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

Supreme Court brief1990

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NO. 89-935 / | ee ce

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OCTOBER TERM, 1989

LIVELY EXPLORATION COMPANY, ET AL.,

Appellants

Vs.

VALERO TRANSMISSION COMPANY,

Appellee

FROM NO. 04-87-00380-CV

IN THE COURT OF APPEALS FOR THE

FOURTH SUPREME JUDICIAL DISTRICT OF TEXAS

AT SAN ANTONIO, BEXAR COUNTY, TEXAS

ite

Be _ APPENDIX TO MOTION TO DISMISS APPEAL

Sree AND, ALTERNATIVELY, TO

J. CLIFFORD GUNTER III

BRACEWELL & PATTERSON

__ 2900 South Tower Pennzoil Place

ee ae Texas 77002

(713) 223-2900

ae: Counsel for Appellee

77063 — 789-2000

APPENDIX INDEX

Lively’s Brief in the Court of Appeals

Valero’s Brief in the Court of Appeals

Valero’s Response in Opposition to Appellants’

Motion for Rehearing in the Court of Appeals

Valero’s Reply to Lively’s Application for Writ

of Error in the Supreme Court of Texas

Brief of Amicii Curiae in Support of Appellants’

Response Point One in the Court of Appeals

Page

147

ON oe ae ee oe ee

i} . a a ove

APPEAL NO. 04-87-00380-CV

Court of Appeals

FOR THE

FOURTH SUPREME JUDICIAL DISTRICT OF TEXAS

SAN ANTONIO, TEXAS

LIVELY EXPLORATION COMPANY, ET AL.,

Appellants,

Vv.

VALERO TRANSMISSION COMPANY,

Appellee.

Appeal from the District Court of

Sutton County, Texas, 112th Judicial District

BRIEF FOR APPELLANTS

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

August 26, 1987

w Brief Co., Inc. — 8748 Westpark — Houston, Texas 77063 — 789-2000

a bs - a

COMPLETE LIST OF THE PARTIES

Pursuant to Rule 74(a) of the Texas Rules of Appel-

late Procedure, a complete list of the names of all parties

follows:

Appellants:

Appellee:

Lively Exploration Company, Lea Roy Ald-

well, Individuatly, 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 Farrell,

Elizabeth Standish, The Desana Corpora-

tion, 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, Kall-

man Nashner, Frank Pace, Jr., Martin B.

_Seretean, Ray B. Vaughters and Theodore

L. Wilkinson.

Valero Transmission Company.

APPEAL NO. 04-87-00380-CV

IN THE

Court of Appeals

FOR THE

FOURTH SUPREME JUDICIAL DISTRICT OF TEXAS

SAN ANTONIO, TLXAS

LIVELY EXPLORATION COMPANY, ET AL.,

Appellants,

VALERO TRANSMISSION COMPANY,

Appeilee.

Appeal from the District Court of

Sutton County, Texas, 112th Judicial District

BRIEF FOR APPELLANTS

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, Frat:

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

Theodore L. Wilkinson (collectively referred to as

“Lively” or “Appellants”) file this Brief for Appellants

with the Court of Appeals.

PRELIMINARY STATEMENT

This is an appeal of part of a final judgment following

a jury trial (Tr. 188). The judgment arose from a suit

filed by Lively against Valéro Transmission Company

(“Valero”) for breach of a gas purchase contract (Tr.

3.35). 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 (Tr. 37),

and by instituting a unilateral rollback of the price paid

for gas actually taken under the contract (Tr. 38). The

judgment ordered that Lively take nothing on their claim

for breach of the take-or-pay provision of the contract,

awarded Lively $1,204,778.60 on the pricing claim, and

awarded Lively $500,000.00 for attorneys’ fees.

Appellants seek a reversal of 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 gas purchase contract and an affirmance of the

remainder of the judgment.

POINTS OF ERROR

POINT OF ERROR ONE: The Trial Court erred in

admitting evidence of the Railroad Commission’s gas

market demand rule offered by Valero in support of

its contention that such rule relieved Valero of its

take-or-pay obligations under the contract, because,

as a matter of law, the Texas gas market demand rule

does not relieve Valero of its contractual obligation

to pay for the Daily Contract Quantity . gas (S.F.

1680-1681).

POINT OF ERROR TWO: The Trial Court erred in

including the gas market demand rule in Instruction

2 to Special Issue 2, because, as a matter of law, the

Texas gas market demand rule does not relieve Valero

of its contractual obligation to pay for the Daily

Contract Quantity of gas (S.F. 1680-1682; Tr. 145-

146).

POINT OF ERROR THREE: The Trial Court erred

in the definition of the term “deliverability” used in

Instruction 2 to Special Issue 2 (S.F. 1675; Tr. 145).

POINT OF ERROR FOUR: The Trial Court erred in

failing to define the term “deliverability” as it is used

in the take-or-pay provision of the gas purchase con-

tract (S.F. 1676-1682; Tr. 145).

POINT OF ERROR FIVE: The Trial Court's instruc-

tions to Special Issue 2 were prejudicial comments

on the weight of the evidence (Tr. 145-146).

POINT OF ERROR SIX: The Trial Court erred in

conditionally submitting Special Issue 3 (S.F. 1682;

Tr. 147).

POINT OF ERROR SEVEN: The Trial Court erred

in entering judgment for Valero on and failing to

set aside the jury’s finding on take-or-pay liability

(Special Issue 2, Tr. 145), because, as a matter of law,

there was no evidence to support the finding.

POINT OF ERROR EIGHT: The Trial Court erred

in entering judgment on and failing to set aside the

jury's finding on take-or-pay liability (Special Issue

2. Tr. 145), because the only evidence in support of

that finding is legally incorrect and is factually in-

sufficient to support the finding.

POINT OF ERROR NINE: The Trial Court erred in

entering judgment on and failing to set aside the

jury's finding on take-or-pay liability (Special Issue

2. Tr. 145), because the finding was against the great

weight and preponderance of the credible evidence,

which conclusively showed that Valero failed to take

or pay for the Daily Contract Quantity of gas.

STATEMENT OF FACTS

On or about February 12, 1973, Lively Exploration

Company. on behalf of itself and all other Appellants

named herein, entered into a Gas Purchase Contract

(the “Contract”) with Lo-Vaca Gathering Company

(“Lo-Vaca”) for the sale of natural gas produced from

certain properties of Appellants in Sutton County, Texas

(“the Contract Area”) (P. Ex. 1; S.F. 115). Appellee,

Valero, is the successor in interest to Lo-Vaca under the

Contract (S.F. 57-58, 111).

The Contract grants Valero the exclusive right for

20 years to purchase all gas from the Contract Area.

Valero has the continuing right and obligation to pur-

chase, upon the terms and conditions and at the prices

specified in the Contract, all gas owned or controlled

by Appellants from the Contract Area during the term

of the Contract.

The Contract provides that Valero will, for each Con-

tract 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 equal 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 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.

le V, € 5.3, of the Contract provides, inter alia, 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, whether

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 he 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 delivery at the time of the test... .7

This provision in the Contract is commonly known in

the oi! and gas industry as a “take or pay” clause. Take-

or-pay provisions in various forms have been standard

provisions in-gas purchase contracts since the early 1950's.

The Contract also contains a definition of the term

“deliverability” which differs from the manner in which

that term is used in the take-or-pay provision quoted

above. Article I (|) of the Contract defines the term

“deliverability” 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

exceeding the maximum (including overproduction)

rate of flow permitted by the laws, rules and regula-

tions 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, regu-

lations 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 wells in

the fields.

|. Emphasis added throughout except where indicated otherwise.

Beginning with the 1982 Contract Year (June 1. 1982 -

May 31, 1983). and continuing through the 1985 Con-

tract Year, Valero failed to either take and pay or simply

pay for the minimum quantity of gas as required by the

Contract. Valero’s failure is a breach of the Contract for

which Lively is entitled to recover.

Pursuant to Article VIII, € 8.2, of the Contract. Lively

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 vear

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 Quan-

tity on anv day or days during such year, excluding

any portion of such deficiency which is caused by,

or is a result of, Buyer’s failure to nominate to the

Texas Railroad Commission to purchase a quantity

of gas equal to the Vaily 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 pro-

vided hereunder.

On September 29, 1983, Lively filed Plaintiffs’ Original

Petition in the 112th Judicial District Court of Sutton

County (Tr. 3). Valero answered with a general denial

and alleged numerous affirmative defenses to its liability.

On or about September 5, 1985, the Honorable Law-

rence Fuller. Judge of the 143rd Judicial District Court,

was assigned to hear this case on the withdrawal of the

sitting District Court Judge, the Honorable Brock Jones.

On September 16, 1985, the Trial Court granted Lively’s

Motion for Partial Summary Judgment as to liability only

against Valero (Tr. 8). On or about October 29, 1986,

the Honorable Bob Parks, having succeeded to the posi-

tion of Judge of the 143rd Judicial District Court upon

the appointment of the Honorable Lawrence Fuller to

the El Paso Court of Appeals, entered an order setting

aside the Order for Partial Summary Judgment (Tr. 29).

Trial on the merits commenced on April 13, 1987. The

jury returned their answers to special issues on April 22,

1987. On May 4, 1987, the Trial Court entered the

judgment complained of herein and on May 11, 1987

denied Lively’s Motion for Partial New Trial. Lively has

timely perfected its appeal to this Court.

The Trial Court submitted this case to the jury by way

of five special issues. Special Issues 1 and 1A inquired

whether Lively and Valero modified the Contract to in-

clude under its terms and conditions the gas produced

from certain wells (Tr. 143, 144). The jury answered

both special issues in the affirmative, and Lively makes

no complaint to this Court as to those findings.

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

by way of two special issues to the jury. Special Issue 2

inquired whether “Valero failed to take or pay for an

amount of gas equal to the Daily Contract Quantity

(DCQ)?” (Tr. 145). Special Issue 3, concerning the

amount of money that Valero owed to Lively for its

failure to take or pay under the contract, was condition-

ally submitted by the Trial Court (Tr. 147). Special

Issues 4 and 4a concern Lively’s claim for underpayment

by Valero for gas that Valero actually took (Tr. 150,

151). Special Issue 5 inquired about the reasonable and

necessary attorneys’ fees incurred by Lively in prosecuting

this action (Tr. 152). Lively makes no complaint to this

Court concerning the findings of Special Issues 4, 4a.

and 5, which have been incorporated in the judgment on

appeal herein.

ARGUMENT AND AUTHORITIES

POINT OF ERROR ONE RESTATED: The Trial

Court erred in admitting evidence of the Railroad

Commission’s gas market demand rule offered by

Valero in support of its contention that such rule

relieved Valero of its take-or-pay obligations under

the contract, because, as a matter of law, the Texas

gas market demand rule does not relieve Valero of

its contractual obligation to pay for the Daily Con-

tract Quantity of gas (S.F. 1680-1681).

POINT OF ERROR TWO RESTATED: The Trial

(Court erred in including the gas market demand rule

in Instruction 2 to Special Issue 2, because, as a

matter of law, the Texas gas market demand rule

does not relieve Valero of its contractual obligation

io pay for the Daily Contract Quantity of gas (S.F.

1680-1682; Tr. 145-146).

Points of Error One and Two will be argued together,

since both points relate to the application of the Texas

gas market demand rule as a defense to take-or-pay

obligations under natural gas contracts.

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 demand rule

abrogates the take-or-pay provision by limiting Valero’s

obligation to take gas to its market demand and conse-

quently relieves Valero of its obligation to pay for the

Daily Contract Quantity of gas not taken. It is Appellants’

position that as a matter of law the Railroad Commission

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 this minimum quantity

of gas provided by the Contract.

Take-or-pay provisions in various forms have been

recognized as standard provisions in gas purchase agree-

ments since the early 1950's. 4 H. Wiixtiams & C.

Meyers, Oi & 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 buyer and seller. “The seller bears the

risk of production. To compens.te seller for that risk,

buyer agrees to take, or pay if not taken, a4 minimum

quantity of gas.” Universal Resources, 813 F.2d at 80.

The Texas Railroad Commission’s gas market demand

rule clearly does not relieve Valero of its alternative

obligation to pay for the Daily Coatract Quantity of gas

as required by the take-or-pay provisions of the Contract.

The gas market demand 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 gas not taken under

take-or-pay provisions or natural gas contracts. No Texas

statute or Railroad Commission regulation, either ex-

pressly or by implication, prohibits or excuses a pur-

chaser from paying for the quantity of gas that purchaser

has contractually obligated itself to pay. The Railroad

Commission and the courts have recognized that con-

tractual 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 inter-

pretive 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 contravened

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, with-

out limitation, provisions relative to (1) gas pur-

chasers 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 allow-

ables and (3) obligations requiring gas purchasers

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

than allowables set by this Commission.

Railroad Commission Gas Well Allowable Order, 2 Tex.

Reg. 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 Dist. 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 con-

a ae ee

tracts.” The Court held that the order was unlawful, in-

valid, 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

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 Comission did not appeal this judgment

and subsequently repromulgated the order without the

invalid paragraph, and it became regularly adopted as the

gas market demand rule. 3 Tex. Reg. 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 Texas gas market demand rule does not and

cannot have the effect of overriding take-or-pay provi-

sions in gas purchase agreements between producers and

pipelines and does not provide a defense for the breach

of those contractual obligations. This is clear from the

district court’s holding invalid that portion of the inter-

pretive order which stated that the rule superseded pri-

vate contractual provisions and the Railroad Commis-

sion’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 Com-

mission again stated that such regulations were not in-

tended to modify existing private contractual relation-

2. Appendix at Al-A2.

ships. In the preamble, the Railroad Commission carefully

describes the scope of those rules:

Sections 3.30 and 3.34 are not intended to be a com-

prehensive statement of rights or obligations under

the Common Purchaser Act, nor are they intended

to preclude any complaints which may arise under

the Act. These amendments shall not affect existing

contractual rights and obligations between parties.

12 Tex. Reg. 536 (1987).

Courts have also rejected a gas market demand rule

defense in the nature of that raised herein by Valero. In

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

Ct. of Houston County, 3rd Judicial Dist. of Texas, Oct.

21, 1986),° a partial summary judgment with respect to

liability was rendered in favor of the plaintiffs on their

take-or-pay claim. The defendants raised the gas market

demand rule as a defense to the piaintiffs’ 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

market demand rule and other defenses asserted by the

pipelines “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

3. Appendix at A3.

4. Appendix at A4.

is not excused on any basis, . . . including regulation

by federal or state governmental authority. . . .”

Valero contends that the gas market demand rule mod-

ifies Valero’s 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 deliver-

ability under the Contract is determined by Valero’s mar-

ket 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 Con-

tract requiring Valero to pay for gas not taken.

Valero’s contention fails 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 & Chem-

| ical 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 min-

imum quantity of gas even though not taken during the

Contract Year.

In International 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

5. Appendix at AS.

of its equipment. In 1978, the New

‘vironmental Improvement Board enacted Reg-

ulation 508, which limited emissions from potash proc-

essing equipment. In employing new technology necessary

to comply with the regulation, IMC did not take or pay

for 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 per-

form in either of two ways. It can either (1) take

the minimum 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;

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

6. Appendix at A36.

7. Appendix at A47

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 (ue state market

demand ruie 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 pro-

duction.’* In rejecting the pipeline company’s argument,

the court stated that such an “interpretation would render

the take-or-pay provisions of the contracts virtually use-

less.””

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 excess of

transportation or market facilities or reasonable 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 pro-

duction of natural gas in excess of transportation and

marketing facilities or reasonable market demands.”

Alternative performance obligations have consistently

been upheld by Texas courts. Moss & Raley v. Wren,

102 Tex. 567, 120 S.W. 847 (1909); Kirkland v. Gaston,

544 S.W.2d 694 (Tex. Civ. App.—Dallas 1976, no writ);

8. Appendix at A46.

9. Appendix at A42.

Carter v. Smith, 184 $.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. Wittiston, Contracts § 1961

(1971 and 1984 Supp.).

No cases have been found which hold that the enforce-

ment of the alternative pay obligation of a take-or-pay

provision is excused by the Texas gas market demand

rule absent some specific contract language so providing.

Any decision to the contrary would be illogical. The

enforcement of the alternative pay obligation neither

requires the producer to produce more gas than allowed

by law nor requires the purchaser to take more gas than

the market demand or discriminate among its producers.

Commentators have reached this same conclusion. In

a recent article discussing the argument that the Texas

gas market demand rule insulates pipeline purchasers

from take-or-pay liability, one writer critiqued the argu-

ment this way:

The pipeline argument has two parts: (1) that the

prorationing and ratable take rules serve as a cap

on the ability to take; and (2) that where the state

says “thou shall not take,” the state is also saying

“thou shall not pay.”

The second part of the pipeline argument against

take-or-pay clauses appears to be a non sequitur.

Unless a contract provision excuses payment for gas

in excess of quantities which the state permits to

be taken, why should a regulatory limit on the

ability to take also be a limit on the duty to pay?

The Railroad Commission has no direct authority

to relieve anyone of their contractual bargains. And

the legislature has not adopted any explicit statutory

controls over take-or-pay clauses. It would seem,

therefore, that the take-or-pay issue should be con-

sidered entirely one of contract.

A. Anderson, The Texas Approach to Gas Proration and

Ratable Take, 57 Coto. L. Rev. 199, 221 (1986).

If the gas market demand rule has the effect asserted

by Valero, the take-or-pay provision of the Contract be-

comes meaningless. It is well recognized that parties to

and an instrument generally intend that every clause has

some effect and purpose. Pinehurst v. Spooner Addition

Water Co., 432 S.W.2d 515 (Tex. 1968). Thus, Texas

case law makes it clear that a contract should be con-

strued in a manner which gives effect to all of its pro-

visions. Coker v. Coker, 650 S$.W.2d 391 (Tex. 1983);

Universal C.1.T. Credit Corp. v. Daniel, 150 Tex. 513,

243 S.W.2d 154 (1951); Sun 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 pro-

vision raeaningless. Mattison, Inc. v. W. F. Larson, Inc.,

529 $.W.2d 271 (Tex. Civ. App.—Amarillo 1975, writ

ref'd n.r.e.). A court has no right to nullify any terms

of an agreement. Williams v. J & C Reyalty Co., supra.

This Court’s recent opinion in Kodiak 198] Drilling

Partnership v. Delhi Gas Pipeline Corp., Appeal No. 04-

84-00499-CV (Tex. App.—San Antonio, May 13, 1987,

no writ) (not yet reported), is not applicable to this

appeal. In Kodiak, this Court affirmed a judgment based

upon a finding that the “gas market failure” there relied

upon by the pipeline company “excused Delhi's perform-

ance under the gas purchase agreement by virtue of the

‘force majeure’ provision of such agreement.” (Slip opin-

icn at 5). However, in this case, the jury made no such

finding. The “force majeure” provision of the Contract

was set forth in Instruction 3(c) of Special Issue 3,

which was conditionally submitted by the Trial Court

and not answered by the jury because of its answer to

Special Issue 2. Further, there is a significant difference

between the force majeure clause involved in Kodiak

and that involved in the Contract here. The force majeure

clause there defined “force majeure” in pertinent part as

meaning “partial or entire failure to gas supply or market.”

The force majeure clause in the Contract here defines

“force majeure” in pertinent part as including “temporary

failure of wells or sources of supply of gas, or markets.”

There was no evidence presented by Valero in the trial

of this case that Valero’s failure to take or pay for Lively’s

gas was the result of a “temporary failure of wells or

sources of supply of gas, or markets.” For the above

reasons, Kodiak is not applicable here.

It is clear from the above that the take-or-pay provi-

sions of the Contract are an essential condition of the

Contract and are binding upon Valero. Valero is not

relieved from compliance with those provisions by the

Texas gas market demand rule, and to uphold Valero’s

reliance upon that rule would render this take-or-pay

provision of the Contract meaningless and deprive Lively

of the protection of that important provision.

ae erry

oii» A

POINT OF ERROR THREE RESTATED: The Trial

Court erred in the definition of the term “deliver-

ability” used in Instruction 2 to Special Issue 2 (S.F.

1675; Tr. 145).

POINT OF ERROR FOUR RESTATED: The Trial

Court erred in failing to define the term “deliver-

ability” as it is used in the take-or-pay provision of

the gas purchase contract (S.F. 1676-1682; Tr. 145).

Points of Error Three and Four will be argued together,

as they both relate to the Trial Court’s definition of

“deliverability.” The Trial Court clearly erred in the

instructions to Special Issue 2 by defining the term

“deliverability” as set forth in Article I{j) instead of as

set forth in Article V, 4 5.3, which is the take-or-pay pro-

vision of the Contract. Under the Contract, Valero’s take-

or-pay liability is determined by comparing actual pur-

chases of gas to ninety percent (90% ) of “deliverability.”

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 re-

quest 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 ‘s re-

quired to deliver into Buyer’s facilities at the oper-

ating pressure 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 Court admitted Lively’s Form G-10’s 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), in

conformity with the express language of the take-or-pay

provision in Article V, € 5.3, of the Contract.

The Trial Court, however, used the wrong definition

of the term “deliverability” in its instructions. The Court

did not instruct the jury that “deliverability” for take-or-

p2y purposes means the actual ability of the wells to

deliver into Valero’s facilities, but instead gave the fol-

lowing instruction 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 properly objected to the Trial Court’s submission

to the jury of Special Issue 2 and its accompanying in-

structions (S.F. 1675), thereby preserving error.

The Trial Court’s error in submitting the wrong defini-

tion of “deliverability” in its instructions to Special Issue 2

a am fk

is shown by a comparison of the Contract’s use of the

term in the definitions section of the Contract (Art.

I(j)) and in the take-or-pay clause (Art. V, € 5.3):

Art. I(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.

Art. V, 9 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 de-

liverability tests more often

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 op-

erating pressure at the

points delivery at the time

of the test... .

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 ref’d n.r.e.). An explana-

tory instruction is improper if it is a misstatement of the

law as applicable to the facts. Wakefield v. Bevly, 704

S.W.2d 339 (Tex. App.—Corpus Christi 1985, no writ).

An erroneous definition given by the court may amount

aaa ii aia i

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 im-

proper and requires reversal. Foerster v. Peoples, 362

$.W.2d 918 (Tex. Civ. App.—Amarillo 1962, no writ);

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

—El Paso 1969, writ ref'd n.t.e.); Emmond’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 be-

tween private parties. As discussed in Appellants’ first

and second points of error, as a matter of law the gas

market demand rule does not affect private contract rights.

The Trial Court’s erroneous definition of the term “de-

liverability” in the instructions to Special Issue 2 was

reasonably calculated to cause and did cause the rendition

of an improper judgment, and the Trial Court’s judgment

in that respect should be set aside.

POINT OF ERROR FIVE RESTATED: The Trial

Court’s instructions to Special Issue 2 were prejudicial

comments on the weight of the evidence (Tr. 145-

146).

The Trial Court’s instructions given with respect to

Special Issue 2 were prejudicial comments on the weight

of the evidence. In Instruction 2, the Court stated, in

part:

ee ee ee ee

The term market demand means that amount of

gas needed for current consumption.

You are instructed that the production, trans-_

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

or under conditions which constitute waste is unlaw-

ful 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.

These instructions by the Trial Court constituted an

impermissible comment that tilted or nudged the jury in

favor of Valero, in violation of the Supreme Court’s hold-

ing in Lemos v. Montez, 680 S.W.2d 798, 801 (Tex.

1984). In Lemos, the Court held that even legally correct

instructions are not proper when they direct the jury

towards a particular answer to a special issue. 680 S.W.

2d at 801.

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. Kaiser-Francis,

supra. There are no conservation statutes prohibiting

Valero from paying even when it cannot take gas.

The Triai Court further commented improperly on the

weight of the evidence by its quote from Article V, © 5.2,

of the Contract in Instruction 2, which stated:

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 wher 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 (Tr. 145).

This instruction was not necessary to enable the jury

to answer Special Issue 2. It impermissibly diverted the

jury’s attention from the central issue in Special Issue 2

—-Did Valero fail to take or pay for an amount of gas

equal to the Daily Contract Quantity? Its effect was to

imply to the jury that Valero controls the quantity of

gas that it is required to take and pay for or pay for if

not taken. This implication is clearly contrary to the

express terms of the Contract.

Submission of unnecessary instructions may be so pre-

judicial as to require reversal. Samsel v. Diaz, 659 S.W.

2d 143 (Tex. App.—Corpus Christi 1983, no writ). An

unnecessary instruction that constitutes a comment on the

weight of the evidence or which diverts the jury’s atten-

tion from 2 central issue is error. Lemos v. Montez,

supra; City of San Antonio v. Roper Corp., 686 S.W.2d

602 (Tex. 1985).

Here, the Trial Court’s error was clearly prejudicial

to Lively. The jury found that Valero did not fail to take

the Daily Contract Quantity when the evidence clearly

established that Valero failed to do so and that Lively

was damaged by that failure in an amount in excess of

Maree NS

$20 million. The Trial Court’s submission of these in-

structions was improper, constituted judicial comments

on the weight of the evidence, was highly prejudicial to

Lively, and caused the rendition of an improper judgment.

POINT OF ERROR SIX RESTATED: The Trial

Court erred in conditionally submitting Special Issue

3 (S.F. 1682; Tr. 147).

The errors in the Triai Court’s instructions with respect

to Special Issue 2 were compounded by the Court’s con-

ditionally submitting Special Issue 3, which was the ulti-

mate or controlling issue in this case. Special Issue 3 in

pertinent part was as follows:

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

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

Contract?” (Tr. 147).

Rules 277 and 279 of the Texas Rules of Civil Pro-

cedure provide that each party is entitled to have sub-

mitted to the jury the controlling issues for each ground

of recovery or defense raised by the written pleadings

and evidence in the case. Texas courts have long recog-

nized *Wyis right. Blanton v. E. & L. Transport Co., 146

Tex. 377, 207 S.W.2d 368 (1948); Montgomery v. Gay,

212 S.W.2d 941 (Tex. Civ. App.—Fort Worth 1948,

no writ). “[T]his right cannot be lost or defeated by jury

findings on other issues, which, in effect, indirectly nega-

tive a favorable finding on an issue not submitted, but

raised by the evidence.” Blanton, 207 S.W.2d at 369.

The conditional submission of special issues is not

authorized where fundamental rights of the parties may

be adversely affected. Accordingly, when the effect of

" lace.

conditionally submitting an issue is to deprive the plain-

tiff of the submission of an independent ground of re-

covery, conditioning the issue is erroneous, 3 R. Mc-

DONALD, TEXAS CIVIL PRACTICE iN DISTRICT AND COUNTY

Courts §§ 12.16.1 and 12.16.2(b) (rev. 1983). The

only appropriate solution is to remand the matter for a

new trial.

Under the rules relating to special issue practice, only

controlling or ultimate issues should be submitted to the

jury. Tex. R. Civ. P. 277 and 279; Holmes v. J. C.

Penney Co., 382 S.W.2d 472 (Tex. 1964): Rocha v.

Ahmad, 676 S.W.2d 149 (Tex. App.—San Antonio

1984, writ dism’d). Evidentiary issues, those which are

embraced within or tend only to establish the fact of the

controlling issue, should not be submitted to the jury.

Lambert v. H. Molsen & Co., Inc., 551 §.W.2d 151 (Tex.

Civ. App.—Waco 1977, writ refd n.r.e.). An evidentiary

issue may be considered by the jury in deciding the con-

trolling issue, but it is not a controlling issue itself and

should not be submitted. Sell v. C.B. Smith Volkswagen,

Inc., 611 S.W.2d 897 (Tex. Civ. App.—Houston [14th

Dist.] 1981, writ refd n.r.e.).

As was argued by Lively at the charge conference

(S.F. 1682-1683), Special Issue 3 was tthe ultimate and

controlling issue in the case. The Daily Contract Quantity

inquired about in Special Issue 2 was simply one of the

many evidentiary matters to be considered by the jury

in deciding the controlling issue. The Trial Court’s con-

ditional submission of the controlling 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 controlling issue with respect to one of

it. eee ee ee ed Pima! sa + i Baa

its grounds for recovery determined by the jury. In effect,

Lively’s entire take-or-pay cause of action was submitted

conditionally.

The conditional submission of Special Issue 3 was

extremely prejudicial to Lively, constituted harmful error,

and led to the rendition of an improper judgment.

POINT OF ERROR SEVEN RESTATED: The Trial

Court erred in entering judgment for Valero on and

failing to set aside the jury’s finding on take-or-pay

liability (Special Issue 2, Tr. 145), because, as a mat-

ter of law, there was no evidence to support the find-

ing.

POINT OF ERROR EIGHT RESTATED: The Trial

Court erred in entering judgment on and failing to

set aside the jury’s finding on take-or-pay liability

(Special Issue 2, Tr. 145), because the only evidence

in support of that finding is legally incorrect and

is factually insufficient to support the finding.

POINT OF ERROR NINE RESTATED: The Trial

Court erred in entering judgment on and failing to

set aside the jury’s finding on take-or-pay liability

(Special Issue 2, Tr. 145), because the finding was

against the great weight and preponderance of the

credible evidence, which conclusively showed that

Valero failed to take or pay for the Daily Contract

Quantity of gas.

Points of Error Seven through Nine will be argued

together, since they involve the determination of the

central issue in this case—Valero’s take-or-pay liability.

Appellants attack the judgment from three standpoints:

(1) there was no evidence to support the jury's finding

on take-or-pay liability: (2) there was insufficient evi-

dence to support the jury's finding on take-or-pay liability;

and (3) the jury’s finding on take-or-pay liability was

against and contrary to the great weight and preponder-

ance of the evidence. Each of these arguments will be

covered below under descriptive subheadings.

Special Issue 2 asked the jury to find whether “Valero

failed to take or pay for an amount of gas equal to the

Daily Contract Quantity (DCQ)?” The jury answered

“No.” This finding is unsupported by the evidence. The

Contract defines “Daily Contract Quantity” as that quan-

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

daily deliverability. The Trial Court used this definition

in its instruction to Special Issue 2. All of the evidence

presented to the jury, with but one exception, showed

that Valero failed to take or pay for the quantity of gas

equal to the Daily Contract Quantity. Lively presented

extensive testimony concerning Valero’s failure to take

or pay for the Daily Contract Quantity during the Con-

tract Years 1982, 1983, 1984, and 1985 (P. Exs. 38-42,

49-51, 57-60: S.F. 367-401). Even Valero’s own evidence,

with one exception, proved that Valero failed to take or

pay for a quantity of gas equal to the Daily Contract

Quantity.

Valero presented Herbert E. Warner, a partner with

the accounting firm of Peat Marwick & Main, as an expert

witness (S.F. 1384). Mr. Warner presented a series of

exhibits calculating Valero’s take-or-pay deficiency. Mr.

Warner presented seven different “scenarios” showing

Valero’s take-or-pay deficiency. Six of these seven sce-

narios proved that Valero had failed to take or pay for

a quantity of gas equal to the Daily Contract Quantity

(D. Exs. 79-90). Only one out of Valero’s own seven

scenarios showed that Valero had not failed to take or

pay for a quantity of gas equal to the Daily Contract

Quantity (D. Exs. 78 and 91). However, that one scenario

is based sole’y on the assumption that the term “deliver-

ability” is the equivalent of the amount of gas that Valero

actually took from Lively pursuant to the gas market

demand rule. As heretofore discussed under Points of

Error One and Two, the gas market demand rule does

not abrogate Valero’s obligation to pay for a quantity

of gas equal to the Daily Contract Quantity. Valero’s

evidence based on this erroneous assumption is equally

incorrect and thus constitutes no evidence.

Therefore, the only legally sufficient evidence presented

to the jury concerning Valero’s failure to take or pay for

a quantity of gas equal to the Daily Contract Quantity

proves that Valero did fail to take or pay for that quantity

of gas as required by the Contract during each of the

Contract Years involved.

A. There was no evidence to support the jury’s

finding on take-or-pay liability.

A “no evidence” point of error must be sustained when

the record discloses one of the following:

(1) a complete absence of evidence of a vital fact;

(2) the court is barred by rules of law or evidence

from giving weight to the only evidence offered

to prove a vital fact;

(3) the evidence offered to prove a vital fact is no

more than a mere scintilla of evidence; or

(4) the evidence establishes conclusively the opposite

of a vital fact.

Roval Indemnity Co. v. Little Joe’s Catfish Inn, Inc., 636

S.W 2d $30. 531 (Tex. App.—San Antonio 1982, no writ):

R. Calvert. “Neo Evidence” and “Insufficient Evidence”

Points of Error, 38 Tex. L. REv. 361, 363-365 (1960). In

determining a “no evidence” point, the court is to consider

only the evidence and inferences which tend to support

the finding of the jury and disregard all evidence and

inferences to the contrary. Larson v. Cook Consultants,

Inc., 690 $.W.2d 567, 568 (Tex. 1985).

In the present case, the evidence presented by both

parties conclusively established that Valero failed to take

or pay for a quantity of gas equal to the Daily Contract

Quantity during each of the Contract Years involved.

The evidence to the contrary is based entirely on Valero’s

invalid argument that the gas market demand rule

abrogates its obligations under the Contract. Therefore,

this Court is barred from considering the only evidence

in the record which supports the jury’s finding with

respect to Special Issue 2.

When the jury finds the nonexistence of a vital fact or

gives a negative answer to an issue inquiring as to the

existence of a vital fact, its finding or answer need not

be supported by evidence, and error can occur only if

the facts have been conclusively established or established

as a matter of law. Jordan v. Ortho Pharmaceuticals, Inc.,

696 S.W.2d 228. 235 (Tex. App.——San Antonio 1985,

no writ); Pouncy v. Garner, 626 S.W.2d 337 (Tex. App.

—Tyler 1981, writ ref’d n.r.e.). When reviewing “matter

of law” points, the Court should consider all of the

evidence, and if the converse of the jury’s findings is

established conclusively, the point will be sustained.

R. Calvert, supra p. 32, at 363-364; Jordan, 696 S.W.2d

at 235.

Here, Lively conclusively established that Valero failed

to take or pay for a quantity of gas equal to the Daily

Contract Quantity in each of the Contract Years involved.

The only evidence in the record to support the ‘inding

that Valero did not fail to take or pay for the minimum

amount was presented in Defendant’s Exhibits 78 and 91.

Those exhibits are based entirely upon Valero’s conten-

tion that the gas market demand rule abrogates Valero’s

obligations under the Contract (S.F. 1449). As heretofore

shown, Valero’s contention is incorrect as a matter of law.

B. There was insufficient evidence to support the

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

jury’s finding was against the great weight and

preponderance of the evidence.

When considering an “insufficient evidence” point of

error, the court should consider and weigh all of the

evidence in the case, including that in support of and

that contrary to the challenged finding, to determine if

the finding is so contrary to the great weight and pre-

ponderance of the evidence as to be clearly wrong and

unjust. Dyson v. Olin Corp., 692 S.W.2d 456, 457 (Tex.

1985); Garza v. Alviar, 395 S.W.2d 821, 823 (Tex

1965). The court must let the jury, as the trier of fact,

judge the credibility of the witnesses, assign the weight

to be given to their testimony, and resolve any conflicts

in the testimony. However, here the only evidence in

support of the jury’s finding as to Special Issue 2 was

wrong as a matter of law. As discussed in Points of

Error One and Two, the gas market demand rule did

not abrogate Valero’s obligations under the Contract.

Valero’s sole evidence in favor of the jury’s finding has

no probative value. The jury’s finding is against the great

weight and preponderance of the evidence, presented by

both Lively and Valero, that Valero failed to take or

pay for the minimum quantity of gas for each of the

Contract Years involved. The challenged finding is against

the great weight and preponderance of the evidence so

as to be clearly wrong and unjust, and this Court should

set the finding aside and order a new trial as to that part.

The jury’s finding with respect to Special Issue 2 is

supported by no evidence, by insufficient evidence, is

contrary to the gieat weight and preponderance of the

evidence, is clearly wrong and unjust, and is incorrect

as a matter of law. For these reasons, Appellants respect-

fully submit that this Court should reverse the judgment

of the Trial Court and render judgment that Valero is

liable to Lively for Valero’s failure to pay for the Daily

Contract Quantity under the Contract for the Contract

Years 1982, 1983, 1984, and 1985 and remand this

case to the Trial Court for a determination of the amounts

owed to Lively by Valero as a result of such failure.

CONCLUSION

The Trial Court clearly erred in the respects set forth

in the above Points of Error, and those errors did cause

rendition of an improper judgment in the case in part,

which is clearly separable without unfairness to the parties.

cial

Therefore, it is respectfully submitted that under Rule 81

of the Texas Rules of Appellate Procedure that the

judgment should be reversed as to the part complained

of by Appellants, judgmnent rendered in favor of Lively

with respect to liability, and a new trial ordered to

determine the amount of damages owed to Lively by

Valero.

PRAYER FOR RELIEF

Appellants respectfully request that this Court reverse

the judgment of the Trial Court that Lively take nothing

by way of their take-or-pay cause of action, render judg-

ment 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, remand

the case for a new trial as to the amount owed to Lively

by Valero, in all other respects affirm the Trial Court’s

judgment, and grant Appellants Lively such other and

further relief to which they be justly cntitled.

By:

Respectfully submtited,

Scott, DouGcLass & LUTON

FRANK DOUGLASS

State Bar No. 06049000

CHRISTOPHER FULLER

State Bar No. 07353050

1200 First City Bank Building

Austin, Texas 78701

(512) 476-6337

SE P. LUTON, JR. NM

tate Bar No. 12708000

JAMES P. PENNINGTON

State Bar No. 15758520

4300 RepublicBank Center

Houston, Texas 77002

(713) 228-6337

Attorneys for Appellants

CERTIFICATE OF SERVICE

I hereby certify that the above and foregoing Brief for

Appellants, together with the Appendix thereto, was

served on 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 26th day of August, 1987, enclosed in a wrapper

addressed as follows:

J. Clifford Gunter, III,

Bracewell & Patterson

2900 South Tower Pennzoil Place

Houston, Texas 77002

om LD okaten, jp

/Yessz P. Luton, Jr. v

NO. 04-87-00380-CV

IN THE COURT OF APPEALS FOR THE

FOURTH SUPREME JUDICIAL DISTRICT

OF TEXAS AT

SAN ANTONIO, TEXAS

LIVELY EXPLORATION COMPANY, ET AL.,

Appellants

VALERO TRANSMISSION COMPANY,

Appellee

APPEALED FROM THE DISTRICT COURT

OF SUTTON COUNTY

112th DISTRICT COURT OF TEXAS

APPELLEE’S BRIEF

J. Clifford Gunter III

Carrin F. Patman

Laura B. Herring

Gregory C. King

BRACEWELL & PATTERSON

2900 South Tower Pennzoil Place

Houston, Texas 77002

(713) 223-2900

Attorneys for Appellee,

Valero Transmission Company

APPELLEE REQUESTS ORAL ARGUMENT

COMPLETE LIST OF THE PARTIES

Pursuant to Rule 74(c) of the Texas Rules of Appel-

late Procedure, a complete list of the names of all parties

follows:

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. 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

Theodore L. Wilkinson

Appellants:

;

Appellee:

Valero Transmission Company

I. NATURE OF THE CASE

Appellants Lively Exploration Company, et al. are

appealing the trial court’s take-nothing judgment against

them on their claim against Valero for breach of a “take-

or-pay” provision in a gas purchase contract.

Il. REPLY POINTS OF ERROR

First Reply Point of Error:

THE TRIAL COURT DID NOT ERR IN ADMIT-

TING EVIDENCE OF THE RAILROAD COMMIS-

SION’S GAS MARKET DEMAND RULE OFFERED

BY VALERO (Reply To Appellants’ Point Of Error

One).

Second Reply Point of Error:

THE TRIAL COURT DID NOT ERR IN INCLUD-

ING THE GAS MARKET DEMAND RULE IN IN.

STRUCTION 2 TO SPECIAL ISSUE 2 (Reply To Ap-

pellants’ Point Of Error Two).

Third Reply Point of Error:

THE TRIAL COURT DID NOT ERR IN DEFINING

THE TERM DELIVERABILITY USED IN INSTRUC-

- TION 2 TO SPECIAL ISSUE 2 (Reply To Appellants’

Points of Error Three and Four).

Fourth Reply Point of Error:

THE TRIAL COURT’S INSTRUCTIONS TO SPE-

CIAL ISSUE TWO WERE ENTIRELY PROPER AND

WERE NOT PREJUDICIAL COMMENTS ON THE

WEIGHT OF THE EVIDENCE (Reply to Appellants’

Point of Error Five).

Fifth Reply Point of Error:

THE TRIAL COURT DID NOT ERR IN CON-

DITIONALLY SUBMITTING SPECIAL ISSUE THREE

(Reply to Appellants’ Point of Error Six).

Sixth Reply Point of Error:

THE TRIAL COURT PROPERLY ENTERED

JUDGMENT FOR VALERO ON THE JURY’S FIND-

ING ON TAKE-OR-PAY LIABILITY, BECAUSE

THERE WAS SOME EVIDENCE TO SUPPORT THE

JURY’S FINDING (Reply to Appellants’ Point of Error

Seven).

Seventh Reply Point of Error:

THE TRIAL COURT PROPERLY ENTERED

JUDGMENT ON THE JURY’S FINDING ON TAKE-

OR-PAY LIABILITY BECAUSE THE EVIDENCE IN

SUPPORT OF THAT FINDING WAS LEGALLY

CORRECT AND FACTUALLY SUFFICIENT TO

SUPPORT THE FINDING (Reply to Appellants’ Point

of Error Eight). |

Eighth Reply Point of Error:

THE TRIAL COURT PROPERLY ENTERED

JUDGMENT ON THE JURY’S FINDING ON TAKE-

OR-PAY LIABILITY BECAUSE THE FINDING WAS

AMPLY SUPPORTED BY THE EVIDENCE, AND

WAS NOT AGAINST THE GREAT WEIGHT AND

PREPONDERANCE OF THE CREDIBLE EVIDENCE

(Reply to Appellants’ Point of Error Nine).

OEE EEE EEE EE EEE EEE EO Ea OE OOOO

ASan,

i Os ee es ee. eS Om a BE ee a EM

Ill. STATEMENT OF FACTS

A. The Parties.

Valero Transmission Company (“Valero”), Appellee,

is a public utility intrastate gas pipeline company that

purchases, transports, and sells natural gas throughout

the State of Texas. Valero operates over 7.000 miles of

pipeline, connected to over 13,000 wells. (S.F. 542, 677.)

Valero’s customers include gas distribution companies

that service cities such as San Antonio, Austin, and Dallas.

industrial consumers, and other pipeline companies. (S.F.

529-30.) Valero meets its customers’ forecasted demands

by acquiring natural gas from over 800 producers pursuant

to approximately 2400 gas purchase contracts. (S.F. 542.)

Lively Exploration Company and the other appellants

(collectively “Lively”) are producers, operators, royalty

interest owners, and sellers of oil and gas in Texas. (S.F.

105-07). It is uncontroverted that both Valero and Lively

are at all times subject to the regulatory authority of the

Railroad Commission of Texas (“Commission”). Tex.

Rev. Civ. Stat. arts. 6050-53 (Vernon 1962 and Vernon

Supp. 1987); Tex. Nat. Res. Code Ann. Sec. 81.051.

111.081 (Vernon 1978). (S.F. 419-23; 675, 1552,

1556.)

B. The Contract.

On February 12, 1973, Lively entered into a Gas

Purchase Agreement (“Contract”) (P. Ex. 1) with

Valero’s predecessor-in-interest for the sale of natural

gas produced from Lively’s properties in Sutton County,

Texas. It is undisputed that at the time Lively and Valero

entered into the Contract, demand for natural gas far

Outstripped supply, and neither Lively nor Valero foresaw

that eventually the natural gas industry would suffer

from a dramatic oversupply that would change the entire

nature of the industry. (S.F. 147-48, 593-94.)

Lively and Valero included various provisions in the

Contract relevant to this lawsuit. Among these provis! ons

is a “take-or-pay” provision:

Subject to the other provisions hereof, Buyer agrees

to purchase and pay for (or, if Buyer’s performance

hereunder is not excused by other provisions of this

agreement, pay for, if available, whether taken or

not) during the days of each Contract year... a

Daily Contract Quantity of gas from Seller’s Lands

and Leases in the Contract Area equa! to ninety

percent (90%) of Seller’s daily Deliverability of

gas hereunder.

(P. Ex. 1, p.12, Art V, § 5.3) (emphasis supplied).

The take-or-pay provision references two specific terms

that are defined in the Contract and operate with the

take-or-pay clause to set forth Valero’s take-or-pay obliga-

tions: “Daily Contract Quantity” (“DCQ”) and “Deliver-

ability.” The Contract defines “DCQ” as “the quantity of

gas per day, averaged over each contract year, which

Buyer is required to take from Seller hereunder at the

point of delivery specified in this Agreement.” (P. Ex.

i, p. 2, art. Ife].)

Since the Contract states that the DCQ is 90% of

Deliverability, the extent of any take-or-pay obligation

must be measured in accordance with the specific Con-

tract definition of “Deliverability”:

[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 exceeding 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. Buyer agrees to make nomina-

tions, 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 in accordance with good engineer-

ing and gas production practice can be produced

from Seller’s wells in the field.

(P. Ex. 1, p. 3, art. I[j]) (emphasis supplied. )'

Thus, the take-or-pay provision in the Contract re-

quires Valero to take, or pay for if available, 90% of

the quantity of gas Lively has available for delivery,

not to exceed the maximum production allowed by the

Railroad Commission of Texas (“Commission”).

The take-or-pay provision was included to reassure

Lively that Valero would not discriminate against Lively

by taking gas from a producer with a lower price to the

exclusion of Lively, whose gas in the subject area was

dedicated to the Contract.

1. Although in its Brief for Appellants, Lively argues that the

Contract also contains another definition of “Deliverability, through-

out trial the definition in art. I(j) was accepted as the proper one

by doth sides. Lively in fact submitted only the definition in art. 1(j)

of “Deliverability” as an instruction in its proposed charge (Tr.

66, 73.)

The Contract also includes a “regulatory bodies”

clause expressly making the Contract subject to Texas

laws and the rules and regulations of an “authority having

jurisdiction” such as the Commission:

This Agreement is made subject to all valid ap-

plicable federal and state laws or city ordinances,

and to the orders, rules and regulations of any

duly constituted federal or state regulatory body

or authority having jurisdiction.

(P. Ex. 1, p. 27, art. XUII, § 13.1.)

Additionally. the parties included a force majeure

clause:

If either party hereto is rendered unable, wholly

or in part, by force majeure, or other causes herein

specified, to carry out its obligations under this

Agreement, other than any matured obligation to

pay money, it is agreed that upon notice . . . then

the obligations of the party giving such notice, so

far as they are affected by such force majeure or

other causes herein specified, shall be suspended

during the continuance of any inability so

caused.

~ * *

The term “force majeure” as employed herein in-

cludes without limitation by the following enumera-

tion acts of God . . . temporary failure of wells or

sources of supply of gas, or market; and any other

causes, whether of the kind herein enumerated or

otherwise, not reasonably within the control of the

party claiming suspension and which by the exercise

of due diligence such party is unable, wholly or

in part, to prevent or overcome.

(P. Ex. 1, pp. 26-26A, art. XII, §§ 12.1,12.2.)

C. Relevant Laws and Regulations.

1. The Regulated Nature of the Texas Oil and

Gas Industry.

The repeated deference in Contract provisions to Texas

laws and Commission rules and regulations reflects the

parties’ recognition that the Commission regulates basi-

cally all facets of the drilling, production, transportation,

and use of natural gas in Texas. (S.F. 419-23, 1474.)

The Commission’s authority is accorued by the Texas

Natural Resources Code (“Code”). The Code declares

“waste” to be unlawful, and defines “waste” as “the

production of natural gas in excess of transportation

or market facilities, or reasonable market demand for

the type of gas produced.” Tex. Nat. Res. Code Ann.

§ 86.001-.012 (Vernon 1978) (emphasis supplied) (S.F.

1491). The Code charges the Commission with adopting

“all necessary rules” to ensure production of natural gas

in accordance with market demand and to prevent its

waste. Code §$§ 85.051, 85.052, 86.001, ef seq., 114.081.

et seq. (Vernon 1978 and Vernon Supp. 1987) (em-

phasis supplied. )

The Commission also implements the Code’s goal of

“compelling ratable preduction,” Code § 86.001, and

Cafries out the Texas Common Purchaser Act’s stipulation

that a pipeline such as Valero must purchase gas without

discrimination in favor of one producer or person against

another producer or person in the same field and without

unjust or unreasonable discrimination between fields in

Texas. Code § 111.083 and § 111.086.

2. The Gas Market Demand Rule Adopted in

1978.

To discharge its Code-prescribed duties of conserving

Texas’ precious natural gas in an equitable manner, in

1978 the Commission adopted a system to “prorate”

natural gas production — i.e., to determine the overall

quantity of natural gas that should be produced in Texas

in a given month and to assure that each producer is

allowed to produce his fair share of that amount. (S.F.

1551.) The heart of this system, and one of the primary

regulations with which Valero and Lively are required

to comply, is known as the Gas Market Demand Rule.

16 Tex. Admin. Code § 3.91 (“§ 3.91”) (prior to

9 1/85) and 16 Tex. Admin. Code § 3.30 (“‘§ 3.30”)

and § 3.34 (“§$ 3.34”) (from and after 9/1/86, as

amended effective 3/2/87) (“Gas Market Demand Rule”

or “Rule”). (D. Ex. 7; S.F. 1491-94.)?

Both Valero and Lively agree on-what the Gas Market

Demand Rule says and requires. At trial, Valero presented

uncontroverted testimony by John Poerner (“Poerner’’), a

Railroad Commissioner when the Gas Market Demand

Rule was adopted and subsequently chairman of the

Commission, who thoroughly explained the Rule and its

operation. (S.F. 1472-1556.)

As Poerner elucidated, the Rule’s gravamen is two-

fold. First, it requires an intrastate pipeline company

such as Valero: (i) to limit its purchases of gas from

producers to proportionate shares of the pipeline’s down-

stream market demand; (ii) to allocate its purchases

“ratably” (without discrimination) among its various

producers; and (iii) to purchase various categories of

—

2. The Gas Market Demand Rule as issued on January 16, 1978

was introduced into evidence as D, Ex. 7. Lively objected to

evidence of amendments after the Contract years at issue, and the

trial court excluded such evidence. Thus, all citations to sections of

the Gas Market Demand Rule are to the sections as in effect during

the Contract years at issue, and as reflected in D. Ex. 7.

gas, established by the Commission, in a specified order

of priority. 16 Tex. Admin. Code § 3.91 (prior to

9/1/86); (D. Ex. 7, 21; S.F. 324-25, 689, 693, 910,

989, 1007, 1050, 1494.)

Second, it proscribes a producer such as Lively from

producing gas in excess of its ratable share of its pur-

chaser’s downstream market demand. (S.F. 935, 989,

1050, 1552, 1556.) The achievement of ratability requires

participation by the producers, since producers, not piyx’-

lines, have physical control of the wells and the quantity

of gas actually produced. (S.F. 715, 1344.)

To ensure that production and takes are in accord-

ance with market demand, the Gas Market Demand

Rule explicitly sets forth steps that producers and pipe-

lines must follow each month. To summarize, early

each month a pipeline’s downstream customers give the

pipeline “nominations” of their “firm forecast of .. .

[their] actual demand.” (D. Ex. 7, § .001(d)(2)(A):

S.F. 683-84.) The pipeline then files its own nomination

with the Commission reflecting the amount of gas it

expects to take from each field. (S.F. 1318-19.) The

pipeline must nominate an amount equal to the total

quantity for which 1. is the ultimate consumer and the

total quantity nominated by its downstream purchasers.

(D. Ex. 7, § .001(d); S.F. 682-84.) In making its

nominations, a pipeline must “ratably apportion” them

from the fields from which it purchases and from the gas

wells connected to its system. (D. Ex. 7, § .001(e).)

A pipeline must also make its nominations according

to the Commission’s “priority system” of different cate-

gories of~gas. Jd. The priority system requires a pipe-

line to nominate, take, and exhaust all of a higher

50 7

category of gas available from its producers before

taking any gas in a lower category. (/Jd., D. Ex. 20; S.F.

693, 1324-25.)*

The pipeline then tells its producers the amount it

intends to nominate, so that they can forecast production.

(S.F. 685-86, 1321.) The Commission adds up nomi-

nations of all pipelines taking gas from a given field,

divides that number among the wells in a field and al-

locates an amount of production to each particular well.

(S.F. 1499-1500.) This amount is the well’s “full

prorated allowable.” (S.F. 1336, 1500.)

Because actual market demand may deviate from

the amount projected by a pipeline in its nomination,

each month a pipeline gives each of its producers a “rate

of flow request” letting it know the pipeline’s actual

market demand, and how much gas the producer should

tender to supply its ratable share of that market demand.

(S.F. 686-87.) If the pipeline’s demand is less than

projected in its nomination, production from each well

must be reduced ratably (proportionately), even though

the well’s “allowable” may be set at a higher amount.

(S.F. 687.) Based on the procedures outlined in the

3. Specifically, under the 1978 Gas Market Demand Rule “casing-

head gas” was given the highest priority, followed by gas classified

as “Rule 49(b)” gas as second priority, and “‘special allowable” gas

as third priority. (S.F. 591, 622, 689, 1494.) Valero must purchase

all priority gas (‘“‘casinghead,” then “Rule 4%(b),” and then “special

allowable” gas) dedicated to its system before it can purchase any

non-priority gas (such as the prorated “gas well gas” produced by

Lively.’ (S.F. 693.)

The Commission established the priority categories based on sound

public policy considerations. For example, in according casinghead

gas highest priority the Commission was mindful of the Arab oil

embargo, since turtailment of casinghead gas interrupts oil produc-

tion. (S.F. 1494.)

Gas Market Demand Rule a pipeline then purchases gas

without discrimination and in accordance with the pri-

ority categories. (S.F. 934.)

In summary, the overriding goal of Texas’ complex

and carefully drawn regulatory scheme governing the oil

and gas industry is to ensure that production of natural

gas does not exceed market demand and result in “waste”

as that term is defined by statute, and that production

of the market demand is fairly apportioned among pro-

ducers. (S.F. 1491-93, 1499, 1551.)

D. The Interface Between the Gas Market Demand

Rule and the Contract.

Pursuant to the parties’ own agreement as reflected

throughout the Contract, the take-or-pay provision and

Gas Market Demand Rule work in tandem to define

Valero’s take-or-pay obligations. Both Valero’s obliga-

tion to take and its alternative obligation to pay are

limited by the Contract’s own terms to the quantity

Lively has “available for delivery,” “not exceeding the

maximum rate of flow permitted by [Commission rules

and regulations].” The Gas Market Demand Rule gov-

erns the amount of gas Lively can have “available for

delivery” at a given time, and establishes that the “maxi-

mum... cate of flow” under the Contract can never

exceed Valero’s downstream market demand.*

It is uncontroverted that Valero’s downstream market

demand has drastically declined. (S.F. 568, 571, 1040,

1483-84, 1532; D. Ex. 11A, 38, 64.) It was similarly

4. It is worth noting that the Gas Market Demand Rule also

established procedures preventing the discrimination the ‘take-or-pay

Clause was originally included to discourage.

conclusively demonstrated at trial (and Appellants do

not argue otherwise in their Brief) that during the

Contract years in issue Valero nominated and requested

all of Lively’s gas for which Valero had a downstream

market demand. (S.F. 1349-51, 1376.)

Any quantity exceeding the amount Valero actually

took from Lively, therefore, could not be produced

pursuant to Commission rules, and the Contract by

its own terms did not require Valero either to take or

to pay for that amount of gas.

E. Lively’s Lawsuit

Despite the fact that Valero had clearly complied with

the Contract’s take-or-pay provisions, Lively sued Valero

for purportedly breaching the take-or-pay clause for the

Contract years 1982-1985. Valero therefore found itself

in the ironic position of defending a breach of contract

lawsuit despite its compliance with the plain terms of

the Contract.

F. The Trial.

At trial, Lively called only three witnesses: Harry

Lively, who testified about the Contract although he had

not negotiated it (S.F. 149-50); Jimmy Condra, who

testified as to the results of alleged “deliverability tests”

on the wells even though he had not run the tests himself

in the last five years (S.F. 660-61) and even though the

pumper he claimed had run the tests testified that he

had never run such tests (S.F. 952-53); and Max Powell,

who testified as to alleged take-or-pay damages. (S.F.

367-403.)

Valero called a number of witnesses, including: John

Poerner, who testified concerning the meaning and import

of the Gas Market Demand Rule (S.F. 1447-1552):

Frank J. Becraft, President of Valero, and Jeffrey H.

Parish, Director of Proration and Producer Affairs of

Valero, who testified as to the decline in Valero’s down-

stream market and Valero’s strict adherence to the Gas

Market Demand Rule (S.F. 531-34, 565-73, 710, 713.

675-936, 1307-76); Travis B. Crow, Valero’s Director

of Reserve Evaluation, who testified about the unreliability

of Lively’s “deliverability” tests (S.F. 1191-1271); Dr.

Alan Anderson, who testified about the decline in Valero’s

downstream markets; and several others.

The take-or-pay claims were submitted to the jury. In

response to Special Issue No. 2, the jury answered “no”

to the question, “Do you find that Valero failed to take

or pay for an amount of gas equal to the Daily Contract

Quantity (“DCQ”)?” (Tr. 145.) Thus, on May 4, 1987,

the Honorable Judge Bob Parks properly entered a take-

nothing judgment against Lively on its take-or-pay claim

against Valero. (Tr. 158).

G. The Appeal

Lively has appealed the judgment as to its take-or-pay

Claim. The trial court’s judgment is supported by both the

law and the evidence, and should be sustained.

In its Brief for Appellants (“Lively’s Brief”), Lively

recognizes that it cannot undermine the jury’s verdict

or the trial court’s judgment based on the Record

or the applicable law. Therefore, in its Brief Lively

grossly distorts the plain meaning of some Contract

provisions and omits reference to others, completely

mischaracterizes Valero’s position, and wholly ignores

the overwhelming evidence supporting the jury’s findings,

most of which Lively did not even attempt to contrcvert

at trial. In desperation, Lively even complains on appeal

of an instruction to the jury that Lively submitted.

That Lively cannot rely on the Record as it exists and

the Contract as it is written exposes its recognition that

an accurate characterization of the Contracts, the law,

and the evidence compels affirmance of the trial court’s

judgment.

IV. THE RELEVANCE OF THE GAS MARKET

DEMAND RULE

First Reply Point of Error (Restated):

THE TRIAL COURT DID NOT ERR IN ADMIT-

TING EVIDENCE OF THE RAILROAD COMMIS-

SION’S GAS MARKET DEMAND RULE OFFERED

BY VALERO (Reply to Appellants’ Point of Error One).

Second Reply Point of Error (Restated):

THE TRIAL COURT DID NOT ERR IN INCLUD-

ING THE GAS MARKET DEMAND RULE IN IN-

STRUCTION 2 TO SPECIAL ISSUE 2 (Reply to Ap-

pellants’ Point of Error Two).

A. The Overall Fallacy in Lively’s Argument.

Lively’s argument under its First and Second Points

of Error embodies a gross mischaracterization of Valero’s

position at trial. Lively opens its argument by asserting:

Valero seeks to avoid its obligations under [the take-

or-pay] provision by asserting that the Railroad

Commission gas market demand rule abrogates the

take-or-pay provision by limiting Valero’s obligation

to take gas to its market demand and consequently

relieves Valero of its obligation to pay for the Daily

Contract Quantity of gas not taken. It is Appellants’

position that as a matter of law the Railroad Com-

mission gas market demand rule does not affect the

rights and obligations of the parties to this Contract

by relieving Valero of its obligations to pay for

this minimum quantity of gas provided by the Con-

tract.

(Appellants’ Brief, p. 11) (emphasis supplied.)

Lively is purely and simply “setting up a straw man

and knocking it down.” Whether the Gas Market Demand

Rule unilaterally abrogates the take-or-pay provision is

not the issue in this appeal. In this Contract, the quantity

of gas Valero is required to take or pay for is defined

as an amount “available for delivery,” “not exceeding

the maximum .. . rate of flow permitted by [Commission!

rules.” (P. Ex. 1, p. 3, art. I[j].)

As explained in § IIIB, supra, the take-or-pay provision

requires Valero to take or pay for 90% of Seller’s daily

Deliverability. Deliverability is defined in the Contract

as the “quantity of gas which Seller has available for

delivery .. . 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 jurisdic-

tion.” Thus, the Contract itself states that Commission

rules and regulations can limit Valero’s obligation to

take and its alternative obligation to pay. The Contract

does not require Valero’s payment for a minimum quan-

tity of gas as measured in Mcfs or Btus; it requires pay-

ment for a certain percentage of “Deliverability,” a

defined term that embodies the concept that it is limited

by Commission rules and regulations.

Lively’s entire argument under its First and Second

Points of Error, the bu/k of its Brief, is therefore based

on a faulty premise, in an attempt to divert this Court’s

attention from the plain words of the Contract. Whatever

contract Lively’s Brief discusses, it is not this one. In

essence, through its lawsuit Lively sought to rewrite

and engraft into the Contract a provision the parties did

not include.

B. Lively’s Specific Arguments.

Under its First and Second Points of Error, Lively

initially discusses its irrelevant proposition that “[t]he

gas market demand rule and associated ratable take

requirements relate to the production and taking of

gas. .. . They do not regulate the payment for gas

not taken. .. .” (Lively’s Brief, p. 11.) Lively cites an

unpublished district court judgment in Dallas Production

Co. v. Railroad Commission, -No. 260,641 (District Court

of Travis County, 53rd Judicial Dist. of Texas, June 10,

1977), in which the court stated that the Commission

had exceeded its statutory authority by issuing an order

that any provisions inconsistent with the Gas Market

Demand Rule were “rendered inoperative,” including

“obligations requiring gas purchasers to take, or pay for

if not taken, quantities greater than allowable set by this

Commission.”

0 mae

To the extent that an unreported district court judg-

ment could be considered by this Court, however, it is

irrelevant, since the plain terms of the Contract limit

Deliverability to the amount the Commission allows

Lively to produce and Valero to take. Whether the

Commission has the authority- unilaterally to render take-

or-pay provisions “inoperative” is an immaterial inquiry.

Lively next invokes the preamble to the most recent

formulation of the Gas Market Demand Rule as adopted

by the Commission in March of 1987, even though at

trial Lively vigorously objected to evidence concerning

the recent version. (S.F. 690.) The preamble states

that recent amendments to the Gas Market Demand

Rule “shall not affect existing contractual rights and

obligations between parties.” As shown, however, the

Contract clearly defines Valero’s obligations to take or

pay as limited by the amount Lively can legally produce

and Valero can legally take. The wording of the pre-

amble is again irrelevant to Valero’s purchase obligation

under the language of the Contract.

Lively also cites several unpublished district court

Summary judgments purporting to undermine a gas

market demand rule defense. Aside from the fact that

these one-page conclusory judgments provide no prece-

dent for this Court, they are predicated on different facts

and different contracts." The judgments contain no in-

dication that the contracts at-issue in those cases

Specifically limited the obligation to pay, as well as the

Obligation to take, to the maximum quantity of gas

5. In fact, the district court in this case withdrew a summary

judgment (Tr. 29) and denied a second motion for summary judg-

ment recognizing there were material fact issues ripe for jury con-

sideration.

“available for delivery,” “not exceeding” the amount

Valero can legally take and Lively can legally produce.

Lively’s next argument seems to be simply that the

Contract is unfair, since “[u]nder Valero’s contention,

Valero’s takes will always equal deliverability, and there

can never be a deficiency under the take-or-pay pro-

vision of the Contract requiring Vaiero to pay for gas

not taken.” (Brief of Appellants, p. 15.) Lively goes

on to argue that_Valero thus “fails to recognize the

purpose and effect of alternative performance obliga-

tions... .” (/d.)

Again, Lively’s argument has no relevance to this

Contract, in which both of Valero’s alternative methods

of performance are tied to the Contract’s definition of

“Deliverability.” Lively cites cases it claims support its

argument that an alternative obligation to pay is not

relieved by an inability to take, but none of these cases

involved contracts such as this one where Valero’s alter-

native obligation to pay is expressly limited to payment

for the quantity it can take. Lively itself concedes that an

alternative obligation to pay could be excused by “some

specific contract language so providing.” (Lively’s Brief,

p. 18.) Such specific contract language exists in this case.

Finally, Lively asserts that “if the gas market demand

rule has the effect asserted by Valero, the take-or-pay

provision . . . becomes meaningless,” and cites case

authority holding that “parties to an instrument generally

intend that every clause has some effect and purpose.”

(Lively’s Brief, p. 19.) Lively adds that Valero’s in-

terpretation would “deprive Lively of the protection of

that important provision.” (/d., p. 20.) First, the Gas

Market Demand Rule was adopted after the Contract

was signed (S.F. 113, 1517); the parties’ intent as

evidenced by the Contract was clearly to provide for a

limitation on an obligation to pay for gas not “Deliver-

able” pursuant to applicable rules and regulations. It is

Lively who seeks to deny effect and purpose to critical

clauses of the Contract — the Deliverability definition

and the take-or-pay clause considered in light of that

definition. As Lively’s cited authorities hold, this Court

cannot change or engraft a new provision onto this

Contract redefining “Deliverability.”

Moreover, the Gas Market Demand Rule affords

Lively the exact protection the take-or-pay provision

was meant to afford — from discrimination in takes.

In truth, it is Lively’s interpretation of the take-or-pay

Clause that is unfair and unreasonable. Lively chara-

Cterizes the take-or-pay clause as a producer’s insurance

policy against any downturn in the market, even an

unforseen downturn of dramatic proportions changing

the nature of the industry. Under Lively’s interpretation,

it would be entitled to payment for gas that it cannot

even deliver under applicable rules and _ regulations.

Clearly, the parties did not intend that the pipeline

Should bear the entire brunt, with no adverse effects on

the producer, of the type of decline currently existing in

the natural gas market. Such an interpretation is not

Only egregiously unfair, it is incorrect under the plain

terms of the Contracts. -

As a final note, Lively conclusorily states that this

Court’s recent opinion in Kodiak 1981 Drilling Partner-

Ship vy. Delhi Gas Pipeline Corp., No. 04-84-00499-CN

(Tex. App. — San Antonio, May 13, 1987) (not yet

reported), is inapplicable. In Kodiak, this Court affirmed

a take-nothing judgment against a producer on a take-or-

pay provision in a gas purchase contract. The Court held

that the pipeline’s obligation to take or pay for gas

had been suspended by events of force majeure as defined

in the contract. Because Kodiak undermines Lively’s

position completely, including its argument that alterna-

tive obligations to pay are not excused by an inability

to take, Lively lamely seeks to Cistinguish Kodiak. First,

Lively states that the jury in this case did not make a

finding that Valero’s performance was excused by virtue

of the force majeure provision. The jury was given a copy

of the Contract, however, and could well have concluded

that force majeure precluded liability.

Lively also contends that the force majeure clause in

Kodiak differs from that involved in the Contract here.

In fact, the force majeure clauses are very similar, in

that both specify failure of markets as a condition of

force majeure. The evidence was uncontroverted at trial

that Valero’s market for Lively’s gas had drastically

failed, and that Valero had taken all the gas from Lively

for which it had a downstream market demand. (S.F.

568, 571, 1040, 1483-84; D. Ex. 11A, 38, 64.) Thus,

Kodiak is directly applicable. Moreover, another Texas

court recently ruled that cessation of production when

weils are shut in under Commission orders is an event

of force majeure. Frost National Bank v. Matthews,

713 S.W. 2d 365 (Tex. App.—Texarkana 1986, writ

ref'd n.r.e.) (force majeure clause prevented termination

of lease). Thus, an inability to take can be force majeure.

C. Conclusion.

In conclusion, Lively’s entire argument under its First

and Second Points of Error fails to address the express

————————<—<<—

provisions of the Contract, and thus underscores that the

trial court’s judgment should be affirmed.

V. THE INSTRUCTION ON “DELIVERABILITY”

Third Reply Point of Error (Restated):

THE TRIAL COURT DID NOT ERR IN DEFINING

THE TERM DELIVERABILITY USED IN INSTRUC-

TION 2 TO SPECIAL ISSUE 2 (Reply to Appellants’

Points of Error Three and Four).

The trial court properly defined the term “Delivera-

bility” in its Instruction 2 under Special Issue No. %

In fact, the definition submitted by the trial court was

the exact definition Lively requested.

A. Lively Failed to Preserve Any Alleged Error.

In Appellants’ Brief, for the first time ever, Lively

complains of the trial court’s instruction to the jury on

the meaning of “Deliverability,” an instruction Lively

itself submitted. Lively contends that the trial court

Should have characterized language on Deliverability

testing in the take-or-pay clause as a definition of “Deliver-

ability,” instead of employing the definition in the “De-

finitions” section of the Contract.

Lively has no standing to belatedly complain of this

instruction on appeal. Lively submitted the exact defini-

tion of which it now complains! (Tr. 66, 73.) Lively

never requested additional or substitute language on

“deliverability” from Article V, § 5, nor did Lively at

trial object to the definition as worded (presumably since

it submitted it). (S.F. 1673-90, Tr. 66, 73.) Therefore,

Lively’s complaint of error is waived. Tex. R. Civ. P. 274;

State v. Harrington, 407 S.W.2d 467, 479 (Tex. 1966),

cert. denied, 386 U.S. 944, 87 S. Ct. 977 (1967). State

v. Lackey, 576 S.W.2d 685, 688-89 (Tex. Civ. App.—

San Antonio 1979, writ ref’d n.r.e.); Adam v. Harris,

564 S.W.2d 152, 156 (Tex. Civ. App.—Houston [14th

Dist.] 1978, writ ref’d n.r.e.); Southwestern Bell Tele-

phone Co. v. Ramsey, 542 S.W.2d 466, 476 (Tex. Civ.

App.—Tyler 1976, writ ref’d n.r.e.). A party cannot

predicate error on instructions given at his own request.

McFadden Publications, Inc. vy. Wilson, 121 S.W.2d 430,

433 (Tex. Civ. App.—El Paso 1938, writ ref’d).

In its Brief, Lively disingeniously claims it “objected

to the Trial Court’s submission to the jury of Special

Issue 2 and its accompanying instructions (S.F. 1675),

thereby preserving error.” (Appellant’s Brief, p. 22).

However, an objection to an instruction must be specific

and distinct to preserve error for appeal. Mahan Volks-

wagen, Inc. v. Hall, 648 $.W.2d 324, 330 (Tex. App.—

Houston [1st Dist.] 1982, writ ref’d n.r.e.); Southwestern

Bell Telephone Co., 542 S.W.2d at 476. Reference to

S.F. 1675 discloses cnly a general objection to the sub-

mission of Special Issue No. 2 on the purported grounds

that it was not a controlling issue, not on grounds that

it contained an improper definition of deliverability. In

fact, the Record discloses no such objection in the entirety

of Lively’s objections to the charge, presumably because

Lively submitted the precise definition used. (S.F. 1673-

90.)

B. The Definition Was Proper.

The trial court’s instruction, moreover, was entirely

proper. The definition of Deliverability is contained in

the “Definitions” article of the Contract, Article I. The

most logical construction of the Contract, and the one

the trial court obviously adopted, is that the reference to

Deliverability in the take-or-pay provision merely refers

to a method for measuring physical deliverability; it is

not the definition of Deliverability, and certainly does not

supplant the language in the Deliverability definition that

Deliverability in no event exceeds the maximum legal

production.

Last, Lively argues that the explanatory instruction on

Deliverability required the answer to a question of law—

whether the Gas Market Demand Rule modified existing

contractual relationships between private parties. As

noted, Lively submitted the instruction, which in any

event does not require the jury to answer a question

of law. It rather provides the jury with necessary back-

ground to determine the fact question of whether Valero

failed to take the DCQ under the Contract, in light of

Valero’s evidence on its market demand for Lively’s

gas and the effect of the Rule.

Therefore, the instruction on Deliverability was en-

tirely proper, and clearly did not cause the rendition

of an improper judgment.

VI. THE TRIAL COURT’S OTHER INSTRUCTIONS

TO SPECIAL ISSUE NO, 2

Fourth Reply Point of Error (Restated):

THE TRIAL COURT'S INSTRUCTIONS TO SPE-

CIAL ISSUE 2 WERE ENTIRELY PROPER AND

WERE NOT PREJUDICIAL COMMENTS ON THE

WEIGHT OF THE EVIDENCE (Reply to Appellants’

Point of Error Five).

In its Fifth Point of Error Lively cavils with several

specific Instructions given under Special Issue No. 2.

All of these instructions were proper, and could not have

caused the rendition of an improper judgment.

A. Instructions Relating to Waste.

First, Lively complains that the following Instructions

constituted “prejudicial comments on the weight of the

evidence”:

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.

(Tr. 200.)

These Instructions mirror language in the Texas

Natural Resources Code and Railroad Commission v.

Woods Exploration & Producing Co., 405 S.W.2d 313,

318 (Tex. 1966), and were entirely proper. First, they

were directly relevant to whether Valero had failed to

take the DCQ under the Contract. As explained, DCQ

is a function of Deliverability, which is the amount of

gas “available for delivery,” not exceeding maximum

legal production. The jury was presented evidence on

the absence of Valero’s market demand for Lively’s

gas. (S.F. 531-34, 540, 565-71, 602, 1040, 1332.)

These Instructions enabled the jury to place this evidence

in the context of applicable rules and regulations, and

thus in the context of the Deliverability clause.

Moreover, Lively does not explain how these In-

structions, even if irrelevant, “nudged” the jury against

Lively. Lively implicitly concedes that these Instructions

are correct statements of the law. In truth, Lively’s

objection to these Instructions is based on the same faulty

premise pervading its Brief: that the issue in this case

is whether the conservation statutes and Commission rules

unilaterally abrogate the take-or-pay provisions. Lively

asserts: “There are no conservation statutes prohibiting

Valero from paying even when it cannot take the gas.”

(Brief, p. 25.) The point, however, is that the Contract

limits Valero’s obligation to pay to payment for gas it can

legally take. It cannot legally take gas in excess of its

downstream market demand, because production of such

gas would be “waste.” Thus, these Instructions are

directly relevant and cannot constitute harmful error.

See First State Bank & Trust Co. of Edinburg v. George,

519 S.W.2d 198, 207 (Tex. Civ. App. — Corpus

Christi 1974, writ ref’d n.r.e.).

A comment on the weight of the evidence occurs

only when the judge assumes the truth of a material

controverted fact, or exaggerates, minimizes, or with-

draws some pertinent evidence from the jury’s con-

Sideration. Hirdler v. Boyd, 702 S.W.2d 727, 729-30

(Tex. App. —- San Antonio 1986, writ ref’d n.r.e.). In

deciding whether an instruction constitutes an imper-

missible comment on the weight of the evidence, the

Court must consider the charge as a whole. Jd. at 730.

To form a ground for reversal, a comment must be

One that would probably cause the rendition of an im-

proper judgment. Jd. The Court may incidentally com-

ment when necessary or proper as part of an explanatory

instruction or definition. /d. Statutory duties should be

handied by instruction. See Southern Pacific Co. v. Castro,

493 S.W.2d 491 (Tex. 1973). Under these standards,

this Court could not have committed reversible error

submitting Instructions that are correct statements of the

law.

Again, Lively’s complaint is a red herring to avoid

the real issue: that wasteful takes are prohibited by

Texas law and the Gas Market Demand Rule, and there-

fore that the definition of Deliverability does not require

Valero to take or pay for quantities of gas that would

be “wasteful” if produced.

B. The Instruction Relating to Article V, ¥ 5.2.

Lively also complains that the following instruction,

which tracked Article V, 45.2 of the Contract, consti-

tuted an impermissible comment on the weight of the

evidence:

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 time to time elect to purchase

up to the total quantity per day which the wells

are capable 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 ap-

plicable orders, rules, regulations or laws, which-

ever is the lesser rate of flow.

(Tr. 199.)

Lively claims that this Instruction was prejudicial be-

cause it somehow implied that Valero controls the

quantity of gas it is required to take or pay for.

This provision simply means what it says, and makes

no additional implication. The jury was given the entire

Contract; an Instruction as to one of its terms clearly

was not prejudicial error causing an improper judgment.

It is relevant to Special Issue No. 2 because it shows

the parties’ intention that Valero be bound by applicable

regulations and laws.

Vil. THE CONDITIONAL SUBMISSION OF

SPECIAL ISSUE NO. 3

Fifth Reply Point of Error (Restated):

THE TRIAL COURT DID NOT ERR IN CONDI-

TIONALLY SUBMITTING SPECIAL ISSUE THREE

(Reply to Appellants’ Point of Error Six).

Lively contends that the Court erred in conditionally

submitting Special Issue No. 3. Lively argues that each

party is entitled to have submitted the controlling issues

for each ground of recovery or defense, that Special Is-

sue No. 3 was a controlling issue, and that because the

jury answered “No” to Special Issue “No. 2,” conditional

submission deprived Lively of a chance for the jury to

answer the controlling issue.

Special Issue No. 2 inquired:

Do you find that Valero failed to take or pay for

an amount of gas equal to the Daily Contract

Quantity (DCQ)?

(Tr. 145.)

Special Issue No. 3 inquired:

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

you find to be due and owing to Lively under the

Contract?

(Tr. 147.)

Both Special Issue No. 2 and Special Issue No. 3 were

accompanied by various Instructions.

Lively’s argument is meritless. The central issue of its

take-or-pay claim was whether Valero failed to take or

pay for the Daily Contract Quantity of gas. Lively’s

own Brief sums up its claim against Valero as follows:

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.

(Brief, p. 2) (emphasis supplied.) Special Issue No. 2

made this controlling inquiry. Special Issue No. 3 merely

inquired as to the amount of damages in the event the

jury answered Special Issue No. 2 in the affirmative.

In its own Brief, Lively describes a~‘controlling issue”

as an “ultimate issue,” as distinguished from a “eviden-

tiary issue” which “tend[s] only to establish the fact of

the controlling issue.” (Lively’s Brief, p. 28.) Special

Issue .No. 2 clearly did not merely “tend to establish

the fact of the controlling issue,” it was the controlling

issue determining dispositively that Varelo had no liability

under the take-or-pay provisions of the Contract.

To argue that “Lively’s entire take or pay cause of

action was submitted conditionally” is simply absurd.

(Lively’s Brief, p. 29.) Surely Lively would not argue

that, once the jury had determined Special Issue No. 2

in the negative, there were any further inquiries necessary

on the take-or-pay claim. The conditional submission of

Special Issue No. 3 was proper, and could not have caused

the rendition of an improper judgment.

Since Lively’s argument does not make sense, it is

not surprising that no Texas cases support its position.

Lively cites no authority holding that if a dispositive issue

is answered in the negative, a plaintiff is entitled nonethe-

less to have additional issues answered that the negative

answer render immaterial to the Court in entering Judg-

ment.

Vill. THE OVERWHELMING EVIDENTIARY SUP-

PORT FOR THE JURY’S FINDING AND THE

JUDGMENT

Sixth Reply Point of Error (Restated):

THE TRIAL COURT PROPERLY ENTERED

JUDGMENT FOR VALERO ON THE JURY’S FIND-

ING ON TAKE-OR-PAY LIABILITY, BECAUSE

THERE WAS SOME EVIDENCE TO SUPPORT THE

JURY’S FINDING (Reply to Appellants’ Point of Error

Seven).

Seventh Reply Point of Error (Restated):

THE TRIAL COURT PROPERLY ENTERED

JUDGMENT ON THE JURY’S FINDING ON TAKE-

OR-PAY LIABILITY BECAUSE THE EVIDENCE IN

SUPPORT OF THAT FINDING WAS LEGALLY COR-

RECT AND FACTUALLY SUFFICIENT TO SUP-

PORT THE FINDING (Reply to Appellants’ Point of

Error Eight).

Eighth Reply Point of Error (Restated):

THE TRIAL COURT PROPERLY ENTERED

JUDGMENT ON THE JURY’S FINDING ON TAKE-

OR-PAY LIABILITY BECAUSE THE FINDING WAS

AMPLY SUPPORTED BY THE EVIDENCE, AND

WAS NOT AGAINST THE GREAT WEIGHT AND

PREPONDERANCE OF THE CREDIBLE EVIDENCE

(Reply to Appellants’ Point of Error Nine).

Lively’s Points of Error Seven through Nine each

involve the evidentiary support for the jury’s answer to

Special Issue No. 2.

Lively contends: (1) there was no evidence to support

the jury’s answer to Special Issue No. 2; (2) there was

insufficient evidence to support the jury’s answer to

Special Issue No. 2; and (3) the jury’s answer to Special

Issue No. 2 was against the great weight and prepon-

derance of the evidence.

The evidence supporting the jury’s answer to Special

Issue No. 2 is not only sufficient, it is overwhelming,

and compels affirmance of the trial court’s judgment.

A. The Standard of Review.

1. “No Evidence” or “Legal Insufficiency” Points

of Error.

In reviewing “legal insufficiency” or “no evidence”

points, the Court must consider only that evidence and

reasonable inferences drawn therefrom in their most

favorable light to support the jury’s findings, rejecting

all contrary or conflicting evidence and inferences. King

v. Bauer, 688 S.W.2d 845, 846 (Tex. 1985); Glover v.

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

(Tex. 1981); Ray v. Farmers State Bank of Hart, 576

S.W.2d 607, 609 (Tex. 1979): Alterman v. Frost National

Bank of San Antonio, 675 S.W.2d 619, 620 (Tex. App.—

San Antonio 1984, no wr®). A “no evidence” point

will not be sustained if there is any probative evidence

to support the jury’s finding. Ray, 576 S.W.2d at 609.

2. “Factual Insufficiency” and “Great Weight and

Preponderance” Points of Error.

In passing on a complaint of insufficient evidence, a

court must consider all the evidence and reverse only

if the jury’s decision is so cleariy against the great weight

and preponderance of the evidence as to render the

judgment clearly wrong and manifestly unjust. Pool v.

Ford Motor Co., 715 $.W.2d 629, 634-35 (Tex. 1986):

In Re King’s Estate, 150 Tex. 662, 244 S.W.2d 660, 661

(1951); Alterman, 675 S.W.2d at 621.

An appellate court may not substitute its opinion

for the jury’s merely because it might have reached a

different fact conclusion. Thompson v. Wooten, 650

S.W.2d 499, 501 (Tex. App.—Houston [14th Dist.]

1983@ writ refd n.re.). Nor may an appellate court

pass on the credibility of witnesses or the weight to be

given their testimony. Rego v. Brannon, 682 S.W.2d 677,

680 (Tex. App.—Houston [Ist Dist.] 1984, writ ref’d

n.r.e.).

B. The Evidence in the Record.

The evidence supporting the jury’s answer to Special

Issue No. 2 is in fact essentially uncontroverted. First,

the Record demonstrates that Valero purchased from

Lively all the gas Lively could legally produce during

the Contract years at issue, and thus purchased the DCQ

as defined in the Contract. Second, Lively’s own “evi-

dence” glaringly failed to prove its case, even under

Lively’s erroneous theory that G-10 tests should determine

deliverability instead of the express Contract definition.

1. The Evidence Showed that Valero Took and

Paid For the Daily Contract Quantity.

As thoroughly explained in Section IIIB, supra, the

Contract requires Valero to take or pay for 90% of the

“quantity of gas [Lively] has available for delivery,”

“not exceeding the maximum . . . rate of flow permitted

by [Commission regulations].” At trial Valero presented

extensive testimony proving it had taken the DCQ under

the Contract. Lively’s Brief does not refute this evidence,

nor did Lively succeed in controverting it at trial.

(a) The Meaning of the Gas Market Demand

Rule.

Because the Contract does not obligate Valero to

take or pay for gas not legally deliverable under the

Gas Market Demand Rule, Valero introduced the 1978

Gas Market Demand Rule and offered undisputed testi-

mony from former Commission Chairman Poerner and

Parish, Valero’s Director of Proration and Producer

Affairs, concerning the Rule’s adoption and meaning.

(S.F. 1472-1557; 675-699; D. Ex. 7.) The substance

of their testimony is set forth in Section IIIC, supra.

To briefly reiterate, the Rule: (i) requires Valero to

purchase only a proportionate share of a producer's

downstream market demand, to allocate its purchases

“ratably” among its producers, and to purchase various

Call

defined categories of gas in a specified order of priority;

and (ii) proscribes Lively from producing more gas

than its ratable share, in accordance with the priority

categories, of its purchaser’s downstream market demand.

(D. Ex. 7, 20-21; S.F. 324-25, 689, 693, 710, 910,

935, 989, 1007, 1050, 1494, 1552, 1556.)

(b) Valero’s Compliance with the Gas Mar-

ket Demand Rule.

Valero then showed that it had purchased from Lively

the maximum quantity under the Rule, and thus took

the DCQ as defined in the Contract.

(i) Valero’s Downstream Market De-

mand Has Dramatically Declined

First, Valero established through unrebutted evidence

that its downstream market demand had declined to a

point where it had been forced to drastically curtail

purchases from its producers, including Lively.

Alan Anderson (“Anderson”), a specialist in natural

gas economics with a Ph.D. in economic history from

Johns Hopkins, and Valero’s President, Becraft, explained

at trial that a natural gas “market” is a function of

price. (S.F. 533, 554, 1005.) The Commission requires

Valero to charge an inflexible price for its gas equal to

the weighted average of gas (“WACOG”) plus $0.15.

(S.F. 555, 571; D. Ex. 12.)* Over the past few years

Valero’s WACOG plus $0.15 has equalled $4.00 to $4.20

6. This requirement is contained in the Final Order in Gas

Utilities Docket No. 500 dated September 4, 1979 (“Final Order’)

(D. Ex. 12; S.F. 556-59). The Appendix to the Final Order de

Scribes in great detail the WACOG calculation. (See also S5.F. 570-71.)

per MMBtu of natural gas. (S.F. 555.) Therefore,

Valero’s sales market is the market for $4.00 gas. (/d.)

That market is currently virtually nonexistent. Due

to many factors, including a reduction in industrial

consumption and governmental policies adversely im-

pacting demand,-a natural gas glut arose approximately

in 1981. (S.F. 602, 710, 713, 1040, 1495, 1483-84; D.

Ex. 11A, 13A, 38, 94.) Prices for natural gas have

fallen accordingly, currently to $1.50 per MMBtu. (S.F.

537.) Thus, Valero’s customers can purchase gas, or

use alternative fuels, at significantly lower prices than

the $4.00 and above that Valero is required to charge

them. (S.F. 529-34, 1012; D. Ex. 32.) As customers’

contracts with Valero have expired, they have sought

cheaper fuel elsewhere. (S.F. 529-34.) Valero’s market

has been drastically reduced. (S.F. 540, 568; 1040,

1532: D. Ex. 11A, 13A, 38, 64.) Its sales have declined

from 620 billion cubic feet of gas in 1981 to 70 billion

in 1986. (S.F. 540.) At the same time, its WACOG,

including cost of service, has increased. (S.F. 571; D.

Ex. 11A, 13A.)

The downstream market demand for $4.00 gas, which

is Valero’s market as established by the Commission,

is purely and simply drying up. (S.F. 540, 568, 1040,

1532; D. Ex. 11A, 13A, 38, 94.)

(ii) Valero’s Nominations from Lively

and its Other Producers Are in Ac-

cordance with its Downstream Mar-

ket Demand.

It is undisputed that Valero has taken all of the gas

available to it from Lively consistent with Valero’s down-

stream market demand. (S.F. 684.)

Parish explained that Valero scrupulously follows the

procedures required by the Rule and set forth in § IIIC

(2), supra. In fact, Valero has implemented a com-

puterized system to mathematically apportion Valero’s

gas purchase requests ratably among its producers across

its system, and in accordance with the priority categories.

(/d.) (S.F. 676-78, 682-85, 695-99, 1307, 1310-11,

1318-21; D. Ex. 16, 17, 18, 19, 61, 62.)

Valero introduced numerous exhibits, explained by

Parish, demonstrating systemwide ratability in accord-

ance with the priority categories. (D. Ex. 61, 62, 63,

64, 65, 66, 67, 68, 69, 70, 71, 72, 74; S.F. 684, 1329-

32, 1346-53, 1376.) In sum, his exhibits demonstrated

that during the Contract years in issue Valero has been

ratable in its nominations and rate requests required by

the Gas Market Demand Rule. (S.F. 1376.)

Valero’s purchases from Lively have been reduced to

virtually zero because Lively produces primarily gas well

gas (S.F. 209, 693), non-priority gas, and Valero’s

market demand has dropped below the amount of priority

gas deliverability. (D. Ex. 63, 64; S.F. 1328-31.) Thus.

Valero must satisfy its market demand exclusively through

ratable purchases from producers of higher-priority gas

(S.F. 1324-25.) Valero’s nominations have been ratable

among the non-priority gas producers. (S.F. 1332; D.

Ex. 64.)

In sum, Valero’s uncontroverted evidence showed that

it has taken al! the gas from Lively “available for de

livery,” “not exceeding the maximum . . . [production!

+. . permitted by [Commission] regulations.” Therefore

Valero took and paid for the DCO under the Contract

and the jury so found.

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: Specia! 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

the 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);

Plaintiffs’ 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, Appellants’

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 liabiity.

[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 «7 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 equal 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. Emphesis 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 wells 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.

Pursuant to Article VIII, € 8.2, of the contract, Lively

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

jor 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. Wittiams & C. Meyers, O1 & 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-A?2.

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,

Ruies 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 shall 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 SW.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 v. City of Austin, 524 S.N.

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

Court took comfort in the fact that since the injunction

required the taking of an “allowable” now set at zero, no

violation of the law was taking place. Valero Transmission

Co., 743 S.W.2d at 665-66.

Lively also faisely claims that Mitchell undermines

the effect of the force majeure clause in the Contract

The force majeure clause in the Mitchell case, however,

did not include “failure of markets” as a specified event

of force majeure, as did the Lively Contract’s force

majeure clause. In Kodiak 198] Drilling Partnership v.

Delhi Gas Pipeline Corp., 736 S.W.2d 715 (Tex. App.

—San Antonio 1987, writ ref'd n.r.e.), this Court re-

cently held that a force majeure provision § specifying

failure of markets as an event of force majeure relieved

the pipeline of its take-or-pay obligation. Kodiak is

directly on point, and eviscerates Lively’s argument.

Lively contends that the take-or-pay provision is not

“violative of any law or the Gas Market Demand Rule,

because it does not require production but payment

in licu of production.” (Motion, p. 8). Again, Lively

misses the point. The Contract itself limits Valero’s pay-

ment obligation to the amount that “Lively can legally

produce and Vaiero can legally take.

Lively asserts that the Court's opinion does not give

effect to the take-or-pay provision. To the contrary, it is

Lively that wholly disregards the Contract’s plain terms

and essentially asks this Court to impose payment obli-

gations on Valero beyond those specified in the Contract.

Therefore, the principles of contract construction set forth

in the Motion (pp. 8-9) support Valero’s position.

Each Contract stands on its own terms. This Court

properly construed the Contract, and heeded its provisions

that limited Valero’s payment obligation to the amount

Lively could legally produce and Valero could legally

take. Lively has never refuted that Valero took from

Lively all the gas Lively could legally produce and

Valero could legally take. Valero therefore complied with

the Contract.

10.

11.

12.

REPLY POINT OF ERROR: THE COURT

CORRECTLY HELD THAT THE TRIAI

COURT PROPERLY SUBMITTED TO THE

JURY SPECIAL ISSUE NO. 2 AND INSTRUC-

TION NO. 2 CONTAINING THE DEFINE

TION OF THE TERM “DELIVERABILITY”

FROM THE “DEFINITIONS” SECTION

(ARTICLE I[j]) OF THE CONTRACT.

REPLY POINT OF ERROR: THE COURT

CORRECTLY HELD THAT LIVELY

WAIVED iTS OBJECTION TO) SPECIAL

ISSUE NO. 2 AND INSTRUCTION NO. 2

CONTAINING THE DEFINITION OF “DE-

LIVERABILITY” FROM ARTICLE 1I(j) OF

THE CONTRACT.

REPLY POINT OF | RROR: THE COURT

CORRECTLY HELD FHAT THE iINSTRUC-

TIONS 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 JUDGMENT.

REPLY POINT OF ERROR: THE COURT

CORRECTLY HELI THAT IN CONSIDER-

ING THE ENTIRE SET OF INSTRUCTIONS

TO SPECIAL ISSUE NO. 2 AND THE EN-

TIRE CHARGE, THE INSTRUCTION CON-

TAINED IN THE THIRD PARAGRAPH OF

THE INSTRUCTION TO SPECIAL ISSUE

NO. 2 WAS NOT A COMMENT ON THE

WEIGHT OF THE EVIDENCE AND PROB-

ABLY DID NOT CAUSE THE RENDITION

OF AN IMPROPER JUDGMENT.

13. REPLY POINT OF ERROR: THE COURT

CORRECTLY OVERRULED APPELLANTS’

POINTS OF ERROR THREE, FOUR, AND

FIVE.

Lively submitted the very instruction of “deliverability”

of which it now complains. This alone justifies the Court’s

Opinion, and compels denial of its Motion.

Lively preposterously asserts that “when viewed in their

entirety the extensive objections were sufficient and...

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.” (Motion, p. 13).

Whether considered in their entirety, or separately, Lively’s

objections include no objection to the definition of “de-

liverability” in the charge. In fact, Lively submitted the

definition, so it would be contradictory to impute an

“objection” to a definition Lively submitted.

Moreover, for reasons discussed extensively in Appel-

lee’s Brief and the Opinion, the issue submission was

entirely proper, and thus could not have nudged the

jury in the wrong direction. (See Appellee’s Brief, pp.

25-34).

15.* REPLY POINT OF ERROR: THE COURT

CORRECTLY HELD THAT THE TRIAL

COURT FAIRLY SUBMITTED SPECIAL

ISSUE NO. 2 AND PROPERLY CONDI-

TIONALLY SUBMITTED SPECIAL ISSUE

NO. 3.

* Lively presented no 14th point of error in its Motion.

16.

REPLY POINT OF ERROR: THE COURT

PROPERLY OVERRULED APPELLANTS’

POINT OF ERROR SIX.

The response to these points of error is thoroughly

addressed in Appellee’s Brief. In sum, the ultimate and

controlling issue was liability, the inquiry of Special Issue

No. 2. Special Issue No. 2 is in fact worded almost

exactly the way Lively described the central issue in its

own Brief. (See Appellee’s Brief, pp. 32-33). Conditioning

submission of the damages issue upon an answer to the

controlling liability issue was proper.

17.

18.

19.

20.

“REPLY POINT OF ERROR: THE COURT

CORRECTLY HELD THAT LIVELY CON-

CEDED THAT THE EVIDENCE OF THE

GAS MARKET DEMAND RULE SUPPORTS

THE JURY’S FINDING IN SPECIAL ISSUE

NO. 2.

REPLY POIN¥ OF ERROR: THE COURT

CORRECTLY HELD THAT THERE WAS

EVIDENCE TO SUPPORT THE JURY’S

FINDING ON TAKE-OR-PAY LIABILITY.

REPLY POINT OF ERROR: THE COURT

CORRECTLY HELD THAT THERE IS

LEGALLY SUFFICIENT EVIDENCE TO

SUPPORT THE JURY’S FINDING ON TAKE-

OR-PAY LIABILITY.

REPLY POINT OF ERROR: THE COURT

CORRECTLY REFUSED TO HOLD THAT

THE JURY’S FINDING ON TAKE-OR-PAY

LIABILITY WAS AGAINST THE GREAT

WEIGHT IN PREPONDERANCE OF THE

EVIDENCE.

21.

22.

REPLY POINT OF ERROR: THE COURT

CORRECTLY OVERRULED APPELLANTS’

POINTS OF ERROR SEVEN, EIGHT, AND

NINE.

REPLY POINT OF ERROR: THE COURT

CORRECTLY AFFIRMED THE JUDGMENT

OF THE TRIAL COURT.

As established in Appellee’s Brief, the uncontroverted

evidence in the Record demonstrates that Valero pur-

chased from Lively all the gas Lively could legally

produce during the contract years at issue, and thus

purchased the “DCQ” as defined in the Contract. More-

over, Lively’s own “evidence” glaringly failed to prove

its case, even under Lively’s erroneous theory that

mechanical testing alone should determine “deliverabil-

ity” instead of the express contract definition. (See Ap-

pellee’s Brief, pp. 34-49).

y < R

24.

REPLY POINT OF ERROR: THE COURT'S

ACTION IN APPLYING THE TEXAS GAS

MARKET DEMAND RULE TO RELIEVE

VALERO OF ANY PAYMENT OBLIGA-

TION IN EXCESS OF THAT EXPRESSLY

DEFINED BY THE CONTRACT IS NOT

INVALID, AS THE NATURAL GAS POLI-

CY ACT DOES NOT PREEMPT THE TEXAS

GAS MARKET DEMAND RULE AS AP-

PLIED BY THIS COURT.

REPLY POINT OF ERROR: THE GAS

MARKET DEMAND RULE AS APPLIED

BY THE COURT DOES NOT VIOLATE

THE COMMERCE CLAUSE OF THE

UNITED STATES CONSTITUTION.

In its Motion, Lively makes two arguments it never

before has alleged: that the Gas Market Demand Rule

is preempted by the Natural Gas Policy Act, and that

it violates the Commerce Clause. (Motion, pp. 20-28).

First, in its Appellant’s Brief and Reply Brief Lively

never controverted the validity of the Gas Market De-

mand Rule per se, or the Railroad Commission’s juris-

diction over Lively and Valero. It cannot do so for the

first time on rehearing. See Gillen v. Diadrill, Inc., 624

S.W.2d 259, 264 (Tex. App. — Corpus Christi 1981,

writ dism’d).

Moreover, its arguments are meritless. Lively cites

Transcontinental Gas Pipeline Corp. v. State Oil & Gas

Board of Mississippi, 106 S. Ct. 709 (1986). In Transco,

however, the court discussed the application of a Missis-

Sippi state ratable take orcer to an interstate pipeline,

not an intrastate pipeline like Valero. The Court noted

in part that Transco’s compliance with Mississippi's law

“disturbs the uniformity of the federal scheme, since

interstate pipelines would be forced to comply with varied

State regulations of their purchasing practices.” 106 S.

Ct. at 712. Thus, Transco is wholly inapposite, which

perhaps is why Lively never cited or based a point of

error upon it in its appellate briefing.

Moreover, the order in McGoldrick Oil Co. v. United

Gas Pipe Line Co., C.A. No. H-84-4971 (September 17,

1987) is also inapposite. First, defendant United Gas

is again an interstate pipeline.

Incredibly, Lively asserts that “no valid reason exists

for distinguishing between interstate and intrastate pipe-

lines. . . .” Lively therefore would welcome the inter-

ference of the Federal Energy Regulatory Commission

in strictly intrastate dealings, when even the federal courts

themselves have not gone this far. The logical extension

of Lively’s argument is that the Texas Railroad Com-

mission, and the Texas statutes on conservation, are all

entirely preempted by the federal regulatory scheme. It

is not surprising that none of the cases Lively cites

support this proposition.

Moreover, the McGoldrick court noted that “the Texas

rule is relied on by United solely to free itself of a

contractual obligation. . . .” Valero, however, is not

relying on the Gas Market Demand Rule to unilaterally

free Valero of a contractual obligation. Rather, in this

case the Contract does not impose on Valero any obliga-

tion to pay for gas it cannot legally take.

Finally, no case holds, even by analogy, that the Gas

Market Demand Rule violates the Commerce Clause.

The Motion presents no valid reasons for rehearing

and should be denied.

Respectfully submitted,

Bracewell & Patterson

By /s/ J. CLIFFORD GUNTER III

J. Clifford Gunter III

TBA No. 08627000

Carrin F. Patman

TBA No. 15572500

Laura B. Herring

TBA No. 03561400

Gregory C. King

TBA No. 11443200

2900 South Tower Pennzoil Place

Houston, Texas 77002

(713) 223-2900

Attorneys for Appellee,

Valero Transmissiun Company

CERTIFICATE OF SERVICE

I hereby certify that a true and correct copy of the

above and foregoing Valero Transmission Company's

Response in Opposition to Appellants’ Motion for Re-

hearing has been served on opposing counsel by certified

a return receipt requested, on the 18th day of April,

By /s/ CARRIN F. PATMAN

Carrin F. Patman

NO. C-7676

IN THE

SUPREME COURT OF TEXAS

LIVELY EXPLORATION COMPANY, ET AL.,

Petitioners

VS.

VALERO TRANSMISSION COMPANY,

Respondent

FROM NO. 04-87-00380-CV

IN THE COURT OF APPEALS FOR THE

FOURTH SUPREME JUDICIAL DISTRICT OF

TEXAS AT SAN ANTONIO,

BEXAR COUNTY, TEXAS

RESPONDENT'S REPLY TO

APPLICATION FOR WRIT OF ERROR

J. Clifford Gunter III

Carrin F. Patman

Laura B. Herring

Gregory C. King

BRACEWELL & PATTERSON

2900 South Tower Pennzoil Place

Houston, Texas 77002

(713) 223-2900

Attorneys for Respondent,

Valero Transmission Company

COMPLETE LIST OF THE PARTIES

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 Wil! 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

Theodore L. Wilkinson

Respondent:

Valero Transmission Company

100

NO. C-7676

IN THE

SUPREME COURT OF TEXAS

LIVELY EXPLORATION COMPANY, ET AL.,

Petitioners

vs.

VALERO TRANSMISSION COMPANY,

Respondent

FROM NO. 04-87-00380-CV

IN THE COURT OF APPEALS FOR THE

FOURTH SUPREME JUDICIAL DISTRICT OF

TEXAS AT SAN ANTONIO,

BEXAR COUNTY, TEXAS

RESPONDENT'S REPLY TO

APPLICATION FOR WRIT OF ERROR

To The Honorable Supreme Court of Texas:

Valero Transmission Company, successful appellee in

Cause No. 04-87-00380-CV, in the Court of Appeals for

the Fourth Supreme Judicial District of Texas at San

Antonio, and defendant in the District Court, respectfully

submits this Reply to the Application for Writ of Error of

petitioners Lively Exploration Company, et al.

101

I. STATEMENT OF THE CASE

Petitioners Lively Exploration Company, et al. (“Live

ly”) sued respondent Valero Transmission Company

(“Valero”) for breach of a gas purchase contract (“Con

tract”) requiring Valero to take, or pay for if available

90% of the quantity of gas Lively had “available for

delivery,” “not exceeding the maximum rate of flow

permitted by the laws, rules and regulations of the Rail

road Commission of Texas. .. .” (Contract, arts. V, I{j})

The jury found against Lively on its take-or-pay claim

and the trial court entered judgment in favor of Valero

The court of appeals affirmed the trial court's judgment

Lively has filed an Application for Writ of Error (“Appi

cation”) with this Court.

The court of appeals’ opinion correctly states the nature

and results of the suit.

Il. REPLY TO STATEMENT OF JURISDICTION

The Supreme Court has no jurisdiction to consider the

Application because the holdings of the Court of Appeals

to which Lively objects were cerrect holdings of sub-

Stantive law.

lil. REPLY POINTS OF ERROR

Reply Point of Error 1]:

THE COURT OF APPEALS CORRECTLY HELD

THAT THE TEXAS GAS MARKET DEMAND RULE

APPLIES IN DETERMINING THE OBLIGATIONS

OF VALERO UNDER THE TAKE-OR-PAY PROVI-

SION OF THE CONTRACT. (Reply to Lively’s Point

of Error 1)

102

Reply Point of Error 2:

THE COURT OF APPEALS CORRECTLY HELD

THAT THE GAS MARKET DEMAND RULE WAS

RELEVANT AND MATERIAL TO PROVE OR DIS-

PROVE THAT THERE WAS A BREACH OF THE

TAKE-OR-PAY PROVISION OF THE CONTRACT.

(Reply to Lively’s Point of Error 2)

Reply Point of Error 3:

THE COURT OF APPEALS CORRECTLY HELD

THAT THE INCLUSION OF THE TEXAS GAS

MARKET DEMAND RULE IN THE CHARGE TO

THE JURY WAS NOT HARMFUL ERROR. (Reply to

Lively’s Point of Error 3)

Reply Point of Error 4:

THE COURT OF APPEALS CORRECTLY HELD

THAT THE OBLIGATIONS OF VALERO UNDER

THE TAKE-OR-PAY PROVISION OF THE CON-

TRACT ARE CONTROLLED BY THE DEFINITIONS

OF “DAILY CONTRACT QUANTITY” AND “DE-

LIVERABILITY” SET FORTH IN ARTICLE I OF

THE CONTRACT. (Reply to Lively’s Point of Error 4)

Reply Point of Error 5:

THE COURT OF APPEALS CORRECTLY HELD

THAT THE TRIAL COURT PROPERLY SUBMITTED

TO THE JURY SPECIAL ISSUE NO. 2 AND IN-

STRUCTION NO. 2 CONTAINING THE DEFINI-

TION OF “DELIVERABILITY” FROM ARTICLE I())

OF THE CONTRACT. (Reply to Lively’s Point of

Error 5)

Reply Point of Error 6:

THE COURT OF APPEALS CORRECTLY HELD

THAT LIVELY WAIVED ITS OBJECTION TO SPE-

103

CIAL ISSUE NO. 2 AND INSTRUCTION NO. 2? CON.

TAINING THE DEFINITION OF “DELIVERARIL-

ITY” FROM ARTICLE I(j) OF THE CONTRACT

(Reply to Lively’s Point of Error 6)

Reply Point of Error 7

THE COURT OF APPEALS CORRECTLY HELD

THAT THE INSTRUCTIONS 10 SPECIAL ISSUE

NO. 2 WERE RELEVANT, WERE NOT A COMMENT

ON THE WEIGHT OF THE EVIDENCE, AND DID

NOT CAUSE A RENDITION OF AN IMPROPER

JUDGMENT. (Reply to Lively’s Point of Error 7)

Reply Point of Error 8

THE COURT OF APPEALS CORRECTLY HELD

THAT THE TRIAL COURT FAIRLY SUBMITTED

SPECIAL ISSUE NO. 2 AND CONDITIONALLY

SUBMITTED SPECIAL ISSUE NO. 3 (Reply to Lively's

Point of Error 8)

Reply Point of Error 9

THE COURT OF APPEALS CORRECTLY HELD

THAT LIVELY CONCEDED THAT THE EVIDENCE

OF THE GAS MARKET DEMAND RULE SUP.

PORTED THE JURY FINDING AND SPECIAL ISSUE

NO. 2. (Reply to Lively’s Point of Error 9)

Reply Point of Error 10:

THE COURT OF APPEALS CORRECTLY HELD

THAT THERE WAS EVIDENCE TO SUPPORT THE

JURY'S FINDING ON TAKE-OR-PAY LIABILITY.

(Reply to Lively’s Point of Error 10)

104

Reply Point of Error 11:

THE COURT OF APPEALS CORRECTLY HELD

THAT LEGALLY CORRECT EVIDENCE SUPPORTS

THE JURY’S FINDING ON TAKE-OR-PAY LIA-

BILITY. (Reply to Lively’s Point of Error 11)

Reply Point of Error 12:

THE COURT OF APPEALS’ ACTION IN APPLY-

ING THE TEXAS GAS MARKET DEMAND RULE

TO RELIEVE VALERO OF ANY PAYMENT OBLI-

GATION IN EXCESS OF THAT EXPRESSLY DE-

FINED BY THE CONTRACT IS NOT INVALID, AS

THE NATURAL GAS POLICY ACT DOES NOT PRE-

EMPT THE TEXAS GAS MARKET DEMAND RULE

AS APPLIED BY THIS COURT. (Reply to Lively’s

Point of Error 12)

Reply Point of Error 13:

THE GAS MARKET DEMAND RULE AS APPLIED

BY THE COURT OF APPEALS DOES NOT VIO-

LATE THE COMMERCE CLAUSE OF THE UNITED

STATES CONSTITUTION. (Reply to Lively’s Point of

Error 13)

IV. STATEMENT OF FACTS PERTINENT TO ALL

REPLY POINTS OF ERROR.

A. The Parties.

Valero is a public utility intrastate gas pipeline com-

pany that purchases, transports, and sells natural gas

throughout the State of Texas. Valero operates over

7,000 miles of pipeline connected to over 13,000 wells.

105

(S.F. 542, 677.) Valero’s customers include gas distri-

bution companies that service cities such as San Antonio,

Austin, and Dallas, industrial consumers, and other pipe-

line companies. (S.F. 529-30.)

Lively is comprised of producers, operators, royalty

interest owners, and sellers of oil and gas in Texas.

(S.F. 105-07). Valero and Lively agree that they are at

all times subject to the regulatory authority of the Rail-

road Commission of Texas (“Commission”). Tex. Rev.

Civ. Stat. arts. 6050-53 (Vernon 1962 and Vernon Supp.

1987); Tex. Nat. Res. Code Ann. Sec. 81.051, 111.081

(Vernon 1978). (S.F. 419-23; 675, 1552, 1556.)

B. The Contract.

On February 12, 1973, Lively and Valero’s predeces-

sor-in-interest entered into the Contract (P. Ex. 1) for

the sale of natural gas produced from Liveiy’s properties

in Sutton County, Texas. At the time Lively and Valero

entered into the Contract, demand for natural gas far

outstripped supply, and Lively and Valero both concede

that neither foresaw the eventual dramatic oversupply

that has changed the entire nature of the natural gas

industry. (S.F. 147-48, 593-94.)

Lively and Valero included various provisions in the

Contract relevant to this lawsuit. Among these provisions

is a “take-or-pay” provision:

Subject to the other provisions hereof, Buyer agrees

to purchase and pay for (or, if Buyer's performance

hereunder is not excused by other provisions of this

agreement, pay for, if available, whether taken or

not) during the days cf each Contract year... a

Daily Contract Quantity of gas from Seller’s Lands

106

and Leases in the Contract Area equal to ninety

percent (90% ) of Seller’s daily Deliverability of gas

hereunder.

(P. Ex. 1, p. 12, Art V, § 5.3) (emphasis supplied).

The take-or-pay provision references two specific terms

that are defined in the Contract and operate with the

take-or-pay clause to set forth Valero’s take-or-pay obli-

gations: “Daily Contract Quantity” (“DCQ”) and “De-

liverability.”” The Contract defines “DCQ” as “the quan-

tity of gas per day, averaged over each contract year,

which Buyer is required to take from Seller hereunder

at the point of delivery specified in this Agreement.”

(P. Ex. 1, p. 2, art. Tfe].)

Since the Contract states that the DCQ is 90% of

Deliverability, the extent of any take-or-pay obligation

must be measured in accordance with the specific Con-

tract definition of “Deliverability”:

[Tlhat 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 exceeding the maximum (including overproduc-

tion) rate of flow permitted by the laws, rules and

regulations of the Railroad Commission of Texas or

other governmental regulatory agency having juris-

diction. Buver 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 Com-

mission) sufficient to cover the daily quantities

which from time to time Buyer is entitled and elects

107

to take hereunder up to the maximum quantity in

accordance with good engineering and gas produc-

tion practice can be produced from Seller’s wells in

the field.

(P. Ex. 1, p. 3, art. I[j]) (emphasis supplied. )’

Thus, the Contract’s take-or-pay provision requires

Valero to take, or pay for if available, 90% of the quan-

tity of gas Lively has available for delivery, not to exceed

the maximum production allowed by the Commission.

The take-or-pay provision was included to reassure

Lively that Valero would not discriminate against Lively

by taking gas from a producer with a lower price to

the exclusion of Lively, whose gas in the subject ar

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