

parties follows: :

Petitioners:

Lively Exploration Company, Lea Roy

Aldwell, Individually, Lea Roy Aldwell,

Winnie Lea McPherson and Marjory Reba

Johansen, as Testamentary Trustees under

the Will of George L. Aldwell, Deceased,

Jon A. Sonnen, J. Howard Marshall, Ed

Farrell, Elizabeth Standish, The Desana

Corporation, Jessee L. Dally, Chester H.

Kenley, Carolyn H. Joseph, Independent

Executrix of the Estate of Gifford E.

Joseph, Deceased, H. B. Lively, B. Jack-

son Bandy, Robert L. Banks, Theo B.

Bean, William R. Gifford, Charlie Gill, Jr.,

Henry Gunders and wife, Elaine Gunders,

Kenneth L. Hewitt, Kallman Nashner,

Frank Pace, Jr., Martin B, Seretean, Ray

B. Vaughters, and Theodore L. Wilkinson.

Respondent: Valero Transmission Company.

NO. C-7676

IN THE

SUPREME COURT OF TEXAS

AUSTIN, TEXAS

LIVELY EXPLORATION COMPANY, ET AL.,

Petitioners,

VALERO TRANSMISSION COMPANY,

Respondent.

PETITIONERS’ APPLICATION FOR

WRIT OF ERROR

To The Supreme Court of Texas:

Lively Exploration Company, Lea Roy Aldwell, Indi-

vidually, Lea Roy Aldwell, Winnie Lea McPherson and

Marjory Reba Johansen, as Testamentary Trustees under

the Will of George L. Aldwell, Deceased, Jon A. Sonnen,

J. Howard Marshall, Ed Farrell, Elizabeth Standish, The

Desana Corporation, Jessee L. Dally, Chester H. Kenley,

Carolyn H. Joseph, Independent Executrix of the Estate

of Gifford E. Joseph, Deceased, H. B. Lively, B. Jackson

Bandy, Robert L. Banks, Theo B. Bean, William R. Gif-

ford, Charlie Gill, Jr., Henry Gunders and wife, Elaine

Gunders, Kenneth L. Hewitt, Kallman Nashner, Frank

Pace, Jr., Martin B. Seretean, Ray B. Vaughters, and

Theodore L. Wilkinson (collectively referred to as

“Lively” or “Petitioners”), Appellants in Cause No.

04-87-00380-CV in the Court of Appeals for the Fourth

Supreme Judicial District of Texas, San Antonio, Texas

(plaintiffs in the district court), respectfully submit their

application for writ of error to correct errors of law com-

mitted by the Court of Appeals in affirming the judgment

for Respondent, Valero Transmission Company (“Val-

ero” or “Respondent”), Appellee below (defendant in the

district court).

STATEMENT OF THE CASE

This is a case in which Lively, a gas producer-seller,

sued for recovery of damages from Valero, an intra-

State gas pipeline-purchaser, for breach of the take-

or-pay provision and the pricing provision of a gas

purchase contract. The case was tried before a jury, and

on the basis of the jury’s answers to the special issues the

Trial Court entered judgment that Lively take nothing on

their claim for breach of the take-or-pay provision of

the contract, awarding Lively $1,204,778.60 on the pric-

ing claim and $500,000.00 for attorneys’ fees. Lively

appealed that part of the Trial Court’s judgment ordering

that they take nothing on their claim for breach of the

take-or-pay provision of the contract.

The opinion of the Court of Appeals on Appellants’

motion for rehearing,’ Lively Exploration Company, et al.

v. Valero Transmission Company, _._S.W.2d___._ (Tex.

App.—San Antonio 1988), correctly states the nature

and result of the case.

1. The Court of Appeals denied Appellants’ motion for rehearing

deleting only one sentence in the original opinion which had no

effect on the Court's ruling. Therefore, Appellants did not, and were

not required to, file a second motion for rehearing under Tex. R.

App. P. 100(d).

STATEMENT OF JURISDICTION

The Supreme Court has jurisdiction of this case under

Tex. Gov't Cope ANN. § 22.001(a)(6) (Vernor

1988).

POINTS OF ERROR

POINT 1. The Court of Appeals erred in holding

that the Texas Gas Market Demand Rule applies in

determining the obligations of Valero under the take-

or-pay provision of the contract.

POINT 2. The Court of Appeals erred in holding

that the Texas Gas Market Demand Rule was relevant

and material to prove or disprove that there was a

breach of the “take-or-pay” provision of the contract

as alleged by Lively.

[Points 1 and 2 are germane to: Plaintiffs’ Origi-

nal Petition (Tr. 3-7); Plaintiffs’ Second Amended

Original Petition (Tr. 35-40); Defendant’s Fourth

Amended Original Answer, € 11-14 (Tr. 48-50); Judg-

ment (Tr. 118-211); Points of Error 1-6, Appellants’

Motion for Rehearing.]

POINT 3. The Court of Appeals erred in holding

that the inclusion of the Texas Gas Market Demand

Rule in the charge to the jury was not harmful

error.

[Germane to: Special Issue No. 2 (Tr. 145-146);

Plaintiffs’ Motion for Judgment and for Partial New

Trial, © 7 (Tr. 160-163); Point of Error 7, Appellants’

Motion for Rehearing. ]

POINT 4. The Court of Appeals erred in holding

that the obligations of Valero under the take-or-pay

provision of the contract are controlled by the defi-

nitions of “Daily Contract Quantity” and “Deliver-

ability” set forth in Article I of the contract.

{[Germane to: Special Issue No. 2 (Tr. 145-146);

Point of Error 1, Appellants’ Motion for Rehearing.|

POINT 5. The Court of Appeals erred in holding

that the Trial Court properly submitted to the jury

Special Issue No. 2 and Instruction No. 2 containing

ihe definition of “Deliverability” from Article I(j) of

the contract.

{[Germane to: Special Issue No. 2 (Tr. 145-146);

Point of Error 9, Appellants’ Motion for Rehearing.]

POINT 6. The Court of Appeals erred in holding

that Lively waived their objection to Special Issue

No. 2 and Instruction No. 2 containing the definition

of “Deliverability” from Article I(j) of the contract.

{Germane to: Special Issue No. 2 (Tr. 145-146):

Point of Error 10, Appellants’ Motion for Rehearing.)

POINT 7. The Court of Appeals erred in holding

that the instructions to Special Issue No. 2 were relevant,

were not a comment on the weight of the evidence,

and did not cause the rendition of an improper judg-

ment.

[Germane to: Special Issue No. 2 (Tr. 145-146);

Piaintiffs’ Motion for Judgment and Partial New Trial,

€7 (Tr. 160-163): Points of Error 11 and 12, Ap

pellants’ Motion for Rehearing. }

POINT 8. The Court of Appeals erred in holding

that the Trial Court fairly submitted Special Issue

No. 2, which was the controlling issue, and properly

conditionally submitted Special Issue No. 3, which was

the damage issue.

[Germane to: Special Issues No. 2 and 3 (Tr. 145-

147); Plaintiffs’ Motion for Judgment and Partial New

Trial, © 7 (Tr. 160-163); Point of Error 15, Appe!lants’

Motion for Rehearing.]

POINT 9. The Court of Appeals erred in holding

that Lively conceded that the evidence of the Gas

Market Demand Rule supports the jury finding in Special

Issue No. 2.

{Germane to: Point of Error 17, Appellants’ Mo-

tion for Rehearing. ]

Point 10. The Court of Appeals erred in holding that

there was evidence to support the jury's finding on

take-or-pay liability.

{[Germane to: Plaintiffs’ Motion for Judgment and

Partial New Trial, © 7 (Tr. 160-163); Point of Error

18, Appellants’ Motion for Rehearing. ]

POINT 11. The Court of Appeals erred in holding

that legally incorrect evidence can be relied upon to

support the jury’s finding on take-or-pay liability.

{Germane to: Point of Error 19, Appellants’ Mo-

tion for Rehearing. }

POINT 12. The Court of Appeals’ action in apply-

ing the Texas Gas Market Demand Rule so as to

relieve Valero of its take-or-pay obligations and liability

under the contract is invalid, because the Texas Gas

Market Demand Rule as applied by the Court of

Appeals is pre-empted by the Natural Gas Policy

Act.

[Germane to: Point of Error 23, Appellants’ Mo-

tion for Rehearing. ]

POINT 13. The Court of Appeals’ action in apply-

ing the Texas Gas Market Demand Rule so as to

relieve Valero of its take-or-pay obligations and li-

ability under the contract is invalid, because the

Texas Gas Market Demand Rule as applied by the

Court of Appeals violates the Commerce Clause of

the United States Constitution.

[Germane to: Point of Error 24, Appellants’ Mo-

tion for Rehearing. |

FACT STATEMENT

This is a general fact statement germane to all points.

The contract in question (P. Ex. 1, S.F. 115) was

entered into in 1973 between Lively and Valero’s pre-

decessor, Lo-Vaca Gathering Company. It grants to

Valero the exclusive right and the obligation to purchase

all of Lively’s gas from the Contract Area for a period

of 20 years.

The contract provides that Valero will, for each

Contract Year, either (1) take delivery of and pay for

the Daily Contract Quantity of natural gas or (2) pay

for the Daily Contract Quantity of natural gas, whether

taken or not. The Daily Contract Quantity is defined as a

quantity of gas equai to ninety percent (90% ) of Lively’s

daily deliverability of gas averaged over the Contract

Year. The quantity of gas to be purchased by Valero

taken or not. The Daily Contract Quantity is defined as a

each Contract Year is determined by multiplying the

Daily Contract Quantity by the number of days during

the Contract Year during which Valero’s performance

was not excused by the contract.

Article V, € 5.3, of the contract provides in pertinent

part as follows:

Subject to the other provisions hereof, Buyer

agrees to purchase and pay for (or, if Buyer’s per-

formance hereunder is not excused by other provi-

sions of this Agreement, pay for, if available, whe-

ther taken or not) during the days of each contract

year of the term hereof a Daily Contract Quantity of

gas from Sellers’ Lands and Leases in the Contract

Area equal to ninety percent (90%) of Sellers’ daily

Deliverability of gas hereunder. Upon request by

Buyer or Seller, Sellers’ Deliverability shall be deter-

mined and established by Buyer by testing the actual

ability of Sellers’ wells to deliver into Buyer's facili-

ties at the points of delivery; provided, however,

neither Seller nor Buyer shall request such Deliver-

ability test more often than once in any ninety (90)

day period. Such Deliverability tests shall be made

after a stabilized rate of flow has been achieved

against such pressure as is required to deliver into

Buyer’s facilities at the operating pressure at the

points of delivery at the time of the test... .”

This provision in the contract is commonly known in

the oil and gas industry as a “take or pay” clause. Mr.

Lively testified that he would not have executed the con-

tract if this provision had not been included (S.F. 121).

2. Emphasis added throughout except where indicated otherwise.

The contract also contains a general definition of the

term “deliverability” which differs from the specific use

of that term in the take-or-pay provision quoted above.

Article I(j) of the contract defines the term “deliver-

ability” as:

[T]hat quantity of gas which Seller has available for

delivery from the Lands and Leases to Buyer during

each day, in conformity with the requirements of this

Agreement, at a constant rate of flow, when Seller’s

wells and facilities are not produced in excess of

their maximum efficient rate of flow, but not exceed-

ing the maximum (including overproduction) rate

of flow permitted by the laws, rules and regulations

of the Railroad Commission of Texas or other gov-

ernmental regulatory agency having jurisdiction.

Buyer agrees to make nominations, or to cooperate

with Seller in the making of nominations. for well

allowables (to be fixed or permitted by rules, regula-

tions or orders of the Texas Railroad Commission)

sufficient to cover the daily quantities which from

time to time Buyer is entitled and elects to take

hereunder up to the maximum quantity which in

accordance with good engineering and gas produc-

tion practice can be produced from Seller’s welis in

the fields.

Beginning with the 1982 Contract Year (June 1,

1982 - May 31, 1983), and continuing through the 1985

Contract Year, Valero failed to either take and pay or

simply pay for the minimum quantity of gas as required

by the contract.

calculated the amount due from Valero under the take-or-

pay provision to be $21,.264,689.30 (P. Ex. 51: S.F.

398).

Article VIII, € 8.2, provides:

If Buyer shall fail in any contract year of the

term hereof to take the quantity of gas that Buyer

is obligated to take hereunder, then Seller shall,

within sixty (60) days after such contract year

render a bill to Buyer based upon the weighted

average price, including tax reimbursement, in effect

hereunder during the contract year in which such

deficiency occurred, computed on the volumes de-

livered during the year and at the price, including

tax reimbursement, applicable to such volumes at

the time of delivery thereof. If Buyer agrees with

such statement, Buyer will make payment to Seller

for the amount of such statement within sixty (60)

days after receiving Seller’s statement. In computing

the amount due Seller for any deficiency in takes by

Buyer occurring during any contract year. there

shall be deducted from such deficiencies the follow-

ing quantities:

(a)_The total of the quantities which Buyer re-

quested, up to 111% of the Daily Contract Quantity,

and which Seller failed to deliver for any reason on

any day or days during such contract year; and,

(b) The total of the quantities of gas which Buyer

was unable to take or failed to take on any day

or days during such contract year by reason of force

majeure; and,

there was a deficiency in Seller’s allowable for the

wells covered hereby below the Daily Contract

Quantity on any day or days during such year, ex-

cluding any portion of such deficiency which is

caused by, or is a result of, Buyer’s failure to nomi-

nate to the Texas Railroad Commission to purchase

a quantity of gas equal to the Daily Contract

Quantity; and

(d) The total of the quantities of gas which

Buyer refuses to take on any day or days during

such year by reason of Seller’s failure to meet any

of the quality specifications or pressure requirements

provided hereunder.

In asserting that it had no liability to Lively under the

take-or-pay provision of the contract, Valero relied upon

evidence that it took the amount of gas under the con-

tract that it was authorized to take under the Gas Mar-

ket Demand Rule of the Railroad Commission of Texas

(S.F. 675-699, 1306-1377; D. Exs. 7, 78, 91; Tr. 45-50).

The amount of gas Valero took under its contract with

Lively was determined by Valero’s market demand for

gas as reflected in its monthly nominations for gas filed

by Valero with the Railroad Commission (D. Exs. 62-

62M).

The Trial Court submitted Lively’s take-or-pay claim

by way of two special issues to the jury. Special Issue

No. 2 inquired whether “Valero failed to take or pay

for an amount of gas equal to the Daily Contract Quan-

tity (DCQ)” (Tr.145). Special Issue No. 3, concerning

the amount of money that Valero owed to Lively for

its failure to take or pay under the contract, was con-

ditionally submitted by the Trial Court upon an affirma-

tive finding being made by the jury to Special Issue No.

2 (Tr. 147). Since the jury answered Special Issue No.

2 in the negative, it did not answer Special Issue No. 3.

On the basis of the jury’s answer to Special Issue No. 2,

the Trial Court entered judgment against Lively on its

take-or-pay claim. Other special issues were submitted to

the jury, and the part of the judgment incorporating the

jury’s findings on them was not appealed.

The Court of Appeals, in affirming the Trial Court’s

judgment, relied upon the general definition of “Deliver-

ability” contained in Article I(j) of the contract and

upon the government regulation clause in Article XIII,

€ 13.1, making the agreement “subject to all valid ap-

plicable federal and state laws . . . and to the orders,

rules and regulations of any federal or state regulatory

body or authority having jurisdiction.” (Court of Ap-

peals’ Opinion, pp. 3-4).

Plaintiffs’ Exhibits 38-41 vividly show how Valero has

manipulated its nominations of, and requests for, gas by

comparing the quantities requested by Valero with the

Daily Contract Quantities under the contract. During

the period June 1, 1982- May 31, 1986, the quantities

requested by Valero were progressively reduced. During

the 1985 Contract Year, the quantities requested by

Valero averaged less than 1000 Mcf per day for 4 months

and were virtually zero for 6 months, while the Daily

Contract Quantity for that same period was 7080 Mcf

per day.

SUMMARY OF ARGUMENT

This case should be reversed and judgment rendered

that Valero is liable to Lively for its failure to pay for

the Daily Contract Quantity under the contract for the

Contract Years 1982, 1983, 1984, and 1985, and the

case should be remanded for a new trial as to the amount

owed to Lively by Valero.

The Trial Court and the Court of Appeals erred in

failing to hold as a matter of law that Valero is not

relieved of liability under the take-or-pay provision of

the contract by the application of the Texas Gas Market

Demand Rule and in permitting the jury to pass upon

this legal question. In so doing, the Court of Appeals

ignored established rules of construction of contracts

and in effect read out of the contract the important

take-or-pay provision.

The courts below also erred in submitting, or approv-

ing the submission of, instructions to the jury in connec-

tion with Special Issue No. 2 which contained an im-

proper definition of “Deliverability” for use in deter-

mining take-or-pay liability and were improper comments

on the weight of the evidence which caused the rendition

of an improper judgment. Error was committed in sub-

mitting Special Issue No. 2, which was not the controlling

issue, and in conditionally submitting Special Issue No. 3,

the controlling issue. Further, there was no evidence to

support the jury’s finding on take-or-pay liability, since

the only evidence was legally incorrect.

The Court of Appeals’ application of the Gas Market

Demand Rule is invalid, because the Rule as applied

by the Court is pre-empted by the Natural Gas Policy

Act and violates the Commerce Clause of the United

States Constitution.

ARGUMENT AND AUTHORITIES

POINTS OF ERROR 1-4. IN SUMMARY: THE

COURT OF APPEALS ERRED IN HOLDING THAT

THE TEXAS GAS MARKET DEMAND RULE AP-

PLIED SO AS TO RELIEVE VALERO OF ANY

TAKE-OR-PAY LIABILITY UNDER THE CON-

TRACT.

The effect of the judgment and the Court of Appeals’

opinion is to hold that because of the Texas Gas Market

Demand Rule Valero has no liability to Lively under the

take-or-pay provision of the contract. This is contrary

to the clear and unambiguous provisions of the contract

and the applicable rules of construction and has the

effect of reading the take-or-pay provision out of the

contract.

This is the first time a Texas court has made such a

holding, and its ramifications are for reaching and will

have a severe, adverse effect on gas producers in this state.

Article V, € 5.3, of the contract contains the take-or-

pay provision relied upon by Lively in this case. Valero

seeks to avoid its obligations under that provision by

asserting that the Railroad Commission Gas Market De-

mand Rule abrogates the take-or-pay provision by limit-

ing Valero’s obligation to take gas to its market demand

and consequently relieves Valero of its obligation to pay

for the Daily Contract Quantity when not taken. It is

Petitioners’ position that as a matter of law the Gas

Market Demand Rule does not affect the rights and

obligations of the parties to this contract by relieving

Valero of its obligation to pay for the minimum quantity

of gas provided by the contract.

Take-or-pay provisions have been recognized as stand-

ard provisions in gas purchase agreements since the early

1950’s. 4 H. WILLIAMS & C. Meyers, O1L & Gas Law

§ 724.5 (1983). Courts have consistently held that such

provisions are common in the industry and are not

unconscionable or unfair. Universal Resources Corp. v.

Panhandle Eastern Pipeline Co., 813 F.2d 77 (Sth Cir.

1987). The purpose of such clauses is to apportion the

risks of natural gas production and sales between the

seller and buyer. “The seller bears the risk of production.

To compensate seller for that risk, buyer agrees to take,

or pay for if not taken, a minimum quantity of gas.”

Universal Resources, 813 F.2d at 80.

The Gas Market Demand Rule clearly does not relieve

Valero of its alternative obligation to pay for the Daily

Contract Quantity of gas as required by the take-or-pay

provision of the contract. That rule and the associated

ratable-take requirements relate to the production and

taking of gas to prevent waste and protect correlative

rights. They do not regulate the payment for as not

taken under take-or-pay provisions of natural gas con-

tracts. Resources Investment Corp. v. Enron Corp., 669

F.Supp. 1038 (D. Colo. 1987). No Texas statute or

Railroad Commission regulation, either expressly or by

implication, prohibits or excuses a purchaser from paying

for the quantity of gas for which that purchaser has

contractually obligated itself to pay. Valero itself recog-

nizes that there is nothing in the Gas Market Demand

Rule that prevents Valero from paying for a deficiency

when it exists by operation of the take-or-pay provision

(S.F. 840).

The Railroad Commission and the courts have recog-

nized that contractural obligations to pay for gas not

taken are not superseded by the Gas Market Demand

Rule. ;

An attempt by the Railroad Commission to declare

by regulation that the Gas Market Demand Rule relieved

purchasers of contractual take-or-pay obligations was held

invalid almost immediately after its adoption. On Febru-

ary 22, 1977, the Railroad Commission issued an in-

terpretive order relating to the Gas Market Demand Rule,

in which the Commission attempted to declare that take-

Or-pay provisions were invalid to the extent they contra-

vened the provisions of that order. What has become

known as the “penultimate paragraph” read as follows:

IT IS FURTHER ORDERED that the provisions

of any and all purchase or other agreements between

producers and gas purchasers which contravene or

are inconsistent with the provisions of this Order

and [sic] are rendered inoperative, including, without

limitation, provisions relative to (1) gas purchasers

nominating to take gas in certain amounts or at

certain levels, (2) producers asserting penalties,

damages or other remedies against gas purchasers

in the event of reductions in or cancellation of

allowables and (3) obligations requiring gas pur-

chasers to take, or pay for it not taken, quantities

greater than allowables set by this Commission.

Railroad Commission Gas Well Allowable Order, 2 TEx.

Rec. 785, 788 (1977).

Three lawsuits were filed in the Travis County district

courts challenging the validity of that order. In one of

those cases, Dallas Production Co. v. Railroad Commis-

sion, No. 260,641 (Dist. Ct. of Travis County, 53rd

Judicial District of Texas, June 10, 1977), the plaintiff

asserted that the above-quoted paragraph was invalid

because the Railroad Commission had exceeded its statu-

tory authority by attempting to regulate take-or-pay

contracts.* The Court held that the order was unlawful,

invalid, and of no force and effect, stating:

The Court further finds that the above quoted pen-

ultimate paragraph herein declared invalid does not

affect the rights, duties or obligations of Brazos

3. Appendix at Al-A2.

Electric Power Cooperative, Inc. and Brazos Fuel

Company, Inc., Intervenors, and Plaintiff producers

under the take or pay provisions of their gas pur-

chase agreements.

The Railroad Commission did not appeal this judgment

and subsequently repromulgated the order without the

invalid paragraph, and it became regularly adopted as

what is commonly referred to as the Gas Market Demand

Rule. 3 Tex. Rec. 324 (1978). That rule, with minor

revisions, was in effect during the 1982-1986 period

covered by this litigation.

From the history surrounding its adoption, it is plain

that the Gas Market Demand Rule does not and cannot

have the effect of overriding take-or-pay provisions in

gas purchase agreements between producers and _ pur-

chasers and does not provide a defense for the breach

of those contractual obligations. This is clear from the

Travis County district court's holding that the portion

of the interpretive order which stated that the rule

superseded private contractual provisions was invalid and

the Railroad Commission’s subsequent omission of the

offending language in the replacement interpretive order.

In adopting the current Gas Market Demand Rule,

Rules 30 and 34 (sections 3.30 and 3.34), the Railroad

Commission again stated that such regulations were not

intended to modify existing private contractual relation-

ships. In the preamble to those rules, the Railroad Com-

mission carefully describes the scope of those rules:

Sections 3.30 and 3.34 are not intended to be a

comprehensive statement of rights or obligations

under the Common Purchaser Act, nor are they

intended to preclude any complaints which may

arise under that Act. These amendments shail not

affect existing contractual rights and obligations be-

tween parties. 12 TEx. REG. 536 (1987).

The above history of the Gas Market Demand Rule

is discussed in Valero Transmission Co. v. Mitchell

Energy Co., 743 S.W.2d 658 (Tex. App.—Houston

[ Ist Dist.] 1987), where the Court held that the Railroad

Commission’s prorationing and ratable take system does

not interfere with the terms of gas purchase contracts.

The Court there held:

Although the Texas Railroad Commission is given

general statutory authority to regulate the produc-

tion of gas, the Commission does not have authority

to hear contract disputes or to abrogate the parties’

respective rights under the gas purchase contract.

See Railroad Comm'n vy. City of Austin, 524 S.W.

2d 262 (Tex. 1975): see also Humble Oil & Re-

fining Co. v. Railroad Comm'n, 133 Tex. 330, 128

S.W.2d 9 (1939); Railroad Comm'n v. United Gas

Pipe Line Co., 358 S.W.2d 907 (Tex. Civ. App.—

Austin 1962, writ ref'd n.r.e.); A. Anderson, The

Texas Approach to Gas Proration and Ratable Take,

57 U. Colo. L. Rev. 199, 220-21 (1986). Indeed,

the Texas Railroad Commission, in adopting 16 Tex.

Admin. Code secs. 3.30, 3.34 (1987), has itself

expressly acknowledged that these rules “shall not

affect existing contractual rights and obligations be-

tween parties.” 12 Tex. Rec. 536 (February 17,

1987).

Id. at 660.

The Court stated further:

[A]s discussed above, the Railroad Commission has

no authority to abrogate contract rights. Nor do the

Railroad Commission rules purport to affect contract

rights. 12 Tex. Rec. 536. A previous attempt to

preempt contractual provisions that were inconsistent

with a Railroad Commission interpretive order was

struck down by the District Court of Travis County

on a complaint that the Commission had exceeded

its authority. See Dallas Production Co. v. Railroad

Comm'n, No. 261.641 (Travis Cty. Dist. Ct., June

10, 1977).

Id. at 661-662.

Prior to the opinion of the Court of Appeals in this

case, all Texas courts passing on the question rejected a

Gas Market Demand Rule defense to a take-or-pay claim.

In Phillips v. Delhi Gas Pipeline Corp., No. 83-141 (Dist.

Ct. of Houston County, 3rd Judicial District of Texas,

Oct. 21, 1986),’ the defendants raised the Gas Market

Demand Rule as a defense to the plaintiffs’ take-or-pay

claim. The Court, in granting partial summary judgment,

stated that “Defendants are liable for failing to take

delivery from or pay Plaintiffs for the Daily Contract

Volume of natural gas during each of the Annual Periods”

and that the Gas Market Demand Rule and other de-

fenses asserted by the pipeline “are not legally sufficient

defenses to Plaintiffs’ claims.” See also El Paso Natural

Gas Co. v. G.H.R. Energy Corp., No. 85-09329 (Dist.

Ct. of Harris County, 127th Judicial Dist. of Texas, Oct.

10, 1986).° where the Court, in granting the producers’

motion for partial summary judgment, held that, “as a

matter of law, the take-or-pay provision . . . is enforceable

and performance is not excused on any basis, . . . in-

cluding regulation by federal or state governmental au-

thority... .”

4. Appendix at A3.

5. Appendix at A4.

The United States District Court, Southern District of

Texas, Houston Division, in McGoldrick Oil Company,

et al. v. United Gas Pipe Line Company, Civil Action

No. H-84-4971, hereinafter discussed, infra p. 46, also

struck down a deiense by the pipeline company based

upon the Gas Market Demand Rule.

In Resources Investment Corp. v. Enron Corp., 66°

F.Supp. 1038 (D. Colo. 1987), the court heid that the

enforcement of a take-or-pay clause did not violate the

Texas Gas Market Demand Rule. In striking and dismiss-

ing a counterclaim and defense based on the conservation

statutes, specifically including the Texas rule, the Court

pointed out that the statute was inapplicable because the

take-or-pay provisions of the gas purchase contracts did

not require production, but, rather, provided for payment

in lieu of production. 669 F.Supp. at 1041.

The Court of Appeals upheld Valero’s assertion that

as a result of the application of the Gas Market Demand

Rule to this contract Valero has no contractual take-or-

pay obligation. Under Valero’s theory, the Gas Market

Demand Rule requires Valero to limit its purchases of

gas from any producer to that producer’s proportionate

share of the downstream market demand. In essence,

Valero argues that deliverability under the contract is

determined by Valero’s market demand. Under Valero’s

contention, Valero’s takes will always equal deliverability,

and there can never be a deficiency under the take-or-pay

provision of the contract requiring Valero to pay for gas

not taken.

The Court of Appeals adopted a construction of the

contract in the light of a rule that was adopted by the

Railroad Commission several years after the contract

———

was entered into. The Court based its action in part upon a

general government regulation clause. (Article XIII,

¢ 13.1) that appears in every natural gas contract. The

Court’s holding in that respect would eliminate “take-or-

pay” liability under all natural gas contracts. The Court’s

opinion renders meaningless and gives no effect to the

“take-or-pay” provision of the contract. It places a legal

stamp of approval on Valero’s manipulation of its nomi-

nations and takes of gas under the contract in a manner

that was clearly never intended by the parties and com-

pletely relieves Valero of any liability under the “take-or-

pay provision of the contract.

The Court of Appeals’ holding not only is contrary

to the clear and unambiguous language of the “take-or-

pay” provision of the contract but also is a direct contra-

diction of the history of the Texas Gas Market Demand

Rule and the Railroad Commission’s stated intent that

the Gas Market Demand Rule “shall not affect existing

contractual rights and obligations between parties.” 12

TEx. Rec. 536 (1987). Further, the Court’s action

nullifies a provision that has been recognized as a stand-

ard provision in gas contracts for over thirty years and

has been upheld by the courts consistently as being con-

scionable and fair and as properly apportioning the risks

between the buyer and seller of gas.

Valero’s contention and the Court of Appeals’ opinion

fail to recognize the purpose and effect of the alternative

performance obligations under the take-or-pay provision

of the contract. The courts have recognized that the take-

or-pay clause is an alternative performance provision.

International Minerals & Chemical Corp. v. Llano, Inc.,

770 F.2d 879 (10th Cir. 1985); Superior Oil Co. v.

Transco Energy Co., No. 84-2138-"L” (W.D. La. 1985).°

Valero can perform by either (1) taking and paying for

the specified minimum quantity of gas for the Contract

Year or (2) paying for that minimum quantity of gas

even though not taken during the Contract Year.

In /nternational Minerals, the defendant International

Minerals (“IMC”) was the operator of a potash mine and

processing facility in New Mexico. In 1972, IMC entered

into a contract with plaintiff to purchase gas needed to

run some of its equipment. In 1978, the New Mexico

Environmental Improvement Board enacted Regulation

508, which limited emissions from potash processing

equipment. In employing new technology necessary to

comply with the regulation, IMC did not take or pay

fer the minimum quantity of gas as required under the

contract. IMC alleged that the enactment of Regulation

508 was an event of force majeure and relieved it of any

performance obligations under the gas purchase contract.

The court rejected that position, stating:

[E]ven if we assume arguendo that Rule 508 pre-

vented IMC from taking the gas, Rule 508 would

still pose no obstacle to IMC’s ability to pay. Since

this is a “take-or-pay” contract the buyer can perform

in either of two ways. It can either (1) take the mini-

mum purchase obligation of natural gas (and pay)

or (2) pay the minimum bill. It is settled law that

when a promisor can perform a contract in either

of two alternative ways, the impracticability of one

alternative does not excuse the promisor if perform-

ance by means of the other alternative is still prac-

ticable. (Citations omitted) Paragraph 15 [the force

majeure clause] does not compel a different result;

6. Appendix at AS.

it would at most excuse IMC from its duty to “take,”

not from its duty to “pay.”

770 F.2d at 885.

In Kaiser-Francis Oil Co. v. Producer’s Gas Co., No.

83-C-400-B (N.D. Okla. June 19, 1985),' and Southport

Exploration Inc. v. Producer’s Gas Co., No. 83-C-550-B

(N.D. Okla. June 6, 1984),° the courts addressed the

argument that a pipeline company had no obligation to

make take-or-pay payments because production of the

gas not taken would have exceeded the market demand

for the gas and thus would have constituted waste under

the Oklahoma conservation statutes. The court in Kaiser-

Francis, recognizing the alternative performance obliga-

tions of a take-or-pay provision, specifically held that

take-or-pay provisions are enforceable under the state

market demand rule and statutes intended to prevent

waste since “the take-or-pay provisions of the contract

do not require production, but rather provide for payment

in lieu of production.” In rejecting the pipeline com-

pany'’s argument, the Court stated that “such an interpre-

tation would render the take-or-pay provisions of the

contracts virtually useless.”*®

”9

The definition of “waste” is virtually the same in the

Texas and Oklahoma conservation statutes. Section

86.012 of the TEXAS NATURAL RESOURCES CODE defines

the term waste to include “the production of gas in ex-

cess of transportation or market facilities or reasonable

7. Appendix at A36.

8. Appendix at A47.

9. Appendix at A46.

10. Appendix at A42.

market demand for the type of gas produced.” Section

86.3 of 52 OKLAHOMA STATUTES ANNOTATED provides

“the term ‘waste’, as applied to gas, in addition to its

ordinary meaning, shall include . . . waste incident to the

production of natural gas in excess of transportation and

marketing facilities or reasonable market demands.”

The Oklahoma Supreme Court has recently written on

this same issue in Golsen v. ONG Western, Inc., ——

P.2d____ (Okla. 1988) (not yet reported)."* In reversing

the trial court’s finding based on the application of those

same conservation statutes, the Court stated:

The trial court held also that production in excess

of market demand was waste under. the definition of

that term in 52 O.S. 1981 § 86.3, and that the

statutory prohibition against production of gas so

to constitute waste contained in that statute com-

bine to prohibit plaintiffs’ tender of any more gas

than was actually taken. Section 86.3 provides the

term waste shall include waste incident to the pro-

duction of natural gas in excess of transportation

and marketing facilities or reasonable market de-

mand. Here the statute again focuses on production.

The statute is not directed to payment for gas not

taken, but to waste incident to production in excess

of reasonable market demand. In this situation the

plaintiff-producer has a market for his gas and is,

indeed, seeking to enforce that market through the

courts. The producer’s contract is proof that he has

a market and it is that market he is trying to enforce

here.*”

Alternative performance obligations have consistently

been upheld by Texas courts. Moss & Raley v. Wren, 102

11. Appendix at A60.

12. Appendix at A71.

Tex. 567, 120 S.W. 847 (1909); Kirkland v. Gaston, 544

S.W.2d 694 (Tex. Civ. App.—Dallas 1976, no writ);

Carter v. Smith, 184 S.W. 244 (Tex. Civ. App.—Dallas

1916, no writ). Where a contract provides for alternative

performance obligations, the fact that one alternative is

prevented does not relieve the party from performing the

second alternative. Yankton Sioux Tribe of Indians v.

United States, 272 U.S. 351 (1926); Ashland Oil &

Refining Co. v. Cities Service Gas Co., 462 F.2d 204

(10th Cir. 1972); S. WiILLIsToN, Contracts § 1961

(1971 and 1984 Supp.).

Valero’s position and the Court of Appeals’ opinion

render meaningless not only to the take-or-pay provision

in Article V, € 5.3, but also Article VIII, € 8.2. That

paragraph sets forth the method of “computing the

amount due Seller for any deficiency in takes by Buyer

occurring during any contract year.” Paragraph 8.2(c)

specifically provides that in computing the deficiency in

takes by Buyer during the Contract Year, the Buyer is

not entitled to any credit for any deficiency which is

“caused by, or is a result of Buyer's failure to nominate

to the Texas Ra:!road Commission to purchase a quantity

of gas equal to the Daily Contract Quantity.” The in-

terpretation of the contract advanced by Valero would

always equate Daily Contract Quantity with Valero’s

nominations, and there can never be any deficiency. If

that interpretation is correct, the language in € 8.2(c)

is superfluous.

If the Gas Market Demand Rule has the effect given

it by Valero and the court below, the take-or-pay pro-

vision of the contract becomes meaningless. If the original

parties to the contract intended that there could never

be any take-or-pay liability, then why did they include a

take-or-pay provision in the contract and why was that

a requirement of the contract insofar as Lively was con-

cerned?

It is well recognized that parties to an instrument in-

tend every clause to have some effect and purpose and

in some measure to evidence their agreement, and this

purpose should not be thwarted. Woods v. Sims, 154

‘Tex. 59, 273 S.W.2d 617, 620 (1954); Pinehurst v.

Spooner Addition Water Co., 432 S.W.2d 515 (Tex.

1968); RESTATEMENT OF THE LAW OF CONTRACTS § 230

(1932). Thus, Texas case law makes it clear that a con-

tract should be construed in a manner which gives effect

to all of its provisions. Coker v. Coker, 650 S.W.2d 391

(Tex. 1983); Universal C.I.T. Credit Corp. v. Daniel,

150 Tex. 513, 243 S.W.2d 154 (1951); Sus Oil Co. v.

Burns, 125 Tex. 549, 84 S.W.2d 442 (1935); Williams

v. J & C Royalty Co., 254 S.W.2d 178 (Tex. Civ. App.

—San Antonio 1952, writ ref'd). Accordingly, courts

should avoid the adoption of a construction which would

render any provision meaningless. Mattison, Inc. v. W. F.

Larson, Inc., 529 S.W.2d 271 (Tex. Civ. App.—Ama-

tillo 1975, writ ref'd n.r.e.). A court has no right to

nullify any terms of an agreement. Williams v. J & C

Royalty Co., supra. Courts are instructed to adopt a

consiruction of a contract which gives effect to all of

its provisions and avoid the adoption of a construction

that would render any provision meaningless. R & P

Enterprises v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.

2d 517 (Tex. 1980). Observance of the above rules

in this case requires rejection of the interpretation placed

on the contract by Valero and the Court of Appeals.

ace

SES

The take-or-pay provision in Article V, € 5.3, is com-

plete and sufficient in itself in defining the obligations of

Valero with respect to the minimum quantity of gas to

be taken or paid for under the contract. The provision

contains its own definition of “Seller’s Deliverability,”

which is to be used “hereunder.” The specific language

included in the take-or-pay provision cannot be and is

not changed by the general definition of “Deliverability”

contained in Article I(j). Under the take-or-pay pro-

vision, the Daily Contract Quantity to be paid for if not

taken is 90% of ‘Sellers’ daily Deliverability of gas here-

under,” which “shall be determined and established by

Buyer by testing the actual ability of Sellers’ wells to de-

liver into Buyer's facilities at the points of delivery.”

“If an instrument contains clauses apparently in con-

flict, they should be reconciled, if it can be done by a

reasonable interpretation; that is, ‘such a construction as

will make the agreement fair, customary, and such as

prudent businessmen would naturally execute.’” Stone

v. Robinson, 180 S.W. 135, 136 (Tex. Civ. App.—

Amarillo 1915, writ ref'd). In this instance, the fair and

reasonable interpretation, the construction which would

make the agreement one which would be executed by a

prudent businessman, is the interpretation which gives

effect to the take-or-pay provision. Mr. Lively himself

testified that he would not have executed the contract if

the take-or-pay provision had not been included therein

(S.F. 121).

In Golsen v. ONG Western, Inc., supra p. 23, the

Court found that the defendant purchaser’s defense of

force majeure on the basis of the inclusion of the phrase

“failure of gas supply or markets” in the force majeure

clause of the contract “frustrated the basic premises of the

contract.” In discussing this issue, the Court stated:

Insofar as the trial court held that the term “failure

of markets” in this contract refers to a decline in

demand of the product, the trial court also erred.

t2 O.S. 1981 § 157 provides that the whole of a

contract is to be construed together if reasonably

practicable so that each clause is an aid to. inter-

preting the others. Additionally, contracts should be

construed so that any repugnancy in a contract is

reconciled if possible, by such an interpretation as

will give some effect to the repugnant clause which

is subordinate to the general intent and purposes

of the whole contract. 12 O.S. 1981 § 168. This

gas sales contract consists of approximately thirty

pages. Throughout the document the general pur-

pose or intent is to arrange the purchase and sale

of gas. These provisions give the defendant an ex-

clusive right to take plaintiffs’ gas for a term of

years at a set price. The defendant acquires a

contractually-assured supply while the plaintiffs are

assured a market; both parties doing so at a price

which is an agreed part of the bargain. Secondly,

the plaintiffs relinquish their right to sell gas to third

parties and the plainuffs in return are paid for a

minimum annual quantity of gas whether or not

taken in that year. The parties are assuring them-

selves of the ability to purchase and sell for a term

of years.

The force majeure clause as interpreted by the

defendant is repugnant to this general purpose. De-

fendant urges that the inclusion in the force majeure

clause of the phrase “failure of gas supply of mar-

kets” should be read with the language in the first

line of the clause “in whole or in part” so that the

language would relieve it of the obligation to take

100

at ali, or to pay if not taken, where there is a de-

cline in demand. Such an interpretation frustrates

the basic premises of the contract virtually entirely.

It would eliminate the requirement to pay for gas

not taken as a practical matter, for any contract

amount not taken would be the result of a partial

failure of demand.**

The real issue in this lawsuit is what does the take-or-

pay provision of the contract require of Valero. A fair

and reasonable reading of that provision is that Valero

is obligated to take or pay for 90% of Lively’s daily

deliverability as determined by actual testing of the wells.

This interpretation does not violate any of the other pro-

visions of the contract, gives real meaning to the take-or-

pay provision, and carries out the original parties’ in-

tention. The construction sought by Valero and adopted

by the Court of Appeals does not do justice to the

contract or the parties, as it completely ignores the intent

of the parties in including a take-or-pay provision in the

contract.

If the take-or-pay provision in the contract is to have

meaning, Valero must be prohibited from using its nomi-

nations to the Railroad Commission as a means of ma-

nipulating its take-or-pay liability. To hold otherwise

defeats the clear intent of the original parties to the

contract.

For the above reasons, the Court of Appeals erred as

a matter of law in sustaining Valero’s position and affirm-

ing the Trial Court’s judgment.

13. Appendix at A66-A67.

101

POINTS OF ERROR 5-6. IN SUMMARY: THE

COURT OF APPEALS ERRED IN HOLDING THAT

THE TRIAL COURT PROPERLY SUBMITTED

SPECIAL ISSUE NO. 2 AND INSTRUCTION NO. 2

CONTAINING THE DEFINITION OF “DELIVER-

ABILITY” FROM ARTICLE I(J) OF THE CON-

TRACT AND THAT LIVELY WAIVED THEIR OB-

JECTION THERETO.

The Trial Court in the instructions to Special Issue

No. 2 defined the term “Deliverability” as set forth in

Article I(j) instead of as set forth in Article V, € 5.3,

which is the take-or-pay provision of the contract. Under

the contract, Valero’s take-or-pay liability is determined

by comparing actual purchases of gas to “ninety percent

(90% ) of Seller’s daily Deliverability of gas hereunder.”

The contract expressly sets forth how “Deliverability” is

to be determined for take-or-pay purposes in Article V,

€ 5.3, wherein it is stated:

Upon request by Buyer or Seller, Seller's Deliver-

ability shall be determined and established by Buyer

by testing the actual ability of Seller's wells to deliver

into Buyer's facilities at the points of delivery: pro-

vided, however, neither Seller nor Buyer shall request

such Deliverability test more often than once in any

ninety (90) day period. Such Deliverability tests

shall be made after a stabilized rate of flow has been

achieved against such pressure as is required to

deliver into Buyer’s facilities at the operating pres-

sure at the points of delivery at the time of the test.

The evidence at trial established that Lively tested the

actual ability of its wells to deliver into Valero’s facilities

and that the results of the tests were found in Lively’s

Form G-10 filings with the Railroad Commission (S.F.

227-231). The Trial Court admitted Lively’s Form G-10’s

—_

102

into evidence (P. Ex. 13; S.F. 243). Lively calculated

its take-or-pay damages based on the actual ability of

the wells to deliver (P. Exs. 42, 49-51: S.F. 370, 442),

inconformity with the express language of the take-or-pay

The Trial Court, however, used the wrong definition

of “Deliverability” in its instructions. The Court did not

instruct the jury that “Deliverability” for take-or-pay pur-

poses means the actual ability of the wells to deliver into

Valero’s facilities, but instead gave the following instruc-

tion in connection with Special Issue 2:

Lively’s daily ‘Deliverability’ is defined by the Con-

tract to be that quantity of gas which Lively had

available for delivery from the Lands and Leases to

Valero during each day in conformity with the re-

quirements of the Contract, at a constant rate of

flow, when Lively’s wells were not produced in

excess of their maximum efficient rate of flow, but

not in excess of the maximum (including over-

production) rate of flow permitted by the laws,

rules and regulations of the Railroad Commission

of Texas or other governmental regulatory agency

having jurisdiction (Tr. 145).

Lively made extensive objections to Special Issue No. 2

and Instruction No. 2 in the trial court. Those objections

were: (1) the issue should not be submitted because it

was not a controlling issue and its submission deprived

plaintiff of the unconditional submission of the control-

ling Special Issue No. 3; (2) the inclusion of the language

was an error because there had been no evidence pre-

sented to warrant its submission, and it could serve only

to mislead and confuse the jury by leading the jury to

103

believe that it relates to Valero’s minimum take under the

contract and possibly lead to an erroneous verdict on

Special Issue No. 2 and possibly also on Special Issue

No. 3; (3) the part of the instruction pertaining to waste

was error because there was no evidence to warrant the

submission of these instructions pertaining to waste and

they could only mislead and confuse the jury and possibly

result in an erroneous verdict; (4) these instructions

were meaningless abstract statements of the law without

reference to or connection with any evidence or issue in

this case; (5) the instruction with respect to Valero’s

obligation under the Gas Market Demand Rule was an

error because there was no evidence in the trial of the

case that the Gas Market Demand Rule has affected

any issue being presented to the jury for determination;

(6) the Gas Market Demand Rule should have no bear-

ing on the determination of the issue the jury was being

asked to answer, and its inclusion in any form in the

instruction could serve only to mislead and confuse the

jury and possibly result in an erroneous verdict; (7) the

instructions concerning the Gas Market Demand Rule

are meaningless abstract statements of law without any

reference to or connection with any issue in this case;

and (8) there was no evidence that compliance with

the Gas Market Demand Rule in any way affected

Valero’s ability to perform its obligations under the con-

tract and particularly its pay obligation under the “take-

or-pay” clause (S.F. 1675-1681).

Just as the Court of Appeals felt it was necessary to

look at the entire Instruction No. 2 to determine whether

it or any part thereof had an adverse effect on the jury,

Lively’s entire objections to Special Issue No. 2 and

Instruction No. 2 should be considered to determine

104

their sufficiency on the question of waiver. Petitioners

respectfully submit that when viewed in their entirety

the extensive objections were sufficient and that there

was no waiver that would preclude the consideration by

the Court of Appeals or this Court of these points of error.

The Trial Court's error in submitting the wrong defi-

nition of “Deliverability” in its instructions to Special

Issue 2 is shown by a comparison of the contract's use

of the term in the definitions section of the contract

(Article I(j)) and in the take-or-pay clause (Article V,

€ 5.3):

Article 1(j)

(j) The term “Deliver-

ability” means that quan-

tity of gas which Seller

has available for delivery

from the Lands and

Leases to Buyer during

each day, in conformity

with the requirements of

this Agreement, at a con-

stant rate of flow, when

Seller’s wells and facili-

ties are not produced in

excess of their maximum

efficient rate of flow, but

not exceeding the maxi-

mum (including over-

production) rate of flow

permitted by the laws,

rules and regulations of

the Railroad Commission

of Texas or other govern-

mental regulatory agency

having jurisdiction.

Article V,¢ 5.3

Upon request by Buyer or

Seller, Seller's Deliverability

shall be determined and es-

tablished by Buyer by test-

ing the actual ability of

Seller's wells to deliver into

Buyer's facilities at the

points of delivery; provided,

however, neither Seller nor

Buyer shall request such

deliverability tests more of-

ten than once in any ninety

(90) day period. Such de-

liverability tests shall be

made after a stabilized rate

of flow has been achieved

against such pressure as is

required to deliver into

Buyer's facilities at the

operating pressure at the

points of delivery at the

time of the test... .

105

To be proper, an explanatory instruction or definition

must be correct. Sanders v. Davila, 593 S.W.2d 127

(Tex. Civ. App.—Amarillo 1979, writ refd n.r.e.).

An explanatory instruction is improper if it is a mis-

statement of the law as applicable to the facts. Wake-

field v. Bevly, 704 S.W.2d 339 (Tex. App.—Corpus

Christi 1985, no writ). An erroneous definition given

by the court may amount to prejudicial error requiring

reversal. Gage v. Langford, 582 S$.W.2d 203 (Tex. Civ.

App.—Eastland 1979, writ ref'd n.r.e.). Furthermore,

an instruction which shifts to the jury the determination

of a legal issue that should have been determined by the

Trial Court involves the submission to the jury of a

question of law, which is improper and requires reversal.

Foerster v. Peoples, 362 S.W.2d 918 (Tex. Civ. App.—

Amarillo 1962, no writ); Barton v. Davis, 441 S.W.2d

299, 301 (Tex. Civ. App.—El Paso, writ ref’d n.r.e.);

Emmord's Inc. v. Obermiller, 526 S.W.2d 562, 566

(Tex. Civ. App.—Corpus Christi 1975, writ ref‘d n.r.e.).

The definition submitted by the Trial Court required

the jury to determine the legal issue of whether the Gas

Market Demand Rule, a regulation by an administrative

agency, modifies existing contractual relationships between

private parties. As heretofore discussed, supra pp. 14-18,

as a matter of law the Gas Market Demand Rule does not

affect private contract rights.

Contrary to the Court of Appeals’ statement, Lively

did not concede “that the evidence of the Gas Market

Demand Rule supports the jury finding in Special Issue

No. 2.” (Court of Appeals’ Opinion, p. 13). Instead,

it was and is Lively’s position that there was no evidence

to support that finding and that the Gas Market Demand

106

Rule has no legal effect upon Valero’s obligation to pay

Lively for the minimum quantity it was obligated to take

or pay for under the contract. This is an alternative

obligation which is not affected or excused by the Gas

Market Demand Rule.

The Trial Court’s erroneous definition of the term

“Deliverability” in the instructions to Special Issue No. 2

was reasonably calculated to cause and did cause the

rendition of an improper judgment, and the Trial Court’s

judgment should be set aside.

POINT OF ERROR 7: THE COURT OF APPEALS

ERRED IN HOLDING THAT THE INSTRUCTIONS

TO SPECIAL ISSUE NO. 2 WERE RELEVANT,

WERE NOT A COMMENT ON THE WEIGHT OF

THE EVIDENCE, AND DID NOT CAUSE THE REN-

DITION OF AN IMPROPER JUDGMENT.

The Trial Court’s submission of Special Issue No. 2

and Instruction No. 2 tainted the entire submission to

the jury. The erroneous and superfluous instructions to

the jury concerning the Gas Market Demand Rule, waste,

ratable take, maximum rate of flow permitted by the

Railroad Commission, and information to be supplied the

Railroad Commission (1) confused and misled the jury

by causing them to believe that because of the Gas Market

Demand Rule there could be no liability of Valero to

Lively under the contract; (2) constituted an impermis-

sible comment that tilted or nudged the jury in favor

of Valero; and (3) improperly shifted to the jury the

determination of a question of law as to the applicability

and effect, if any, of the Gas Market Demand Rule on

the “take-or-pay” obligation of Valero under the contract.

107

The Trial Court’s instructions given with respect to

Special Issue No. 2 were prejudicial comments on the

weight of the evidence. In Instruction No. 2, the Court

stated, in part:

The term market demand means that amount of

gas needed for current consumption.

You are instructed that the production, transporta-

tion, or use of gas in a manner, in an amount, or

under conditions which constitute waste is unlawful

and is prohibited.

You are instructed that the term “waste” includes

the production of gas in excess of transportation or

market facilities or reasonable market demand for

the type of gas produced (Tr. 146).

These instructions by the Trial Court constituted an

impermissible comment that tilted or nudged the jury in

favor of Valero, in violation of this Court’s holding in

Lemos v. Montez, 680 S.W.2d 798, 801 Tex. 1984).

There, this Court held that even legally correct instruc-

tions are not proper when they direct the jury towards a

particular answer to a special issue. /d.

Here, even if the Trial Court’s definition of the term

“waste” is accurate, it was irrelevant. There was no need

for the Court to instruct the jury on “waste.” Valero

had the option of fulfilling its obligations under the con-

tract by either taking and paying for the Daily Contract

Quantity or by merely paying for that gas. The contract

neither obligates Lively to produce, nor Valero to pur-

chase, gas wastefully. Instead, the contract specifically

provides for payment in lieu of production. There are no

conservation statutes prohibiting Valero from paying even

when it cannot take gas.

108

The Trial Court further commented improperly on the

weight of the evidence by i

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