Petition for Writ of Certiorari — Llano, Inc. v. International Minerals & Chemical Corp.

85-1041 as ais

OL, JR.

Co

¢

IN THE

Supreme Court of the United States

OCTOBER TERM, 1985

LLANO, INC.,

Petitioner,

Vv.

INTERNATIONAL MINERALS AND

CHEMICAL CORPORATION,

Respondent.

ON WRIT OF

CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

PETITION FOR CERTIORARI

DON MADDOX JERON STEVENS

Maadox, Renfrow & Saunders MARK HELD

P.O. Box 5370 Baker & Botts

Hobbs, New Mexico 88241 3000 One Shell! Plaza

(505) 393-0505 Houston, Texas 77002

(713) 229-1432

Attorneys for

LLANO, INC.

QUESTION PRESENTED

Is a buyer which is obligated either

(1) to take gas or (2) to pay a

minimum bill relieved of the

obligation to pay when it chooses

to comply early with a governmental

regulation and thereby causes

itself not to need the gas but

nevertheless requires the seller

to stand ready to deliver gas?

\7

CONTENTS

Page

er ere ee eae re l

I gra ee eee ce ee ran ne eo 2

eee a re as kee Vas AS KOA oe Oe 2

STATUTORY PROVISIONS INVOLVED .................-. 2

me UU A gh a etek eauakiwn sees 2

REASONS FOR GRANTING THE WRIT

1. The issue in this case will have a profound

impact on the natural gas and other energy

industries, including local utilities.

The court of appeals’ decision will create

unnecessary uncertainty in these industries......... 4

2. The court's opinion was arbitrary and capri-

cious and internally inconsistent on a dis-

positive issue. The result is inequitable

to Ligne GN WARCONOCIONEDIS...... 0... cee ees 9

EE ere FET EEO EL CLEP TLE SER Oe 1]

ee e.g Erne 12

APPENDIX A

APPENDIX B

APPENDIX C

AUTHORITIES

CASES

Beck v. Indianapolis Light & Power Co., 76 N.E.

i A Ss ks Wala ka tea KK As ons 0% 6

Birdsboro Corp. v. Pennsylvania Public Utility

Comm. and UGI Corp., 406 A.2d 1184 (Pa.

ee ee ee a gag sx kb as 6

Carborundum Co. v. Tennessee Valley Authority,

$21 ©. Seen. S00 (5.0). Teme. WS}... ... 2. 0s 5... 6

General Cable Corp. v. Citizens Utilities Co., 555

fe. Bf ee 8 | ere re ere 6

Page

Gould v. Edison Illuminating Co., 60 N.Y.S. 559

OR PRU oe ry eee ee 6

Houston Pipe Line Co. v. Oxy Petroleum, Inc.,

597 S.W.2d 57 (Tex. Civ. App. — Corpus

Coriets UGG, wrel GOURD 5 xk vcd kagek ces asia 7

Lone Star Gas Co. v. McCarthy, 605 S.W.2d 653

(Tex. Civ. App. — Houston — Ist Dist. 1980) ....... 6

Marin Water & Power Co. v. Town of Sausalito,

CS O-F07 GR: FRESE oo a ca ee ee ees 6

Mobil Oil Corp. v. Tennessee Valley Authority,

SG? ©. Sapp. 406 €re.2 A. Tees. okies cece 4,6

Olinkraft, Inc. v. Gerend, 364 So.2d 639 (La.

A A CIE a 5h se hic rn eee ee ee 7

Oliver-Mercer Elec. Coop. Inc. y. Fisher, 146

I. . 26 306 (RG: TOUS 6c cee ee ee 6

San Joaquin Light & Power Corp. v. Costaloupes,

TPR PY. OA CE. FR hls cca eee 6

Wisconsin Gas Co. v. FERC, 770 F.2d 1144

(WAL. Coe. TRS soc eee 4

STATUTES

3 UBC. 6 TUF Do cc eeeee 4

78 USC. § 129601) ....505i5043 ee 2

N.M. Stat. Ann. § $5-2-615 (1978) (U.C.C.).......... 10

No.

It' THE

Supreme Court of the United States

OCTOBER TERM, 1985

LLANO, INC., Petitioner.

Vv.

INTERNATIONAL MINERALS AND

CHEMICAL CORPORATION, Respondent.

PETITION FOR A WRIT OF

CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

Llano, Inc. (Llano) respectfully prays that a writ of certiorari

issue to review the judgment and opinion of the United States

Court of Appeals for the Tenth Circuit entered in this proceeding

on August 9, 1985.

QUESTION PRESENTED

Is a buyer which is obligated either (1) to take gas or (2) to

pay a minimum bill relieved of the obligation to pay when it

chooses to comply early with a governmental regulation and

thereby causes itself not to need the gas but nevertheless requires

the seller to stand ready to deliver the gas?

OPINION BELOW

The opinion of the court of appeals {not yet reported) is

appended hereto as Appendix A. It reverses the judgment of the

district court in favor of Llano and remands the case with

direction to enter a declaratory judgment in accordance with the

opinion of the court of appeals. The order denying rehearing is

not reported but is appended hereto as Appendix B. The opinion

of the district court (not reported) is appended hereto as Appen-

dix C.

JURISDICTION

The judgment of the United Siates Court of Appeals for the

Tenth Circuit was entered on August 9, 1985. A timely petition

by Llano for rehearing was denied on September 18, 1985. This

Court’s jurisdiction is invoked under 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

This is a question of whether basic federal contract law should

be contrary to basic state and common contract law; no federal

statutes are involved.

STATEMENT OF THE CASE

Llano is a New Mexico corporation engaged in the intrastate

transportation and sale of natural gas. International Minerals and

Chemical Corporation (IMC) is a New York corporation operat-

ing a potash mining facility near Carlsbad, New Mexico. On

February 24, 1972, these companies executed a contract (which

expired on June 31, 1982) for the delivery of natural gas by Llano

to IMC, continuing a transaction begun in 1961. IMC sought a

declaratory order in the United States District Court for the

District of New Mexico determining its nghts and duties under

the contract. Llano counterclaimed for damages, alleging that

IMC had breached the contract by failing either to purchase the

minimum contract volumes or to pay the minimum bill. The

district court had jurisdiction by reason of diversity of citizenship

between Llano and IMC.

The contract contained a “Minimum Annual Purchase Provi-

sion” that required IMC to take a minimum volume of gas from

Llano or alternatively to pay a minimum bill. Llano was required

to be able each day to deliver to IMC a minimum volume of

4,800 million British Thermal Units of gas. The “Adjustment of

Minimum Bill” provision (quoted in App. A at 5) provided that if

IMC was unable to take gas for any reason beyond IMC’s

reasonable control or for any reason based on force majeure, the

minimum purchase requirements would be appropriately ad-

justed. Neither clause excused payment of the minimum bill.

About 60 percent of the gas supplied under the contract was

burned in IMC’s submerged evaporators as part of a drying

process used in the manufacture of chemical fertilizers. This

process released particulates into the atmosphere as a by-product.

On December 15, 1978, the Environmental Improvement Board

of New Mexico (EIB) adopted air quality standards concerning

particulate emissions, calling for reduction of emissions to 350

pounds per hour after December 31, 1982, and to 30 pounds per

hour after December 31, 1984.

IMC chose to adopt a process that used virtually no natural

gas; the district court found that IMC had failed to show other

alternatives examined at trial (and which would have utilized

natural gas) were unavailable. IMC began testing this process in

June 1980. In May and August of 1980, IMC notified Llano that

tests would be made and gas consumption reduced for a short

time, but never informed Llano that the testing was in response to

environmental probiems, or that the reduced gas consumption

might be permanent because of a “force majeure” situation.

iMC rebuffed Llano’s attempts to learn what the problem was

and would not allow Llano to resolve it by permitting Llano to

assign some gas to others. By March 1981, IMC had completely

eliminated the submerged evaporators, well in advance of the

requirements of the regulations adopted by the EIB.

At all times under the contract, Llano performed its obligation

to stand by ready fo deliver the full daily contract volumes. The

Capacity in its system which Llano had allocated for twenty years

to serving IMC was never allocated to any other customer.

Indeed, if Liano had failed on any day to deliver the volumes

IMC requested, IMC would have had a cause of action against

Llano.

REASONS FOR GRANTING THE WRIT

1. The issue in this case will have a profound impact on the

natural gas and other energy industries, including local

utilities. The court of appeals’ decision will create unneces-

sary uncertainty in these industries.

Minimum take or pay obligations are pervasive in the natural

gas industry (from production through distribution and consump-

tion) and form the core of buyers’ obligations in contracts

involving billions of dollars. These obligations are also common

in electricity and coal contracts, although they go by a variety of

names. Regardless of the name, their character is the same: the

buyer must either (1) purchase some minimum quantity of the

commodity or (2) pay some minimum amount if takes of the

commodity are deficient. The seller’s obligation is to stand by to

serve the buyer up to the limit of what the buyer can request.

Decades of custom and usage have sanctioned minimum take

or pay obligations. And (until now) the courts have uniformly

respected the integrity of these obligations even where force

majeure has prevented the buyer from taking the commodity.”

One of the better discussions regarding the nature and enforce-

ability of these obligations is found in Mobil Oil Corp. v. Tennes-

‘Until recently, federal policy encouraged minimum bills under

various names. See Wisconsin Gas Co. v. FERC, 770 F.2d 1144 (D.C.

Cir. 1985). That case provides an excellent discussion of the role of

minimum bills for gas pipelines regulated under the Natural Gas Act, 15

U.S.C. § 717 et seq. (which Llano is not). In all cases minimum bills,

demand charges, take or pay clauses, efc., serve the same function, ie.,

they guarantee a minimum level of revenue to the supplier in return for

Standing ready to serve at any time. For example, any resident of

Washington, D.C., will pay a minimum bill for gas and electricity for

any one month even if the resident is out of town all month and has

turned all appliances off; the local supplier is required to stand by to

supply service if the resident returns early and demands service.

* Llano has been unable to find any decision (other than the decision

below) refusing to enforce such a clause, nor did either the court below

or IMC cite such a case.

see Valley Authority, 387 F. Supp. 498 (N.D. Ala. 1974),

wherein Mobil had agreed to pay a minimum bill. The court

described the contract as follows:

“Under such a contract, the power supplier agrees to provide

a service by making available the customer's contract de-

mand for the contract term. The customer does not agree to

use any particular amount of power, but merely to pay a

specified sum in exchange for the service — in this case, the

minimum bill or [the amount predicated on actual power

taken], whichever is higher. The nature of such a contract is

well described in [Gatineau Power Co. v. Fraser Companies,

Lid. (1941) 20 D.L.R. 487, 496-500, 517 (Brunswick

1940) }:

‘It seems quite clear to me that under this contract there

are mutual obligations. There is an obligation upon the

plaintiff to provide the service specified, that is, the

maintenance of...electrical energy, [some] to be

available at all times [and some] under [certain condi-

tions]. Provided that is done by the plaintiff then there

is an obligation upon the defendant to pay for such

electrical energy at the rate specified, namely, at the

rate of $20 per horsepower per year, payable monthly. |

do not say that the defendent was bound to take the

power, even if available; the plaintiff was providing a

service, the defendant might use the service or not, but if

the service were available the defendant was bound to

pay for it [pp. 498-99]. 387 F. Supp. at S11-12.

(Citations omitted.) (Emphasis added.)

Mobil closed down part of its plant and incurred minimum bill

charges for three years. The court ruled that TVA was entitled to

judgment as a matter of law. The court said Mobil had not

breached the contract by reducing its takes of power; Mobil had

the option and right to do that. Rather, TVA was suing for

amounts accrued under the contract and for which Mobil had

bargained.

The court cited and relied’ os ‘Sun Joaquin Light & Power

Corp. v. Costaloupes, 274 P. 84 (Ca.. 1929), where the buyer was

held liable for the minimum bill even though its plant had been

destroyed by fire. In San Joaquin, the court relied on Marin

Water & Power Co. v. Town of Sausalito, 143 P. 767 (Cal. 1914).

Both Mobil and San Joaquin quoted the following from the

California Supreme Court’s language in Marin Water.

“[ T]he contract with which we are here concerned, however,

is not the usual agreement to accept and pay for personal

property. It is... one of that class of agreements in which

one of the parties promises to pay a minimum sum for a

commodity at a fixed rate, such amount to become due

whether enough of the commodity te equal such minimum

price at the agreed rate is required or a * Such agreements

have been upheld and the minimum rate as been sustained

as the true measure of recovery, the promise to pay such sum

being a part of the direct obligation of the contract and in no

sense a covenant for liquidated damages in case of breach.”

274 P. at 86.

In turn, other courts have relied on Mobil to reach the same

result. General Cable Corp. v. Citizens Utilities Co.. 555 P.2d

350, 353 (Ariz. Ct. App. 1976); Carborundum Co. v. Tennessee

Valley Authority, 521 F. Supp. 590, 594 (S.D. Tenn. 1981).

In Birdsboro Corp. v. Pennsylvania Public Utility Comm. and

UGI Corp., 406 A.2d 1184 (Pa. Comm. Ct. 1979), Birdsboro had

been buying gas from UGI Corp., the local gas company, under a

contract with a minimum bill provision. UGI’s pipeline supplier

was forced to reduce deliveries to UGI and UGI in turn delivered

to Birdsboro less than the minimum bill amount. Nevertheless,

Birdsboro was forced to pay. See also Lone Star Gas Co. y.

McCarthy, 605 S.W.2d 653 (Tex. Civ. App. — Houston — Ist

Dist., 1980), where the buyer under a take or pay clause was

required to pay the minimum bill despite the facts that (1) the

contract permitted buyer to “make up” the deficiency payment by

* See also Oliver-Mercer Elec. Coop., Inc. v. Fisher, 146 N.W.2d 346

(N.D. 1966); Beck v. Indianapolis Light & Power Co., 76 N.E. 312

(Ind. App. 1905); Gould v. Edison IMluminating Co., 60 N.Y.S. 559

(Sup. Ct. 1899).

taking gas later without payment and (2) the well depleted before

such right could be exercised. See also Houston Pipe Line Co. v.

Oxy Petroleum, Inc., 597 S.\W.2d 57 (Tex. Civ. App. — Corpus

Christi 1980, writ dism’d), and Olinkraft, Inc. v. Gerend, 364

So.2d 639 (La. Ct. App. 1978).

The rationale for minimum bills is to impose on the buyer the

risks involved in either marketing or consuming the gas. The

seller assumes the risk that it can line up an adequate source of

supply and be able to make deliveries to the buyer. Competitive

conditions, of course, play their role in determining the features of

take or pay obligations. In Llano’s case, and generally in

contracts between pipelines and purchasers, gas supplies must be

lined up and plant must be constructed to meet a given level of

projected demand. With multiple suppliers and multiple buyers,

and with contracts of short or very long duration, the pipeline (or

the electricity supplier) bears the risk of overall demand and

supply being in equilibrium over time.

The only method by which a pipeline can attempt to equaic

supply and demand is by lining up purchase and sales contracts

that try to equate the two. A take or pay obligation accepted by a

buyer nails down, as it were, a certain level of demand. Even if

the buyer takes less than the minimum, for whatever reason,

revenue will accrue to the seller as if the buyer had taken the

minimum, assuring that the seller will recover the sums it

bargained for to cover the capital and operating costs of standing

ready to serve. The court below, however, has struck a blow

against this principal method of risk allocation. If that court's

decision is allowed to stand, sellers of natural gas, electricity and

coal may find that their contracts are not reliable and that it is the

courts, not the parties, that will determine who bears what risks.

And such a determination by the courts would be retroactive.

That will necessarily change the bargaining process and the costs

to ultimate consumers.

The governmental regulation which IMC claims relieved it of

its take or pay obligation did not require IMC to be in final

compliance until December 31, 1984 — one and a half years after

the contract was to expire and over three and a half years after

>

IMC ceased taking gas from Llano; it clearly did not relieve IMC

of the obligation to pay.

The court of appeals did not believe that IMC should be

excused by either force majeure or commercial impracticability

(and indeed expressly found that the requisite notice for either

was never given). Instead, the court devised two novel reasons for

allowing IMC to escape its take or pay obligation under the

contract: (1) as a matter of policy, corporations which cooperate

with local regulatory agencies and comply prematurely with the

letter and spirit of legally proper regulations are to be “en-

couraged”; and (2) “as a matter of law, government policy need

not be explicitly mandatory to cause [commercial] impracticabil-

ity’ (App. A at 13), despite the fact that payment of the

minimum bill was not at all impracticable.

The form of “encouragement” which the court chose, however,

is a blatant exercise of judicial power to impair a contract. The

court held in effect that a company will be encouraged to comply

early with regulations by imposing the risks which the company

had contracted to bear on the other party to the contract. This

type of encouragement is antithetical to the (perhaps now out-

dated) tenant of contract law that parties are to be encouraged to

perform their contracts.

Equally objectionable in this case is the court’s argument that

governmental policy need not be explicit or mandatory to cause

commercial impracticability. The fact is that the pollution

regulation was both explicit and mandatory — that companies

must cut down particulates by December 31, 1984. The point is

that IMC began curtailing its takes from Llano. in June of 1980,

three and a half years before final compliance with the regulation

was necessary. Most important, the court fully ignored the fact

that the EIB regulation did not affect IMC’s ability to pay the

minimum bill, while Llano stood ready to serve as reauired by the

contract.

The cases cited by the court of appeals (App. A at 13-14)

highlight the novel result reached here. In none of those cases

was there an alternative obligation to pay a minimum bill if the

defendant.could not perform its primary obligation. The court

8

totally ignored that fundamental difference. In addition, all three

of those cases involved the exigencies of war. In the first case, the

government’s “jawboning” was directed to immediate compli-

ance; in the latter two cases the shipowners anticipated events

(war or government requisitions for war) that may have occurred

at any time. Immediate change in conduct in the context of war

was involved in those cases; in IMC’s cacz, on the other hand, the

requisite compliance was years away Chis is particularly signifi-

cant because, as will be discussed beluw, IMC had ample time to

notify Llano of these crucial circumstances. But no such notice

was ever given, and Llano’s attempt to deal with IMC’s reduced

takes received a cold shoulder.

2. The court’s opinion was arbitrary and capricious and inter-

nally inconsistent on a dispositive issue. The result is

inequitable to Llano and unconscionable.

The bitter irony of the court’s opinion is highlighted by its

comments on the requirements for, and absence of, notice by

IMC to Llano. The contract required notice of any force

majeure; otherwise, Llano would be forced to stand fully ready to

serve without the option of seeking other opportunities to replace

the purchases by IMC. IMC drafted, but never sent to Llano, a

letter notifying Llano of IMC’s reduced gas consumption and the

reasons therefor. App. C at 14. The court found that IMC’s

notice to Llano “was inadequate in that no reasons were given as

to why gas consumption would be decreased. Adequate notice

was required to trigger the protections of the [force majeure]

provision” (App. A at 10).

Another vital aspect of the notice issue was overlooked by the

court of appeals. In September of 1980, Llano attempted to

obtain IMC’s approval to assign to a third party a portion of the

gas supply that Llano had under purchase contract to supply

IMC’s maximum contract demand. The district court found that

IMC did not indicate to Llano any lesser estimate of future gas

consumption, nor did IMC respond in any fashion to Llano’s

request for assignment. Llano’s good faith attempt to reach a

solution acceptable to both parties was futile.

=

Incredibly, however, the court of appeals completely overlooks

iIMC’s failure to give notice and failure to respond to Llano’s

request to assign the contract when the court discusses commer-

cial impracticability, which is the doctrine the court relies on in

excusing IMC. Not only does the court thus dispense with the

requirements of notice in the contract, but it also fails to point out

that a party invoking commercial impracticability has the duty to

give reasonable notice (N.M. Stat. Ann. § 55-2-615(c) (1978)

(Uniform Commercial Code) ).*7 IMC certainly had the opportu-

nity (and obligation) to give Llano notice — testing of the new

equipment began in June of 1980, and the contract did not expire

until two and a half years later.

IMC’s conduct towards Llano can be described only as extreme

bad faith: there was nct a word to Llano of IMC’s plans and

intentions; this was a rebuff to Llano’s request that part of the

contract be assigned to alleviate the problem of IMC’s reduced

takes. IMC, particularly by this rebuff, compelled Llano to stand

ready to render its full delivery obligation under the contract.

IMC thus positioned itself to be able to call upon the “Llano

option” if that option were needed. But when Llano asked IMC

to fulfill its end of the bargain — by paying the minimum bill —

IMC initiated litigation. Good faith demands honesty and

candor, not deceit; yet the court below would reward that deceit

because IMC complied early with environmental regulations in a

manner which fulfilled its principal motive of reducing gas costs

(App. C at 12).

The court’s suggestion that Llano would have IMC polluting

the air until the last moment is simply a mischaracterization of

Llano’s argument. Had IMC given notice of its plans or re-

sponded to Llano’s request to assign the contract, the problem

could have been resolved. Llano’s argument, quite simply, is that

IMC was perfectly capable of complying with its contract obliga-

tion to pay the minimum bill even if it chose to comply early with

the environmental regulations. There should not be a public

* Although Section 2-615 by its terms applies only to sellers, the

court implicitly held that buyers may invoke its protection. Surely,

however, a buyer must comply with the notice provisions of that section

if that section is to be relied upon in the first instance.

10

policy which permits one to escape its payment obligations under

such circumstances.

The court of appeals decision required it to support its opinion

with findings directly contrary to the record and the district

court’s findings. The finding that Llano had been able to sell the

gas elsewhere for a higher price (App. A at 7-8) is not established

by the record. Indeed, the undisputed evidence showed that

Llano stood ready each day to deliver that gas to IMC, not to

someone else (Tr. 319-321).

The court also improperly found that failure to take gas

reduced the minimum bill to zero. The court found that if IMC

could not take gas, then the contract had the effect of lowering

the buyer’s minimum bill (App. A at 11). Accepting that

conclusion arguendo, the proper next step would be to determine

how much the bill was lowered. But the court inexplicably holds

that IMC owed nothing because it “should not be required to pay

for any natural gas it did not take under the contract” (App. A at

13).

The court of appeals stated that there was no technically

suitable way for IMC to comply with the regulation other than

the salting-out process (App. A at 13). To the contrary, the

district court found that IMC failed to demonstrate that its

inability to perform was caused by the regulation (App. C at 12).

The district court did not decide the fact issue whether compli-

ance with the regulation was possible only by utilizing the salting

out process, and it was improper for the court of appeals to do so.

CONCLUSION

As noted above, the rationale of a minimum bill or take or pay

clause is to shift to the buyer the risk that the gas will be

marketable or consumed. These clauses have been in natural gas

contracts for years. IMC and Llano voluntarily entered into the

contract, and the contract contained a clause sanctioned by

custom and usagé for decades. The court of appeals’ relentless

disregard of the notice provisions of the contract and the require-

ments for notice under the doctrine of commercial impracticabil-

ity, its refusal to allocate risks according to the contract agreed

1]

upon by the parties and its notable failure to deal with Llano’s

attempt to deal with IMC’s reduced takes led the court to an

unprecedented result which put the court on the opposite side of

the unanimous body of decisions on these clauses. In addition, it

denotes the court's willingness to exceed the bounds of judicial

propriety to achieve a desired result — a result desired by the

court, not by the parties as expressed in their contract.

For the reasons stated, a writ of certiorari should issue to review

the judgment and opinion of the Tenth Circuit.

Respectfully submitted,

JERON STEVENS

DON MADDOX JERON STEVENS

Maddox & Renfrow & MARK HELD

Saunders Baker & Botts

P.O. Box 5370 3000 One Sheil Plaza

Hobbs, New Mexico 88241 Houston, Texas 77002

Attorneys for Llano, Inc.

CERTIFICATE OF SERVICE

| hereby certify that the foregoing was served on all counsel of

record in accordance with the rules on the 13th day of December,

1985, by first-class mail, postage prepaid.

JERON STEVENS

JERON STEVENS

A-1

APPENDIX A

PUBLISH

UNITED STATES COURT OF APPEALS

FOR THE TENTH CIRCUIT

No. 83-2657

INTERNATIONAL MINERALS AND CHEMICAL CORPORATION,

Plaintiff-Appellant,

versus

LLANO, INCORPORATED, Defendant-Appellee.

Appeal from the United States District Court

For the District of New Mexico

(Civil No. 82-165-M)

Keith A. Jones, John B. Ruhi of Fulbright & Jaworski, Wash-

ington, D.C., and James P. Houghton, Mark Thompson III of

Modrall, Sperling, Roehl, Harris & Sisk of Albuquerque, New

Mexico, Attorneys for Plaintiff-Appellant.

Don Maddox of Maddox & Renfrow, Hobbs, New Mexico, and

Jeron Stevens of Baker & Botts of Houston, Texas, Attorneys for

Defendant-Appellee.

Before BARRETT, DoyLe and McKay, Circuit Judges.

BARRETT, Circuit Judge

After examining the briefs and the appellate record, this three-

judge panel has determined unanimously that oral argument

would not be of material assistance in the determination of this

appeal. See Fed. R. App. P. 34(a); Tenth Cir. R. 10(e). The

cause is therefore submitted without oral argument.

International Minerals and Chemical Corporation (IMC)

brought this diversity action against Llano, Inc. (Llano), seeking

a declaratory judgment that it was excused from its obligation to

pay for natural gas under a contract between IMC and Llano.

Llano counterclaimed for $3,564,617.12, the amount it claimed

was due under the contract. The district court granted judgment

in favor of Liano and against IMC. The court found that IMC

had no legal excuse for non-performance, and ordered IMC to

pay Llano $3,441,869.79.

IMC, a New York corporation, operates a potash mine and

processing facility near Carlsbad, New Mexico. At all times

relevant to this action, IMC obtained the natural gas it needed to

operate its facilities from Llano. Llano is a New Mexico

corporation engaged in the business of intrastate transportation of

natural gas by pipeline. The natural gas contract between Llano

(seller) and IMC (buyer) that is the subject of this litigation was

made in 1972, and continued in effect until June 30, 1982. It was

amended only once, in 1975. That amendment concerned pricing

structure as set forth in paragraph 5 of the contract, and is not an

issue in this case. The pertinent portions of the contract are as

follows:

NOW, THEREFORE, in consideration of the premises

and of the mutual convenants and agreements hereiriafter set

forth, the parties do hereby bargain, contract and agree as

follows:

1. SUPPLY OF NATURAL GAS: Subject to the terms

and conditions of this Contract, Seller will sell and deliver to

Buyer and Buyer will take, purchase and pav for the entire

fuel requirements of Buyer's Plant, provided that Buyer may

at its option procure and maintain a supply of standby fuei to

be used only to such extent as may be necessary when the

gas supply from Seller may be interrupted or curtailed, as

A-3

hereinafter provided, and in such other amounts as may be

necessary from time to time to test such standby facilities

and fuel.

6. DELIVERY REQUIREMENTS: During the term

of this Contract, unless Seller agrees in writing to the

contrary, the minimum daily deliveries that Seller shall make

to Buyer and Buyer shall take from Seller shail be 4800

million BTU’s per day except as hereafter provided. The

maximum daily deliveries that Seller shall be required to

make te Buyer shall be 133% of the average daily require-

ments of Buyer’s Plant for the preceding 36S days provided,

however, Seller shall at no time be required to deliver in

excess of 6400 million BTU’s per day unless Seller agrees in

writing to the contrary.

Buyer does not contemplate reducing its operations, but on

the contrary contemplates the increase thereof from the

present daily requirements. In order to meet unanticipated

contingencies, it is agreed that in the event Buyer during the

term of this Contract reduces its operation by closing a

portion of its plant, it shall have the right upon six months

notice in writing to reduce the minimum requirements to a

figure equal to 70% of the stated minimum of 4800 million

BTU’s per day. In the event of such reduction in minimum

requirements, Seller's price to Buyer then in effect under the

terms hereof shall be increased by ’2¢ per million BTU’s, but

not in excess of the highest price for a like quantity of gas

then being paid by any potash company in the area.

7. MINIMUM ANNUAL PURCHASE: During the

term of this Contract, commencing with the first year, Buyer

agrees to take from Seller a volume of gas having a BTU

content of not less than 355 times the minimum daily

deliveries specified in Section 6 hereof. Buyer agrees to pay

Seller for such minimum volume of gas at the price set forth

in Section 5 hereof provided that if Buyer fails during any

calendar year to take such minimum volume of gas, then the

deficiency between the volume actually taken and Buyer's

minimum purchase obligation shall be paid at the price in

effect during the calendar year in which such deficiency

occurs.

A-4

Billing for any payment due by reason of a deficiency in

Buyer's takings of gas hereunder during a particular calendar

year shall be included on the bill rendered to Buyer for gas

delivered to Buyer during the month of December in the

calendar year in which such deficiency occurred and pay-

ment therefor shall be made in the manner provided for

monthly bills in Section 11 hereof. Failure on the pari of

Seller to so bill Buyer for any such deficiency payment shall

not constitute a waiver hereof by Seller.

* * *

15. FORCE MAJEURE: Either party shall be excused

for delay or failure to perform its agreements and undertak-

ings, in whole or in part, when and to the extent that such

failure or delay is occasioned by fire, flood, wind, lightning, or

other acts of the elements, explosion, act of God, act of the

public enemy, or interference of civil and/or military author-

ities, mobs, labor difficulties, vandalism, sabotage, malicious

mischief, usurpation of power, depletion of wells, freezing or

accidents to wells, pipelines, permanent closing of Buyer's

operations at its Eddy County mine and refinery, after not

less than six (6) months notice thereof to Seller, or other

casualty or cause beyond the reasonable control of the

parties, respectively, which delays or prevents such perform-

ance in whole or in part, as the case may be; provided,

however, that the party whose performance hereunder is so

affected shall immediately notify the other party of all

pertinent facts and take all reasonable steps promptly and

diligently to prevent such causes if feasible to do so, or to

minimize or eliminate the effect without delay. It is under-

stood and agreed that settlement of strikes or other labor

disputes shall be at the sole di8tretion of the party encounter-

ing the strike or dispute.

Nothing contained herein, however, shall be construed as

preventing the Buyer from discontinuing the operation of the

plant for such periods of time as may be required by Buyer to

perform necessary overhaul operations on plant properties or

to accomplish preventative maintenance operations on such

plant properties, which the Buyer may determine as neces-

sary to safeguard its investment in the plant.

A-5

16. ADJUSTMENT OF MINIMUM BILL: In the

event that Seller is unable to deliver or Buyer is unable to

receive gas as provided in this Contract for any reason

beyond the reasonable control of the parties, or in the event

of force majeure as provided in Section 15 hereof, an

appropriate adjustment in the minimum purchase require-

ments specified in Section 7 shail be made.

(Pl. Exh.3, Def. Exh. C8b).

The contract may be characterized as a requirements contract,

with an important limitation: Pursuant to paragraph 6, the buyer

(IMC) is obligated to take, at a minimum, a daily average of

4800 million BTU’s of gas. Pursuant to paragraph 7, if the buyer

does not take this minimum amount, the buyer is obligated to pay

for the minimum amount of gas anyway. These provisions are

known in the industry as “take or pay” provisions, the purpose of

which is to compensate the seller for being ready at all times to

deliver the maximum amount of gas to the buyer and to eliminate

the risk that the seller would face in a pure requirements contract

were the buyer’s requirements to drop too low. See, e.g.. Utah

International, Inc. v. Colorado — Ute Electric Association, 425 F.

Supp. 1093 (D. Colo. 1976) (“take or pay” coal purchase

contract); Mobil Oil Corporation v. Tennessee Valley Authority.

387 F. Supp. 498 (N.D. Ala. 1974) (“take or pay” electricity

contract). The harshness of the “take or pay” provisions in this

contract are to some extent ameliorated by the “force majeure”

provision of paragraph 15 and the “adjustment of minimum bill”

provision of paragraph 16; paragraphs 15 and 16 are discussed

below.

At the time the contract was made, IMC operated nine

submerged combustion evaporators (Ozarks) at its plant. These

Ozarks were gas-fired boilers in which a mixture of water and the

ores sylvinite (potassium chloride) and langbeinite (potassium

magnesium sulphate) was heated. The excess water was boiled

off, and the hot solution was subsequently cooled. When the

solution was cooled, potassium sulfate would crystallize out of

solution. This potassium sulphate was marketed commercially as

a fertilizer. These Ozarks were fitted with stacks that emitted

large amounts of fine particulates, resulting in air pollution.

A-6

Initially, the particulate emissions from these Ozarks were not

regulated by the New Mexico Environmental Improvement

Board (EIB). In December, 1978, however, the EIB promul-

gated Regulation 508. (Pl. Exh. 19, Def. Exh. A-23). Paragraph

C of that regulation limited emissions from potash processing

equipment (i.e., Ozarks) to 30 pounds per hour. Compliance was

to be achieved “as expeditiously as practicable” and not later than

December 31, 1982. Paragraphs D and E allowed operators the

option of replacing submerged combustion evaporators (i.e.,

Ozarks) with alternative technology, in which case emissions

were required to be reduced to 350 pounds per hour by December

31, 1982 and to 30 pounds per hour by December 31, 1984. IMC

participated with the EIB in the Rule 508 rulemaking process,

and was especially instrumental in getting the alternative provi-

sions of paragraphs D and E included.

Before the promulgation of Rule S08, IMC had considered

different ways to reduce the particulate emissions of the Ozarks.

IMC looked at the “Venturi Scrubber,” the “Brink Mist Elimina-

tor,” and the “Multiple Effect Evaporator” systems. The first two

systems were designed to remove particulates from the exiting gas

stream, and the latter system was designed to heat the solution in

such a way that no particulates were created. Because of various

technical problems with each of these alternatives’, IMC had

concluded by the end of 1978 that its best hope for achieving

compliance with Rule SO8 was in a solar evaporation process.

Accordingly, a timely statement of intent to adopt the solar

evaporation process and petition for compliance schedule were

'IMC’s general manager at the Carlsbad plant testified that the

“Venturi Scrubber” had never been used in this particular way, and that

because of the very fine size of the particulates there were doubts that

the scrubbers could reduce emissions sufficiently to come into compli-

ance with Rule 508. The “Brink Mist Eliminator” utilized a filter that

would plug up almost immediately. The filter had to be washed with

dilute sulfuric acid, which had to be neutralized with limestone. That

process in turn caused a sludge problem. The “Multiple Effect Evapora-

tor” had been used in another mine. Their experience had been that the

titanium tubing used in the system would clog with langbeinite deposits

in a matter of days or weeks, forcing a shutdown while the tubing was

drilled clean. There were also serious corrosion and abrasion problems.

R. Vol. IV at 503-512.

A-7

filed with the EIB on March 30, 1979. (Pl. Exh. 21). The EIB

adopted a schedule of compliance for IMC on July 13, 1979. (PI.

Exh. 22). IMC experimented with the solar evaporation process

for about a year, and eventually concluded that this process, too,

was technically infeasible. In May, 1980, IMC sought from EIB

an amended compliance schedule to give IMC a chance to

experiment with a “salting out process” (SOP), whereby the

potassium sulphate would be extracted from solution by chemical

precipitation (Pl. Exh. 23). An amended compliance schedule

for IMC was adopted by EIB on July 11, 1980. (PI. Exh. 25).

Meanwhile, an IMC employee notified Llano by telephone on

May 21, 1980 that IMC would begin testing on June 2 and that

gas consumption would be 50%-60% of the normal usage during

that time. This was followed by a second telephone call in

August, informing Llano that testing would continue. In neither

of these calls was Llano informed that the testing was in response

to environmental problems, or that the reduced gas consumption

might be permanent because of a “force majeure” situation.

IMC’s tests of the SOP were successful, and on March 20,

1981, IMC advised the EIB that the SOP was commercially

operational and that “IMC will be able to immediately eliminate

continued use of the evaporators in the potassium sulphate

manufacturing process.” (Pl. Exh. 29).

The Ozarks, when they had been in operation, had consumed

approximately 60% of IMC’s natural gas requirements. The

result of IMC’s change to the SOP in response to Rule SO8 was

that the Ozarks were shut down and IMC did not take its

minimum obligation of natural gas during the last eighteen

months that the contract was in effect (January, 1981 — June,

1982).

In its action for declaratory judgment, IMC claimed that tt was

excused from its obligation to “take or pay” under a variety of

legal and equitable defenses. The trial court rejected cach

defense, and found that IMC was liable to pay Llano for the full

value of the gas not taken (i.e., the amount of the minimum

purchase obligation, less the gas actually purchased, multiplied by

the purchase price per unit of gas), even though Llano had, in

A-8

fact, been able to sell the gas elsewhere for a higher price than it

would have receiv IMC. QOur focus will be on the trial

court's findings pect to the common law doctrine of

impossibility/impracticability and the “force majeure” and “ad-

justment of minimum bill” clauses in the contract.

The trial court found that the common-law doctrine of impossi-

bility/impracticability, as codified in Section 2-615 of the Uni-

form Commercial Code (N.M. Stat. Ann. § 55-2-615 (1978)),

was not applicable in this case. The court found that Section 2-

615, by its terms, applies only to sellers, and read Official

Comment 9 to say that the section can apply to buyers only

“where the buyer's contract is in reasonable commercial under-

standing conditioned on a definite and specific venture or assump-

tion ....” The court found that such was not the case here.

With respect to the “force majeure” and “adjustment of

minimum bill” paragraphs 15 and 16, the court found that these

provisions did not excuse IMC from its contract obligations.

These provisions would have been applicable only if the EIB

regulation had prohibited absolutely IMC’s daily purchase of

4800 million BTU’s of gas. The court thus construed the

provisions of paragraphs 15 and 16 to excuse performance only if

it became absolutely impossible or illegal to purchase the mini-

mum amount of gas. Though the court recognized that IMC had

found compliance through the fitting of “scrubbers” on the

Ozarks’ stacks to be technically unsuitable, such a finding did not,

in the court’s view, help IMC. This was because IMC had

voluntarily cooperated with the EIB, and had come into compli-

ance earlier than required. IMC had therefore not done all it

could to surmount the obstacles to performance, and thus could

not claim that it was unable to comply for reasons beyond its

control.

In this appeal, IMC contends that: (1) IMC’s supervening

need to comply with environmental regulations excused its duty of

performance under both (a) the common law doctrine of impos:-

bility/impracticability as codified under Section 2-615 of New

Mexico's Uniform Commercial Code, and (b) the “force

majeure” and “adjustment of minimum bill” provisions of the

contract; (2) the “minimum payment” clause of the contract

A-9

constitutes an unenforceable penalty; (3) the contract as a whole

is unconscionable; and (4) the trial court incorrectly calculated

the amount of damages owing in the event the contract is found to

be enforceable. We consider only the two parts of IMC’s first

contention.

On a fundamental level, this case is one of contract construc-

tion. Our prmary objective, as always, in the construction or

interpretation of a contract is to ascertain the intention of the

parties. Schultz & Lindsay Construction Co. v. State, 494 P.2d

612, 613 (N.M.1972); Yankee Atomic Electric Company v. New

Mexico and Arizona Land Company, 632 F.2d 85S, 858 (10th

Cir. 1980) (interpreting New Mexico law.) We assume that the

parties intended a reasonable interpretation of the language

Smith v. Tinley, 674 P.2d 1123, 1125 (N.M.1984). Accordingly,

the legal context in which the contract was made will be relevant

As mentioned above, paragraphs 15 and 16 ameliorate the harsh-

ness of the “take or pay” provisions in that either party's duty of

performance may be excused upon the occurrence of certain

contingencies. As we examine the language of paragraphs |S and

16, an appropriate area to look for guidance is the common law

doctrine of impossibility/impracticability, codified at Section 2-

615 of New Mexico’s Uniform Commercial Code (NM. Stat

Ann. § 55-2-615 (1978)), which was the law in New Mexico at

the time the parties contracted and which remains the law today

While it is a basic premise of both Section 2-615 and the Uniform

Commercial Code in general that the parties may allocate risks

and penalties between themselves in any manner they choose,

N.M. Stat. Ann. §§ 55-1-102 and $5-2-615 (1978), the Code and

the common law upon which it is based remain a significant

backdrop.”

> Section 2-615 of the ' !niform Commercial Code (N.M. Stat. Ann

§ 55-2-615 (1978) provides in pertinent part:

§5-2-615 Excuse by failure of presupposed conditions,

Except so far as a seller may have assumed a greater obligation and

subject to the preceding section... on substituted performance

(a) delay in delivery or nondelivery in whole or in part by a seller

... is not a breach of his duty under a contract for sale if performance

as agreed has been made impracticable by the occurrence of a

contingency, the nonoccurrence of which was a basic assumption on

A-10

We first consider the effect of paragraph 15, the “force

majeure” provision, on IMC’s duty of performance under the

circumstances of this case. Specifically, paragraph 15 provides

that either party is excused from performance if failure or delay in

performance is “occasioned” by such events as fire. flood, act of

God, interference of civil and/or military authorities, etc. The

party seeking to be excused from performance must provide the

other party with immediate notice of all pertinent facts and take

all reasonable steps to prevent the occurrence. It also appears

that the seller is entitled to six months notice before the buyer can

be excused. We agree with the trial court that paragraph 15 does

not operate to excuse IMC, although our conclusion is based on a

somewhat different rationale. First, IMC’s notice to Llano was

inadequate in that no reasons were given as to why gas consump-

tion would be decreased. Adequate notice was required to trigger

the protections of the provision. Second, even if we assume

arguendo that Rule 508 prevented IMC from taking the gas, Rule

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

this is a “take or pay” contract, the buyer can perform in either of

two ways. It can either (1) take the minimum purchase obliga-

tion of natura] 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 performance by roeans of the

other alternative is still practicable. Ashland Oil and Refining Co.

v. Cities Service Gas Co., 462 F.2d 204, 211 (10th Cir. 1972);

Glidden Company v. Heilenic Lines, Limited, 275 F.2d 253. 257

(2d Cir. 1960); Restatement (Second) of Contracts § 261, com-

ment f (1981). Paragraph 15 does not compel a different result;

which the contract was made, or by compliance in good faith with any

applicable foreign or domestic governmental regulation or order

wheiher or not it later proves to be invalid;

Official Comment 8 (which we regard as persuasive authority, even

though it is not a part of the statute) provides inter alia: Generally,

express agreements as to exemptions designed to enlarge upon or

supplant the provisions at this section are to be read in the light of

mercantile sense and reason, for this section sets up the commercial

standard for normal and reasonable interpretation and provides a mini-

mum beyond which agreement may not go.

A-11

it would at most excuse IMC from its duty to “take,” not from its

duty to “pay.”

Paragraph 16, the “minimum bill” provision, however, affords

the buyer additional protection. !t provides that, in the event the

buyer is “unable to receive gas as provided in the Contract for any

reason beyond the reasonable control of the parties

(emphasis added), then “an appropriate adjustment in the mini-

mum purchase requirements specified in Section [paragraph] 7

shall be made.” Paragraph 7, in turn, provides for a minimum bill

based on the difference between the buyer’s minimum purchase

obligation and the gas actually taken. It follows that an adjust-

ment of the buyer’s minimum purchase requirements made

pursuant to paragraph 16 would have the effect of lowering the

buyer’s minimum bill under paragraph 7. Liano’s contention that

paragraph 16 provides for a reduction in IMC’s minimum

purchase obligation but not its minimum bill obligation (Appel-

lee’s Brief at 4) is thus quickly disposed of.

The determinative question, then, is: Did the promulgation of

Rule 508 constitute an event beyond the reasonable control of

IMC that rendered IMC “unable” to receive its minimum

amount of gas under the contract?

A simplistic, literai inierpretation of the word “unable” would,

in our view, be inappropriate and lead to absurd results: IMC

could never be “unable” to take Llano’s gas; IMC could always

take the gas and vent it into the air, even if its facilities were

completely destroyed. The word “unable” appears here as a term

in a contract, prepared by businessmen and attorneys; thus, it 1s

appropriate to construe the term in light of the common law as it

existed in New Mexico when the contract was entered into. For

our purposes, then, “unable” is synonymous with “impractica-

ble,” as that term is used in the common law and in Section 2-

615.

The term “impracticable” has, over the years, acquired a fairly

specific meaning. -Although earlier cases required that perform-

ance be physically impossible before the promisor would be

excused, strict impossibility is no longer required. See Restate-

ment of Contracts (Second) § 261, comment d (1981). The

A-12

New Mexico Supreme Court has described the doctrine of

impracticability as follows:

Regarding the meaning of “impossibility” as used in the

rules that excuse the non-performance of contracts, it is

stated:

“As pointed out in the Restatement of Contracts, the

essence of the modern defense of impossibility is that

the promised performance was at the making of the

contract, or thereafter became, impracticable owing to

some extreme or unreasonable difficulty, expense, in-

jury, or loss involved, rather than that it is scientifically

impossible. * * * The important question is

whether an unanticipated circumstance has made per-

formance of the promise vitally different from what

should reasonably have been within the contemplation

of both parties when they entered into the contract. If

so, the risk should not fairly be thrown upon the

promisor.” Wood v. Bartolino, 146 P.2d 883, 886 (N.M.

1944), quoting 6 Williston on Contracts, § 1931.

Cf. Gulf Oil Corporation v. Federal Power Commission, 563 F.

2d 588, 599 (3d. Cir. 1977), cert. denied 434 U.S. 1062 (1978)

‘“The crucial question in applying that doctrine to any given

situation is whether the cost of performance has in fact become so

excessive and unreasonable that the failure to excuse performance

would result in grave injustice....”); Mineral Park Land Co. v.

Howard, 156 P. 458,460 (Cal.1916) (“a thing is impracticable

when it can only be done at an excessive and unreasonable cost”’).

Performance will be excused when made impracticable by

having to comply with a supervening governmental regulation.

N.M. Stat. Ann. § 55-2-615 (1978); Restatement of Contracts

(Second) § 264 (1981). Thus, for example, in the case of Kansas

City, Missouri v. Kansas City, Kansas, 393 F. Supp.1 (W.D. Mo.

1975), the court held that the defendant city’s obligation to

accept the plaintiff city’s sewage was excused by the enactment of

the Federal Water Pollution Control Act Amendments of 1972.

The federal act imposed new requirements with regard to the

treatment of sewage that was discharged into the Missouri River;

the court found that the added expense of such treatment would

A-13

impose a significant, unreasonable burden on the defendant.

Accord City of Vernon v. City of Los Angeles, 290 P. 2d 841

(Cal.1955).

Inasmuch as there was no technically suitable way for IMC to

comply with the EIB’s Regulation 508 without shutting down the

Ozarks and changing to the SOP, with the concomitant decrease

in natural gas consumption, we hold that the adjustment provision

of paragraph 16 of the contract was triggered. IMC was unable,

for reasons beyond its reasonable control, to receive its minimum

purchase obligation of natural gas between January i, 1981 and

June 30, 1982; thus, the minimum bill should have been adjusted

appropriately. IMC should not be required to pay for any natural

gas it did not take under the contract.

Llano contends that there was no supervening legal! impractica-

bility in this case because IMC was not required to be in final

compliance until December 31, 1984, and that IMC cooperated

with the EIB and came into compliance too early. The argument

here is that, notwithstanding the interim standards contained in

the schedules of compliance, IMC should have stalled in its

negotiations with the state regulatory agency, which would have

resulted in the pollution of air until the last minute. We must

reject this contention on two grounds: First, as a matter of policy,

individuals and corporations who cooperate with local regulatory

agencies and comply with the letter and spirit of legally proper

regulations, environmental or otherwise, are to be encouraged.

Stalling tactics are not regarded favorably. Second, as a matter of

law, government policy need not be explicitly mandatory to cause

impracticability. Thus, for example, in Eastern Air Lines, Inc. v.

McDonnell Douglas Corporation, 532 F.2d 957 (Sth Cir. 1976),

an aircraft manufacturer was excused from its contractual obliga-

tion to deliver commercial jet airliners on certain scheduled dates

because it had voluntarily complied with government requests to

expedite production of military equipment needed for the war in

Vietnam. Similarly, in the maritime context, shipowners have

been excused from contractual obligations because they have

anticipated governmental intrusion. The Kronprinzessin Cecilie,

244 U.S. 12 (1917) (German ship was justified in returning to

New York rather than completing a voyage to Great Britain and

A-14

France on the eve of the outbreak of hostilities in World War 1);

The Clavaresk, 264 F. 276 (2d Cir. 1920) (shipowner may

anticipate and need not resist government requisition of his ship

for wartime service in order to be excused from performance of a

charter agreement). There is, we recognize, a limit to the extent

to which an individual can seek refuge in the context of a case

such as this by cooperating with the government: “any action by

the party claiming excuse which causes or colludes in inducing

the governmental action preventing his performance would be in

breach of good faith and would destroy his exemption.” Official

Comment 10, N.M. Stat. Ann. § 55-2-615 (1978). Here, Regu-

lation 508 was promulgated by the EIB as part of New Mexico’s

State Implementation Plan mandated by the Clean Air Act.

Regulation 508’s existence and its enforcement mechanism is

designed to eliminate pollution of the environment, thus serving

the public health and welfare. IMC’s recognition of the pubdiic

benefit goal and its willingness to cooperate in eliminating pollu-

tion can hardly be termed improper collusion.

For the reasons described above, the judgment of the trial court

in favor of Llano is REVERSED. The case is REMANDED

with direction that the court enter a declaratory judgment in

accordance with this opinion.

BI

APPENDIX B

JULY TERM

(September 18, 1985)

Before Honorable JAMES E. BARRETT, Honorable Witttam E.

Doytt, and Honorable Monror G. McKay, Circuit Judges

No. 83-2657

INTERNATIONAL MINERALS AND CHEMICAL CORPORATION,

Plaintiff-Appellant,

versus

LLANO, INC., Defendant-Appellee.

This matter comes on for consideration of appellee’s petition

for rehearing filed in the capitioned cause.

Upon consideration whereof, the petition for rehearing is

denied.

cA Mt ied eR AT at Te Ts i a ee ei

HOWARD K. Puitttps, Clerk

C-]

APPENDIX C

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW MEXICO

No. 82-165-M Civil

INTERNATIONAL MINERALS AND CHEMICAL CORPORATION,

Plaintiff.

versus

LLANO, INC. Defendant.

Memorandum Opinion and Order

This matter came on for bench trial on July 18, 1983. This

opinion constitutes my findings of fact and conclusions of law

pursuant to Fed.R.Civ.P. 52(a).

This diversity case arises from a contract for delivery of natural

gas executed by the parties on February 24, 1972. The plaintiff,

International Minerals and Chemical Corporation (IMC), is a

New York corporation operating a potash mining facility near

Carlsbad, New Mexico. IMC’s principal offices are in North-

brook, Illinois. The defendant, Llano, Inc. (Llano), is a New

Mexico corporation in the business of intrastate transportation of

natural gas. Plaintiff seeks a declaratory judgment determining

its rights and duties under the contract. Defendant has counter-

claimed for damages alleging that IMC has breached the contract

by failing to make payments for gas contracted for but not taken

for the year ending December 31, 1981, and for the period from

January 1, 1982 through June 30, 1982. Llano also sought

damages for construction and storage costs, but has withdrawn

this claim.

C-2

IMC and Llano entered into a contract in 1961 which provided

that Llano was to supply natural gas to IMC for use at tts

Carlsbad facility for a period of ten years. That contract expired

and was replaced in 1972 with the contract at issue here. The

bulk of the gas supplied under the two contracts was burned in

IMC’s Ozark submerged evaporators (Ozarks) as part of a drying

process used in the manufacture of chemical fertilizers. The

Ozarks released particulates through smoke stacks, causing air

pollution. As early as 1971, IMC began studying alternatives to

the Ozark drying process, as both a possible means of eliminating

the pollution and reducing the fuel cost the Ozarks required.

On May 28, 1975, the parties, by letter agreement, amended

the contract. This was the only amendment affecting the con-

tract, and related only to the pricing structure as set forth in § 5 of

the contract.

On December 15, 1978, the Environmental Improvement

Board (EIB) of the State of New Mexico adopted its Air Quality

Control Regulation 508 concerning particulate emissions of pot-

ash, salt or sodium sulfate processing equipment. The regulation

set forth alternative schedules of compliance with allowable

emission rates. It called for reduction of particulate emissions in

excess of 30 pounds per hour “[a]s expeditiously as practicable,

but not later than December 31, 1982.” Paragraph D of the

regulation provided an alternative method of compliance for

persons owning processing equipment “which includes submerged

combustion equipment which have no controls for particulate

matter.” Such persons could file, within 30 days of the effective

date of the regulation, “a written statement of intent to replace

the submerged combustion evaporators with solar or other evapo-

rators with total particulate matter emissions inherently less than

30 pounds per hour.” Paragraph E provided the alternative

schedule of compliance for persons submitting a timely statement

of intent. It called for the reduction of emissions caused by such

persons in excess of 350 pounds per hour after December 31,

1982, and in excess of 30 pounds per hour after December 31,

1984.

IMC had studies for reducing particulate emissions or drying

methods not requiring Ozarks that began before the EIB adopted

C-3

its Regulation 508. IMC attended a series of meetings with the

EIB concerning promulgation of Regulation 508, and its recom-

mendations were instrumental and included as provisions in the

final draft.

On March 30, 1979, pursuant to § D, IMC filed a timely

statement of intent to replace the Ozarks with solar evaporators,

conditioned upon the successful operation of a prototype system.

Included with the statement was a “Petition for Compliance

Schedule” showing intended modifications of IMC’s Carlsbad

operations pursuant to Regulation 508. The EIB adopted IMC’s

schedule of compliance on July 13, 1979. IMC experimented for

about a year with the solar evaporation process, which proved

unsatisfactory. In May, 1980, IMC notified the EFB of its

election to replace the solar evaporators with a “salting out”

process. On July 11, 1980, the EIB approved IMC’s amended

schedule of compliance showing that the Ozarks would be re-

placed with a “salting out” process, which, if successful, would

result in elimination of the Ozarks well in advance of December

31, 1984.

On May 21, 1980, IMC notified Llano, by telephone, that it

would begin “testing” on June 2, 1980 for three to four weeks,

and that IMC’s gas consumption would be reduced by about 50%

for that period. Testing of the “salting out” process began about

June 2, 1980, at which time the Ozarks were shut off. Since then,

the Ozarks have been dismantled. The “salting out’ process

utilizes virtually no natural gas, and IMC’s consumption of

natural gas was reduced by about 60% when the “salting out”

testing began.

The dispute arises from the contract’s minimum/maximum

daily delivery requirements set forth in § 6, and IMC’s minimum

annual purchase obligation, as provided in §7. These clauses

read as follows:

6. DELIVERY REQUIREMENTS: During the term of

this Contract, unless Seller agrees in writing to the contrary,

the minimum daily deliveries that Seller shall make to Buyer

and Buyer shall take from Seller shall be 4800 million BTU’s

per day except as hereafter provided. The maximum daily

deliveries that Seller shall be required to make to Buyer shall

————

C-4

be 133% of the average daily requirements of Buyer's Plant

for the preceding 365 days provided, however, Seller shall at

no time be required to deliver in excess of 6400 million

BTU's per day unless Seller agrees in writing to the contrary.

Buyer does not contemplate reducing its operations, but on

the contrary contemplates the increase thereof from the

present daily requirements. In order to meet unanticipated

contingencies, it is agreed that in the event Buyer during the

term of this Contract reduces its operation by closing a

portion of its plant, it shall have the right upon six months

notice in writing to reduce the minimum requirements to a

figure equal to 70% of the stated minimum of 4800 million

BTU’s per day. In the event of such reduction in minimum

requirements, Seller’s price to Buyer then in effect under the

terms hereof shall be increased by 2¢ per million BTU’s, but

not in excess of the highest price for a like quantity of gas

then being paid by any potash company in the area.

7. MINIMUM ANNUAL PURCHASE: During the

term of this contract, commencing with the first year, Buyer

agrees to take from Seller a volume of gas having a BTU

content of not less than 355 times the minimum daily

deliveries specified in Section 6 hereof. Buyer agrees to pay

Seller for such minimum volume of gas at the price set forth

in Section 5 hereof; provided that if Buyer fails during any

calendar year to take such minimum volume of gas, then the

deficiency between the volume actually taken and Buyer's

minimum purchase obligation shall be paid at the price in

effect during the calendar year in which such deficiency

occurs.

Billing for any payment due by reason of a deficiency in

Buyer's takings of gas hereunder during a particular calendar

year shall be included on the bill rendered to Buyer for gas

delivered to Buyer during the month of December in the

calendar year in which such deficiency occurred and pay-

ment therefore shall be made in the manner provided for

monthly bills in Section 11 hereof. Failure on the part of

Seller to so bill Buyer for any such deficiency payment shall

not constitute a waiver hereof by Seller. (Emphasis in

original. )

C-5

It is clear in this case, as it was in Utah Int'l. Inc. v. Colorado-

Ute Electrical Ass'n, Inc., 425 F.Supp. 1093 (D.Colo. 1976), that

one of the effects of the minimum purchase obligation is that

Llano could at all times require that IMC take or pay for the

contractual minimum amount of gas, regardless of its actual fuel

requirements. As Judge Arraj recognized, “[s]uch a purchase

obligation is a protective provision for the seller and as such

eliminates some of the risk for seller which normally attend the

type of requirements contract containing no such minimum

purchase obligation.” /d., at 1097. IMC does not deny the

general enforceability of minimum purchase clauses, nor would

such an attack have merit. See Mobil Oil Corp. v. Tennessee

Valley Authority, 387 F.Supp. 498 (N.D.Ala. 1974). Rather,

IMC sets up a variety of legal and equitable defenses, and asserts

that it is excused from performance under one or another defense.

IMC also argues that the contract is subject to the Uniform

Commercial Code, N.M.Stat.Ann. §§ 55-1-101 et seg., and that

either its performance is excused, or Llano’s remedies are limited,

by various provisions of the U.C.C. In addition, IMC contends

that the circumstances described above and leading to its reduc-

tion in natural gas Consumption constitute force majeure, and it is

thus excused under the provisions of § 15 of the contract.

1.

UNIFORM COMMERCIAL CODE

IMC relies on Amoco Pipeline Co. v. Admiral Crude Oil Corp.

490 F.2d 114 (10th Cir. 1974) for its contention that this contract

is governed by the U.C.C. In that case, the applicability of the

U.C.C. to the sale of crude oil was decided by the district court,

and I don’t find the issue was raised on appeal. Even if it is

assumed that the sale of natural gas here is a sale of goods and

governed by the U.C.C., §2-107, this assumption does not provide

the relief asserted by IMC.

First, IMC argues that the contract is a requirements contract,

and that its good faith cessation of natural gas requirements

terminates its liability for payment for gas in excess of its

requirements. It cites Utah Int'l v. Colorado-Ute Elec Ass'n,

inc., supra, in support of this contention. That case noted that

C-6

such a contract “is not, however, a prime requirements contract,

but one modified by the maximum seller's obligation and the

minimum buyer's obligation.” 425 F.Supp. at 1096. IMC’s

assertion that its obligation to purchase natural gas only in such

quantities is measured by its “actual requirements as occur in

good faith” is based on the language of U.C.C. § 2-306. This

section of the Code, IMC argues, relieves it of ti obligation to

pay for gas not required by it as a result of its good faith

conversion to the “salting out” process pursuant to EIB regula-

tions. Admittedly, U.C.C. § 2-306 provides for reasonable elas-

ticity and good faith variation in requirements. However, Official

Comment 3 to § 2-306 provides: “Any minimum or maximum

set by the agreement shows a clear limit on the intended elastic-

y.” IMC’s argument that its minimum purchase obligation was,

at best, an “estimate” of its requirements is without merit.

IMC next relies on U.C.C. § 2-615 to excuse its obligations

under the contract. This section “excuses a seller from timely

delivery of goods contracted for, where his performance has

become commercially impracticable because of unforeseen super-

vening circumstances not within the contemplation of the parties

at the time of contracting.” While § 2-615 seems to apply only to

sellers, IMC cites Nora Springs Cooperative Co. v. Brandau, 247

N.W.2d 744 (lowa 1976) as authority for its applicability to

buyers as well. The Brandau case relies on Comment 9 as

evidence of the section’s equal applicability to buyers. However,

Comment 9 is not nearly so broad, and applies the reasoning of

§ 2-615 entitling the buyer to its exemption only in cases “where

‘he buyer's contract is in reasonable commercial a

conditioned on a definite and specific venture or assumption .

i find that the contract here was not so conditioned, and refuse to

follow the general language of Brandau on this issue. U.C.C. § 2-

615 thus affords no remedy to IMC.

IMC also raises as a defense the doctrine of unconscionability

as set out in U.C.C. § 2-302. This defense is available “[i]f the

court, as a matter of law finds the contract or any clause of the

contract to have been unconscionable at the time it was made.” |

do not find any provision of the contract to have been unconscion-

able at the time of execution. See infra, at 11.

C-7

Finally, under the U.C.C., IMC argues that what it labels

Llano’s “minimum obligation claim”, as being barred 5) U.C.C.

§ 2-709. The claim was submitted to IMC by Liano in a

minimum billing statement pursuant to 9 6 and 7 of the contract

and is asserted by Llano as its claim for damages for IMC’s

alleged breach. IMC characterizes this claim as an action for

price, and argues that U.C.C. § 2-709 is the exclusive remedy

section when the seller seeks to recover price. Llano denies that it

is Suing for “price”, and argues that its claim is for the amount

IMC contracted to pay for the availability of natural gas.

IMC’s position is that the only possibly valid portion of Llano’s

“minimum obligation claim” is the one for natural gas identified

to the contract and held in storage by Llano for IMC. IMC

further asserts that, upon its payment of the price, it is entitled to

take possession of the gas. However, in its argument on this

point, IMC ignores the U.C.C.’s underlying policy of freedom of

contract as expressed in § 1-102(3). Furthermore, the Code, in

§ 2-719, specifically leaves the parties free to shape their remedies

according to their particular needs. U.C.C. § 2-719, Comment |:

Frank Leroux, Inc. v. Burns, 4 Wash.App. 165, ...., 480 P.2d

213, 215 (Ct.App. 1971), noted in Annot., 90 A.L.R.3d at 1146

(1979) See also Jamestown Farmers Elevator, Inc. v. General

Mills, 443 F.Supp. 764, 772 (D.N.D. 1976) (§ 2-719 “specifically

allows for additional remedies”); Equitable Lumber Corp. v. IPA

Land Development Corp., 38 N.Y. 2d 516, ...., 344 N.E.2d 391,

394, 381 N.Y.S.2d 459, (1976) (“variations on the code’s dam-

ages scheme are permitted by subdivision (1) of Section 2-719").

In Frank Leroux, Inc. v. Burns, supra, the court rejected the

argument that the seller's exclusive remedies were those provided

in the Code in $§ 2-709 and 2-703. The court said: “In other

words, it is defendants’ [buyers’] contention that plaintiff's

[seller's] remedy is limited to those provided in the statutes

above quoted [§§ 2-709 and 2-703] and cannot be contracted

away by agreement of the parties. We are unable to agree.” 480

P.2d at 215. In that.case, as here, there was no evidence that the

U.C.C. obligations of good faith, diligence, reascnableness and

Care were in any way disclaimed by the agreement of the parties.

Neither was there “evidence that the agreement or any part of it

C-8

was unconscionable so as to render it unenforceable [§ 2-302],

nor that the remedy agreed upon is unreasonable in a commercial

context.” /d. Section 2-719’s provisions “for remedies in addition

to or in substitution for those provided in [Article 2]” are subject

further to limitations for liquidation of damages contained in

§ 2-718." However, IMC does not argue that the “take or pay”

clause is void as a penalty. Such a challenge was overruled in

Mobil Oil Corp. v. TVA, supra. Thus, the minimum annual

purchase obligation provided for in §] 7 of the contract is enforcea-

ble under Article 2 of the Code.

Il.

OTHER DEFENSES

IMC also relies on a variety of common law and equitable

defenses as excusing its performance. Before discussing these

other defenses, I note that, in several memoranda, IMC repeats

verbatim its contention that any construction of the “minimum

annual purchase” obligation which would allow Llano to recover

the price for gas not taken by IMC is unconscionable as a matter

of law. Yet, this construction of IMC’s obligation is precisely

what the parties agreed upon: “Buyer agrees to pay Seller for

such minimum volume of gas at the price set forth in Section 5

hereof.” § 7, Natural Gas Contract. The minimum volume is

calculated at 355 times the minimum daily delivery (4800 million

BTU’s) for each calendar year. In return for this promise, Llano

was required to have available for delivery to IMC up to 6400

million BTU’s per day, whether IMC purchased that amount or

not. The evidence shows that such a minimum purchase obliga-

tion is a common feature in gas supply contracts. In this context,

| cannot find such a provision unconscionable as a matter of law,

supra at 9. See, Utah Int'l, Inc. v. Colorado-Ute, supra, at 1096-

97.

FORCE MAJEURE

Some of the legal and contract defenses raised by IMC can be

gathered under the heading “force majeure”. 4 15 and 16 of the

contract provide:

C-9

15. FORCE MAJEURE. Either party shall be excused

for delay or failure to perform its agreements and undertak-

ings, in whole or in part, when and to the extent that such

failure or delay is occasioned by fire, flood, wind, lightning, or

other acts of the elements, explosion, act of God, act of the

public enemy, or interference of civil and/or military author-

ities, mobs, labor difficulties, vandalism, sabotage, malicious

mischief, usurpation of power, depletion of wells, freezing or

accidents to wells, pipelines, permanent closing of Buyer’s

Operations at its Eddy County Mine and refinery, after not

less than six (6) months notice thereof to Seller, or other

casualty or cause beyond the reasonable control of the

parties, respectively, which delays or prevents such perform-

ance in whole or in part, as the case may be; provided,

however, that the party whose performance hereunder is so

effected shail immediately notify the other party of all

pertinent facts and take all reasonable steps promptly and

diligently to prevent such causes if feasible to do so, or to

minimize or eliminate the effect without delay. It is under-

stood and agreed that settlement of strikes or other labor

disputes shail be at the sole discretion of the party encounter-

ing the strike or dispute.

Nothing contained herein, however, shall be construed as

preventing the Buyer from discontinuing the operation of the

plant for such periods of time as may be required by Buyer to

perform necessary overhaul operations on plant properties or

to accomplish preventative maintenance operations on such

plant properties, which the Buyer may determine as neces-

sary to safeguard its investment in the plant.

16. ADJUSTMENT OF MINIMUM BILL: In the

event that Seller is unable to deliver or Buyer is unable to

receive gas as provided in this Contract for any reason

beyond the reasonable control of the parties, or in the event

of force majeure as provided in Section 15 hereof, an

appropriate adjustment in the minimum purchase require-

ments specified in Section 7 shall be made.

IMC’s contentions falling in this category are that its minimum

purchase obligation-under {| 7 of the Contract is modified by

reason of: (a) force majeure; (b) circumstances and events

C-10

beyond the reasonable control of the parties; (c) frustration of

purpose of object of contract (commercial frustration); (d)

supervening impracticability; and (e) good faith compliance with

governmental air quality regulations.

The force majeure clause in {| 15 delineates certain circum-

stances, including interference of civil authorities and any “other

casualty or cause beyond the reasonable control of the parties”

which, if they prevent performance, will excuse the parties from

failure to perform the contract. The language requiring that

performance be prevented by such circumstances conforms with

the same requirement found in the doctrine of force majeure:

Generally the rule is stated that, to constitute force majeure,

the event must render performance absolutely impossible.

This would appear to foliow from the wording of the general

codal provision itself which provides that the debtor may be

discharged if he is prevented from performing by an event of

force majeure....

In keeping with the foregoing, the fact that performance

may be made considerably onerous for one of the parties by

governmental acts, natural causes, or human agencies, will

generally not operate to excuse such party from the required

performance. (Emphasis in original).

Smith, Impossibility of Performance as an Excuse in French Law:

The Doctrine of Force Majeure, 45 Yale L.R. 452, 454 (1936).

Under this rule, the EIB regulation must have made illegal or

prohibited absolutely IMC’s daily purchase of 4800 million

BTU’s of gas. See Wood v. Bartolino, 48 N.M. 175, 185, 146

P.2d 883 (1944) (rule of commercial frustration applied to

leases.). Though the regulation with other motivation led to

IMC’s selection of a process which did not require the minimum

volume stated in the contract, this is not to say that the regulation

prevented the minimum purchase. IMC’s reliance on force

majeure and related language of the contract is misplaced.

IMC next relies on §.16 in support of its assertion that an

adjustment in its minimum purchase obligation should be made

because Regulation 508 constitutes a “reason beyond the reasona-

ble control of the parties” causing reduced gas requirements and

C-11

thus IMC’s inability to receive gas as provided in the contract. It

also advances the 1975 pricing amendment as evidence of prior

course of dealing between the parties in terms of their construing

this paragraph. I find that IMC was not obligated to finally

comply with the EIB regulation until December, 1984, well after

the contract would have terminated. Also the section of regula-

tion allowing compliance by the “salting-out” process was in-

cluded at IMC’s sole request. It is clear that the purpose of the

added sections was to permit replacement of the Ozarks with the

process using less gas. Though it is admirable that such a process

results in decreased particulate emissions, it is also evident that

IMC’s reduced gas consumption was not mandated by any reason

beyond its reasonable control. The 1975 amendment has no

bearing on this issue, and did not result from any provision of

q 16.

Much of the testimony at trial and argument in the briefs

concerns the issue of IMC’s possible means of complying with

Regulation 508 other than shutting down the Ozarks. Llano

asserts that alternative methods of compliance with the regulation

were available to IMC without its reduction of gas usage, includ-

ing use of Venturi scrubbers or Brinks Mist Eliminators, with and

without heat recovery systems, and a device called a Multiple

Effect Evaporator. There is considerable dispute as to whether

these alternative methods were technically or commercially feasi-

ble, and whether or not their use would have resulted in reduced

gas requirements for the Ozarks. While it seems that IMC’s

decision to comply with Regulation 508 by its successful imple-

mentation of the “salting-out” process was based on its view that

the other methods were not as profitable and/or technically

suitable, such a finding does not help the plaintiff. This is true in

spite of its reliance on the doctrines of supervening impracticabil-

ity, Restatement (Second) of Contracts § 261, or commercial

frustration, id. § 265.

The approach of the cases to the impracticability doctrine is to

determine whether 4n unforeseen event occurred, whether the

nonoccurrence of the event was a basic assumption underlying the

agreement, and whether the event rendered performance com-

mercially impracticable. Roth Steel Products v. Sharon Steel

C-12

Corp., 705 F.2d 134,149 (6th Cir. 1983). The party asserting the

defense of commercial impracticability bears the burden of proof.

The analysis is conducted with a regard for any allocation of risk

provided in the agreement. Transatlantic Financing Corp. v.

U.S., 363 F.2d 312, 319 (D.C. Cir. 1966) (Suez Canal closing

case). Finally, the unforeseeable event upon which excuse is

predicated must be due to factors beyond the party’s control.

Roth Steel Products v. Sharon Steel Corp., supra, at 150.

IMC began studying alternatives to the Ozarks as early as

1971. It was instrumental in drafting the 1978 regulation, and its

compliance with it was substantially in advance of the deadline.

A principal motive was reduction of gas consumption and ex-

pense. I cannot agree that its failure to take the minimum

volume results in spite of its reasonable efforts to surmount

obstacles to performance. See Neal-Cooper Grain Co. v. Texas

Gulf Sulphur Co., 508 F.2d 283 (7th Cir. 1974); Restatement

(Second) of Contracts § 261, comment b (1981).

The analysis under the commercial frustration rule as well as

under the supervening governmental regulation doctrine upon

which plaintiff also relies are essentially the same as that of

impracticability. See id., Comments to §§ 264 and 265. Though

there is some difference in the degree that foreseeability is a

factor under the three rules, the trend toward greater governmen-

tal regulation indicates allocation of such risk to the promisor. /d.

In any event, I find that IMC has failed to affirmatively demon-

strate that its alleged inability to perform was caused by Regula-

tion 508, and thus it is not excused from performance under the

Restatement rules or the general doctrine of impossibility.

IMC argues that “new technology” combined with increased

gas cost is an occurrence in addition to governmental regulation

that would discharge its minimum purchase obligation. This

argument also is untenable. See Thomas v. Pavletich, 31 N.M.

76, 239 P.862 (1925). IMC pled, but has failed to brief, failure

of consideration as an affirmative defense. Though it probably

has abandoned this defense, I find that adequate consideration

supports the contract.

C-13

Equitable Defenses

IMC contends that Llano waived, and is estopped from assert-

ing, any claim for payment for the deficiency between the volume

actually taken and IMC’s minimum purchase obligation. Under

its waiver theory, IMC argues that the parties’ prior course of

dealing constitutes a different basis of their understanding of the

terms of the contract. Specifically, IMC states that Llano’s

voluntary delivery of natural gas in excess of the maximum

volume and without written agreement shows that the figures in

{| 6 are simply estimates of IMC’s requirements. It also asserts

that since Llano voiced no complaint to the reduced minimum

volume taken in 1981 and 1982, it therefore is estopped from

asserting existence of a deficiency volume and a claim to a

minimum bill.

Paragraph 7 of the contract provides that “[f]ailure on the part

of Seller to so bill [in the month of December in the calendar

year in which such deficiency occurred] Buyer for any such

deficiency payment shall not constitute a waiver hereof by Seller.”

IMC undoubtedly was aware of this language. Defendant's

Exhibit C(6). Llano did not relinquish any right to its deficiency

billing, and its voluntary delivery of gas in excess of the maximum

does not constitute waiver nor is it estopped from asserting the

deficiency volume claim to which it is entitled.

Interestingly, IMC also claims that Llano breached its duty to

deal with IMC in good faith. The testimony and evidence

produced at trial show that IMC never notified Llano of the

reason for its reduction of gas consumption until after it received

the minimum bill. On May 21, 1980, Stan Bode of IMC told

Loury Greig, by telephone, that tests were to be conducted for

three to four weeks with gas usage during that time being 50-60%

of normal. Though in a February 11, 1982 letter denying Llano’s

minimum bill claim, IMC states that it notified Llano of the EIB

regulation and its effect on gas consumption, there is nothing in

the record to ascertain that Llano was so informed. The contract

provides for notice, the importance of which was recognized in

Brown v. American Bank of Commerce, 79 N.M. 222, 226, 441

P.2d 751 (1966).

“St Sm. :»>

C-14 oe

On August 29, 1982, Mr. Bode again talked with Mr. Greig by

telephone. He notified Llano that IMC was planning to remain

on the reduced gas consumption for the rest of the year, and

would try to give Llano at least a month’s notice before raising its

gas consumption. There is some confusion as to whether Llano

understood whether this meant the remainder of the fiscal or

calendar year, but it is certain that Llano reasonably expected

that it was required, during this time, to deliver up to the

maximum volume stated in the contract.

On September 19, 1980, a meeting was held in Dale Willhoit’s

office at which time Llano attempted to obtain [MC’s approval to

Llano’s proposed assignment of a portion of its gas purchase

contracts. This meeting was followed by a letter of September 23,

1980 from Mr. Greig to Mr. Willhoit. The letter stated that

Llano needed to assign certain contracts because of an excess of

contracted gas it had resulting from IMC’s estimate of its future

gas requirements. Dan Reddy, of IMC, did consider Llano’s

request, as shown by his November 19, 1980 memo to Mr.

Willhoit. He also drafted a response which he testified he

proposed sending to Llano because he thought that they should be

notified in writing of IMC’s reduced gas consumptions and the

reasons therefor, as required by the contract. This draft letter,

attached to a December 4, 1980 memo to Mr. Willhoit, was never

mailed to Llano. In short, IMC did not indicate to Llano any

estimate of future gas consumption, nor did it respond in any

fashion to Llano’s request for assignment as expressed in the

September 23rd letter.

IMC asserts that fair dealing mandates some kind of notice or

demand by Llano with respect to its minimum bill prior to

January, 1982, and that Llano’s failure to give such notice

constitutes bad faith. IMC was fully aware of the minimum bill

provision in the contract. Jt was IMC’s silence and failure to

respond to Llano’s inquiry that prevented any timely resolution of

the problem. IMC is liable under the contract for payment of the

minimum bill.

C-15

ill.

DAMAGES

The parties have stipulated that all of the natural gas purchased

by Llano from wellheads in 1981 or the first half of 1982 that

could have serviced the IMC/Llano contract was either con-

sumed and paid for by IMC, consumed by Llano for its own

operations, sold to rigs at a price equal to or greater than IMC

would have paid had it taken the gas, banked under a wellhead

banking agreement, or placed by Llano into a storage facility

owned by Llano. IMC claims a set-off for the price of the gas

that Llano has sold to other parties, and asserts that Llano has a

duty to mitigate its damages by selling the gas elsewhere.

The parties bargained at arm’s length. They have dealt with

each other for twenty years. They were free to reach any

agreement suitable to them. Their intentions are easily ascertain-

able, and the terms of the contract are clear. No question as to

the meaning of the minimum purchase obligation was raised until

IMC changed its method of drying. The contract does not

indicate that Llano has any duty to account for any gas it sold to

others. Rather, it plainly imposes upon IMC an obligation to take

or pay for minimum volumes. Any contrary intent could have

easily been specified. Llano is entitled to all amounts due for

minimum bills for the contract term.

The parties, in the stipulation, outlined their respective posi-

tions on the proper measure of the minimum bills. Their disputes

concern (1) the calculation of the deficiency volume; (2) the

calculation of the deficiency price; and (3) the propriety of

Llano’s claim for recovery of gross receipts tax.

IMC argues that its minimum purchase obligation cannot

exceed Llano’s maximum delivery requirements. Paragraph 6

provides that Llano’s maximum daily delivery requirements shall

be 133% of IMC’s average daily requirements for the preceding

365 days, but never in excess of 6400 million BTU’s per day. In

March or April, 198], Llano’s maximum delivery requirement did

drop below IMC’s minimum purchase obligation of 4800 million

BTU’s per day. However, I find that the minimum purchase

obligation is not subject to the decrease in Llano’s maximum

C-16

daily delivery requirement, and remains at 4800 million BTU’s

per day pursuant to { 7.

If IMC failed to take the minimum volume of gas (355 X 4800

million BTU’s) during any calendar year, it is obligated to pay for

the deficiency between the minimum volume and the volume

actually taken. The parties agree that the applicable price for the

deficiency is governed by the 1975 amendment to 4/5 of the

contract. Thus, the price is “based on the Seller's Average

Wellhead Cost per MMBTU plus eight cents (8¢) per

MMBTU”, subject to adjustments not important here. IMC

objects to Llano’s calculation of the deficiency price on two

grounds.

Its first argument is centered on the definition of “average

wellhead cost” contained in the amendment:

Average Wellhead Cost hereunder shall mean the cost

paid by Seller for gas purchased from the wellheads through-

Out its system including application of all adjustments. Pro-

vided, this average shall be weighted by applying the lowest

priced gas first in the event gas in excess of Buyer's

purchases is purchased by Seller until the volume purchased

by Buyer is attained. In the event Seller owns less than one

hundred percent (100%) of the gas taken by Seller from a

given well then Seller's actual ownership percentage will be

applied to the volume taken and that calculated volume will

be used for purposes of determining Average Wellhead Cost

regardless of the amount actually taken and credited by

Seller for its own account.

The parties recognize that the average cost shall be weighted by

applying the lowest priced gas first, the next lowest priced gas

second, and so forth, IMC argues that the cost should be

averaged only on the gas it actually took, where Llano calculated

the price on the cost average of the minimum volume (355 X

4800). I find that Llano’s calculation of the deficiency price in

this regard is consistent with the minimum purchase obligation

provision and the pricing amendment of the contract.

IMC also contends that the eight cent per MMBTU increment

provided in the amendment is a transportation charge and should

C-17

be disallowed because the gas was not delivered. Though the 8¢

does reflect a transportation charge, the amendment makes no

such reference. The 8¢ is a factor to be included in calculating

the price in effect.

The 1975 amendment includes “all applicable taxes” as part of

the price. However, IMC must pay gross receipts tax only for gas

actually delivered. It is not obligated to pay gross receipts tax on

the deficiency billing amount.

There is no provision in the contract for an award of attorney

fees. Llano’s claim for attorney fees is denied.

The Parties shall submit an approved judgment in accordance

with this opinion.

IT IS SO ORDERED.

SENIOR UNITED STATES

DistRICT JUDGE