Petition for Writ of Certiorari — Williams Natural Gas Co. v. Talus Properties Ltd. Partnership

Supreme Court, U.S.

FILED

BH51758 MAR4 19%

"at Be

CU)

No. OFFICE OF THE CLERK

Fapreme Gonrt af the United States

OCTOBER TERM, 1995

WILLIAMS NATURAL GAS COMPANY,

Petitioner,

v.

TALUS PROPERTIES LIMITED PARTNERSHIP,

PRIMA OIL AND GAS COMPANY, JOHN P.

LOCKRIDGE, YUMA COUNTY OIL COMPANY,

AND JER PARTNERSHIP,

Respondents.

On Petition for Writ of Certiorari

to the United States Court of Appeals

for the Tenth Circuit

PETITION FOR WRIT OF CERTIORARI

GARY W. BOYLE JAY V. ALLEN

COUNSEL OF RECORD WILLIAMS NATURAL GAS

WILLIAMS NATURAL GAS COMPANY

COMPANY 4100 ONE WILLIAMS CENTER

4100 ONE WILLIAMS CENTER TULSA, OKLAHOMA 74172

TULSA, OKLAHOMA 74172

(918) 588-2359

. Did the Tenth Circuit Court of Appeals

err when it failed to consider the extrinsic

evidence presented to it by the Petitioner?

Z. Did the Tenth Circuit Court of Appeals

err when it refused to direct the District Court

to consider the Petitioner’s contract reformation

claim?

LIST OF PARTIES AND RULE 29.1 LISTING

There were no parties to this action below other than

those identified in the caption of this Petition. Petitioner

Williams Natural Gas Company is a wholly-owned subsidiary of

The Williams Companies, Inc. Other subsidiaries of The

Williams Companies, Inc., that are not wholly-owned by that

corporation are as follows:

Apco Argentina, Inc.

Nebraska Energy, L.L.C.

NESP Supply Corporation

Northern Border Intermediate Limited Partnership

Northern Border Partners, L.P.

RESERVECO Inc.

TransNetwork Holding Co.

Tubexpress, Inc.

TABLE OF CONTENTS

QUESTIONS PRESENTED FOR REVIEW .......... (i)

LIST OF PARTIES AND RULE 29.1 LISTING ........ (ii)

PEM ccc ccc vc ebee cee cerrs (v)

ee ce paewy seeps ¥ vie 2

en oe ov cs he wets ou ve e's 2

ogc ed eecweseerees sis 2

SEMemeeeee OO EPMO CAGE... 0... ccc ccc eees 2

REASONS FOR GRANTING THE WRIT ............ 6

ET Se ee ee 6

I. THE COURT OF APPEALS’ DECISION

INVOLVES FEDERAL ISSUES THAT HAVE

A SIGNIFICANT IMPACT ON THE

INTERSTATE NATURAL GAS GRID. ........ 6

A. The Decision Below Directly Conflicts

With FERC’s Policy Determinations in

Its Order No. 636, Which Introduced

Competition to the Interstate Gas

Supply and Transportation Markets. ...... 6

B. The Tenth Circuit’s Interpretation of the

Contracts Creates an Unconscionable

Burden on Interstate Commerce ......... g

Il. IN A MATTER OF GREAT PUBLIC

IMPORTANCE, THE TENTH CIRCUIT

MISAPPLIED THE APPLICABLE LAW AND

HELD THAT WNG MUST PERPETUALLY

PURCHASE GAS FROM THE

(iii)

RESPONDENTS AT AMOUNTS IN EXCESS

OF 400% OF THE MARKET PRICE.......... 10

A. een GE MI, nk bc cv wvcacn 10

B. The Tenth Circuit Erroneously

Determined That the Contracts are

Perr eT TTT eT: Cee 1]

1. The Contracts Contain Internally

Inconsistent Language.......... 13

2. Circumstances External to the

Contracts Also Raise

Ra geal ar eri Reter sean pepe 15

nF The Absurdity of the Contracts’

Operation Evidences Their

pa ica a eee a 16

i. The Tenth Circuit Erroneously Refused

to Consider WNG’s Extrinsic Evidence

6 be ew Pee SE ET ex 18

D. The Tenth Circuit Erroneously Failed to

Direct the District Court to Consider

WNG’s Reformation Claim............ 24

CRY oo oe Go ee ee ee 27

(iv)

TABLE OF AUTHORITIES

Court Cases

American Casualty Co. v. Glaskin, 805 F. Supp. 866 (D. Colo.

Re Pe EET en EE 24

Amoco Prod, Co. v. Kansas Power & Light Co., 505 F. Supp.

Che ti WO. . cal ea es. 15, 22

Amoco Prod. Co. v. Western Slope Gas Co., 754 F.2d 303

NOt ic Ws sits is cs wns Ges 13

Amoco Rocmount Co. v. Anschutz Corp., 7 F.3d 909 (10th Cir.

oiccxc sages ae 11, 12, 19

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)... 11

Boyles Bros. Drilling Co. v. Orion Indus., Ltd., 761 P.2d 278

(ihe. Co Re ONE ns til Heh ec 24, 25

Chilson v. Reed, 389 P.2d 87 (Colo. 1964) ........... 25

f Wichita v. Southwestern Bell Tel. Co., 24 F.3d 1282

Ci ie, SOE esaitna bs SEEK toda a Po 15

Colorado Interstate Gas Co. v. Chemco, Inc., 833 P.2d 786

(Colo. Ct. App. 1991), affd, 854 P.2d 1232 (Colo.

ROPE sin o:0din oe Dip bles 4k vee ee 11, 19

Eastman Kodak Co. v. Image Technical Serv., Inc., 504 U.S.

ED CANE was cep 6 okay Ca ee ean 10, 11

(v)

Evensen v. Pubco Petroleum Corp., 274 F.2d 866 (10th Cir.

DIGS os 52444 dk cael eeld eras vere 12, 16

Jensen v. Redevelopment Agency, 998 F.2d 1550 (10th Cir.

SON oo 5.0 om a eae Beta pe ee 10

In re Manzo, 659 P.2d 669 (Colo. 1983) ............. 24

Northwest Cent. Pipeline Corp. v. JER Partnership, 943 F.2d

1219 (10th Cir. 1991) .... 3, 15, 17, 18, 19, 20, 21

Oklahoma Radio Ass’n v. F.D.LC., 987 F.2d 685 (10th Cir.

IDDS) cc ewvkdeus ti cdd eee ee 11

Otteson v. United States, 622 F.2d 516 (10th Cir. 1980) . 11

Pennzoil v. FERC., 645 F.2d 360 (Sth Cir. 1981), cert.

denied, 454 U.S. 1142 (1982) ............... 13

Prenal v. Colorado Inter 944 F.2d 677

(30gm Cir. SORE). in cs La Aes. 12

Segelke v. Kilmer, 360 P.2d 423 (Colo. 1961) ......... 24

In re Thomason, 802 P.2d 1189 (Colo. Ct. App. 1990) .. 12

United States v. Diebold, Inc., 369 U.S. 654 (1962) .... 10

nit Fideli __v. Bu Rent-A-

Car Sys., Inc., 842 P.2d 208 (Colo. 1992) ...... 12

(vi)

es CUT

Western Gas Processors, Ltd. v. Woods Petroleum Corp., 15

F.3d 981 (10th Cir. 1994) ..../......-.0--0e 16

Wota v. Blue Cross & Blue Shield, 831 P.2d 1307 (Colo. 1992)

NR ES UN, a ae ee CREE 12

tatut

28 U.S.C. § 1254(1) (1994)... 2... eee eee eee rece 2

28 U.S.C. §§ 1332(a)(1), 2201(a) (1994)......-------- 2

Colo. Rev. Stat. § 4-2-202 (1992) ...........-. 2 ai, oe

ES Re Ee. eo 11

oe i eee er ce 5

Administrative Materials

Pipeline Serv. Obligations and Revisions to Regulations

Governing Self-Implementing Transportation; and Regulation

of Natural Gas Pipelines After Wellhead Decontrol [hereinafter

Order No. 636], 57 Fed. Reg. 13,267, III FERC Stats. & Regs.

Preambles 4 30,939, order on reh’g, 57 Fed. Reg. 36,128, Ill

FERC Stats. & Regs. Preambles 30,950, order on reh’g, 57

Fed. Reg. 57,911, 61 FERC 4 61,272 (1992) .......-. 7,8

Presentations of INGAA Panel at Pub. Conference on Pricing

Differential Mechanisms, Interstate Natural Gas Ass’n of

America, May 26, 1994 .........---. eee eee ee eeeee: 8

(vii)

No.

—aeu“a‘[?———————ss SSO

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1995

a... OOOO

WILLIAMS NATURAL GAS COMPANY,

Petitioner,

ws

TALUS PROPERTIES LIMITED PARTNERSHIP,

PRIMA OIL AND GAS COMPANY, JOHN P.

LOCKRIDGE, YUMA COUNTY OIL COMPANY,

AND JER PARTNERSHIP,

Respondents.

Sa=laa

On Petition for Writ of Certiorari

to the United States Court of Appeals

for the Tenth Circuit

PETITION FOR WRIT OF CERTIORARI

Petitioner, Williams Natural Gas Company (“WNG”),

seeks a writ of certiorari to review an opinion and order of the

United States Court of Appeals for the Tenth Circuit, which

affirmed an order granted by the district court in favor of

Respondents.

OPINIONS BELOW

The December 5, 1995, unpublished opinion of the

Tenth Circuit is reprinted at Appendix A’ and may be found at

1995 U.S. App. LEXIS 33,734. The unpublished decision of

the United States District Court for the District of Colorado

(Nottingham, D.J.), is reprinted at App. B.

JURISDICTION

The United States Court of Appeals for the Tenth

Circuit issued its opinion on December 5, 1995. App. A. This

petition for a writ of certiorari is being docketed in this Court

within ninety days from the entry of judgment by the Court of

Appeals. The jurisdiction of this Court is invoked under 28

U.S.C. § 1254(1) (1994).

RELEVANT STATUTE

Pursuant to Rule 14.1(f), WNG has attached a copy of

Colo. Rev. Stat. Section 4-2-202 (1992) as App. C.

STATEMENT OF THE CASE

This case arises from the respondents’ action seeking

declaratory judgment in a contract dispute and WNG’s

counterclaim seeking reformation of the contracts involved.

The district court’s jurisdiction was based on diversity of

citizenship grounds under 28 U.S.C. §§ 1332(a)(1), 2201(a)

(1994). WNG is a Delaware corporation with its principal place

: References to documents reprinted in an Appendix will hereinafter

appear in the Petition as “App.”

of business in Oklahoma. Talus Properties Limited Partnership

is a Texas partnership, with a General Partner that is a South

Carolina corporation with a principal place of business in South

Carolina and with Limited Partners of a New Jersey corporation

with a principal place of business in Florida and an individual

who is a resident of Switzerland and a citizen of the United

States. Prima Oil and Gas Company is a Colorado corporation

with its principal place of business in Colorado. John P.

Lockridge is a Colorado citizen. Yuma County Oil Company

is a Colorado corporation with its principal place of business in

Colorado. JER Partnership is a Colorado partnership whose

partners are all Colorado citizens.

Respondents are the sellers, and WNG is the buyer,

under three Gas Purchase Contracts (the “Contracts”). Various

aspects of the Contracts had been before the district court in

four prior proceedings and before the Tenth Circuit in

Northwest Central Pipeline Corp. v_ JER Partnership, 943 F.2d

1219 (10th Cir. 1991). The Contracts are identical with respect

to their provisions concerning the term of WNG’s obligation to

purchase gas. The Contracts provide, in part, as follows:

Term

This Contract shall remain in full force and effect

from the date hereof and shall extend for a period of

twenty (20) years from the date of initial delivery of gas

hereunder.

ial Righ rch Right of First R:

Upon the expiration of the primary term of this

Contract, Seller hereby grants to Buyer the preferential

right and the right of first refusal to purchase gas

produced from the wells, leases and lands described on

Exhibit “A” attached hereto. At least thirty (30) days,

but not more than ninety (90) days, before the expiration

of this contract, Seller may make a bona fide offer to

Buyer to sell that natural gas which may thereafter be

produced from such wells, leases and lands. If no offer

is made by Seller to Buyer within the time above

described, then that natural gas thereafter produced from

the wells, leases and lands described on Exhibit “A” will

continue to be sold to Buyer under the terms and

conditions of this Contract. Thereafter, Seller shall have

the right to make a bona fide offer at least thirty (30)

days, but not more than ninety (90) days, before the next

anniversary date of this Contract and each and every

anniversary date thereafter until Seller shall make a bona

fide offer to Buyer within the above described time

period prior to any succeeding anniversary date.

aes The parties discovered that they interpreted the quoted

language differently in the course of settling claims raised in

other litigation, which has since been settled. Respondents filed

a declaratory judgment action asking the district court to hold

that the Contracts provide Respondents with the power to

unilaterally extend WNG’s obligation beyond the twenty-year

term. WNG opposed that claim and sought a declaration that

the Contracts could not be extended beyond the twenty-year

term without the consent of WNG or, in the alternative, an

equitable reformation of the Contracts to reflect the agreement

of the parties that the Contracts could not be extended beyond

the twenty-year term without WNG’s consent.

Ree Ee in gt ee ne

Respondents filed a motion for summary judgment

contending that the Contracts are unambiguous and that they

provide Respondents with the option to unilaterally extend the

term. WNG opposed the motion on the same grounds

presented here. The district court granted Respondents’ motion

for summary judgment, inolding that the Contracts are

unambiguous and that they provide Respondents with a

unilateral option to extend. The district court entered a

judgment declaring that interpretation of the Contracts and

specifically declining to reach WNG’s reformation action. App.

B at 16. WNG appealed that decision to the Tenth Circuit.

On appeal, the Tenth Circuit found that the Contracts’

terms are “plain and unambiguous.” App. A at 10. From this

finding, the court concluded that “defendant cannot introduce

extrinsic evidence to vary or contradict” the Contracts’ terms.

App. A at 10.

Despite the fact that the Contracts are not fully

integrated, the court held that WNG’s evidence of consistent

additional terms was inadmissible. The court recognized that

UCC Section 2-202 (as adopted in Colorado) allows a party to

introduce evidence of consistent, additional contract terms.

However, the evidence was not allowed because the court

erroneously believed that the additional terms would conflict

with the Contracts.

Finally, the court disallowed WNG’s reformation

counterclaim. WNG presented several examples of evidence

that supported its request for reformation of the Contracts.

However, the court’s opinion incorrectly recognized only the

evidence that supported the court’s ultimate conclusion.

REASONS FOR GRANTING THE WRIT

Summary of Argument

In a matter of great public importance, this Court should

grant certiorari in order to limit the negative impact of the Court

of Appeals’ decision on the clearly established policy goals of

the Federal Energy Regulatory Commission (“FERC”). If this

decision is allowed to stand, FERC’s attempts to introduce

competition to the interstate natural gas market will be

threatened, and the economic basis on which FERC reorganized

the natural gas industry will be thrown into serious question.

FERC’s inability to meet its competition goals, and the resulting

chaos in the interstate natural gas transportation markets, would

ultimately cause citizens nationwide to pay higher gas rates

without receiving corresponding value in return.

L THE COURT OF APPEALS’ DECISION

INVOLVES FEDERAL ISSUES THAT HAVE A

SIGNIFICANT IMPACT ON THE INTERSTATE

NATURAL GAS GRID.

A. The Decision Below Directly Conflicts With

FERC’s Policy Determinations in Its Order No. 636,

Which Introduced Competition to the Interstate

Gas Supply and Transportation Markets.

In its Order No. 636, FERC made a sweeping regulatory

reorganization of the interstate natural gas industry that was

designed to promote competition among suppliers for both

.

natural gas and natural gas transportation services.2, The FERC

intended such competition to benefit individual gas consumers

and the nation as a whole by ensuring reliable gas supplies at

reasonable prices.

When FERC was developing its regulations, it made

economic assessments of the impact of reorganization based on

the assumption that gas supply contracts entered into by

pipelines would terminate after a known time period. The

termination of gas supply contracts was required because FERC

believed that it would be in the consumers’ best interests to take

pipelines out of the business of buying and selling gas and limit

them to transportation only. “Unbundling” of pipelines’

merchant function was necessary to realize FERC’s goal of a

competitive interstate natural gas grid. To assist a fair and

orderly transition to the reorganized industry, FERC permitted

pipelines to recover from ratepayers the cost of terminating

their gas purchase contracts that were no longer necessary due

to the reorganization. FERC assumed that the transition costs

associated with terminating the contracts would be limited to

reasonable amounts by the terms of the contracts.

FERC’s economic assumptions played a key role in the

formulation of its policies. The decision of the Tenth Circuit in

this case, if followed in other Circuits, would invalidate FERC’s

careful analysis. With the underlying analysis undermined, the

complete restructuring of the massive interstate natural gas

: Pipeline Serv. Obligations and Revisions to Regulations Governing

Self-Implementing Transportation; and Regulation of Natural Gas Pipelines

After Wellhead Decontrol [hereinafter Order No. 636], 57 Fed. Reg. 13,267,

III FERC Stats. & Regs. Preambles ¥ 30,939, order on reh’g, 57 Fed. Reg

36,128, II FERC Stats. & Regs. Preambles $ 30,950, order on reh’g, 57 Fed.

Reg. 57,911, 61 FERC 4 61,272 (1992).

7

system would be thrown into question. This Court has the

opportunity to stop the potential destruction of FERC’s well-

planned efforts to restructure the natural gas transportation

industry for the benefit of consumers across the nation.

Actions that steer reality away from FERC’s projections

pose a serious threat to FERC’s competitive efforts. The Tenth

Circuit’s interpretation of the Contracts, when combined with

the potential for similar decisions in other Circuits, has just such

an effect. In WNG’s case, it was assumed that the Contracts

would expire in 2002 (a twenty-year term) based on the written

terms of the Contracts. The Tenth Circuit’s decision causes the

Contracts to continue perpetually. There are many contracts

that FERC assumed had various remaining terms with some

extending as long as 2004.’ If the Tenth Circuit’s decision is

allowed to stand, some of these contracts could be interpreted

in a manner similar to WNG’s Contracts. Such an interpretation

would clearly render FERC’s initial assumptions about the

industry’s contracts unreliable and would pose a severe threat

to FERC’s competitive goals.

Pipeline companies will pass the extra gas costs they pay

under such extended contracts to their customers.‘ The

resulting threat to competition would be two-fold. First, this

Differential Mechanisms, Teme: one Gas Ass” shanties idee oe

1994.

: FERC determined that the costs of the pipelines’ transition to a

competitive market, including the Respondents’ excess recovery under the

Contracts, should be completely borne by the customers, as long as the

pipelines prudently incurred the costs. Order No. 636, III FERC Stats. &

Regs. Preambles { 30,939, at 30,457-59 (1992).

would attach to the effected pipelines a stigma as a potential

source of future, hidden costs. This would have a negative

impact on interstate pipelines’ competitive standing in the

marketplace. Second, the amounts charged to the pipelines’

former and current customers lessen the amount of money that

the customers have available to spend on future services. This

has the same impact as if a portion of the customers were

simply removed from the marketplace because the customers

will not be able to purchase their anticipated amount of services.

Overall, the net result of the Tenth Circuit’s ruling in

this case is to make interstate pipeline companies less

competitive with intrastate pipelines and to destroy the basis on

which FERC restructured the industry. This result directly

contradicts the commendable, stated policy goals of FERC.

Such a conflict is clearly a matter of public and federal

importance that this Court should review.

B. The Tenth Circuit’s Interpretation of the

Contracts Creates an Unconscionable Burden on

Interstate Commerce.

The pipeline’s customers will ultimately bear the costs

of the Contracts. In this instance, WNG’s local distribution

company customers in Kansas and Missouri will pay for the

difference between the contract price of the gas and the actual

market price for the gas -- approximately a 400% markup.

WNG will be little more than a conduit through which the gross

overrecovery windfall will pass from the hands of individual

consumers and businesses in Kansas and Missouri into the

pockets of gas producers in Colorado. Although it may be

reasonable to force consumers to pay these costs for a fixed

term, it is unreasonable and contrary to public policy to force

them to pay these costs in perpetuity as the Tenth Circuit has

ruled. The payment required by the Tenth Circuit is especially

egregious when one recalls that the FERC determined that

consumers would be best served by an industry restructuring for

which those consumers would pay. Allowing the Tenth

Circuit’s decision to stand will unfairly increase the cost of

transition for consumers and will do so for an unlimited term.

Because other interstate pipelines have similar contracts,

consumers in other states are potential targets of a comparable,

burdensome interstate wealth transfer from consumers in

gas-consuming states to producers in gas-producing states. The

total impact of such a transfer presents a serious burden on

interstate commerce, which this Court should not countenance.

By saddling consumers with an unexpected perpetual surcharge,

the Tenth Circuit's opinion regarding the Contracts creates a

situation that compels this Court's review.

IL. IN A MATTER OF GREAT PUBLIC

IMPORTANCE, THE TENTH CIRCUIT MISAPPLIED

THE APPLICABLE LAW AND HELD THAT WNG

MUST PERPETUALLY PURCHASE GAS FROM THE

RESPONDENTS AT AMOUNTS IN EXCESS OF 400%

OF THE MARKET PRICE.

A. Standard of Review.

Courts must review summary judgment decisions

de novo. Thus, the Court should utilize the same legal

5 Eastman Kodak Co. v. Image Technical Serv., Inc., 504 U.S. 451,

466 n. 10 (1992) (citing United States v. Diebold, Inc., 369 U.S. 654 (1962));

Jensen v. Redevelopment Agency, 998 F.2d 1550, 1555 (10th Cir. 1993).

10

standards as the district court in evaluating the motion. This

Court may affirm the Tenth Circuit’s decision only if it finds

that there is no genuine issue as to any material fact and that

Respondents were entitled to judgment as a matter of law.®

This Court must view this case in the light most favorable to

WNG, the party that opposed the motion.? WNG's evidence is

to be believed and ail justifiable inferences are to be drawn in

WNG's favor.*

B. The Tenth Circuit Erroneously Determined

That the Contracts are Unambiguous.

The Tenth Circuit reviewed the Contracts and concluded

that the term provisions are unambiguous. The Tenth Circuit

incorrectly concluded that such a finding was necessary if the

court was to ignore the disputed issues raised by WNG’s

extrinsic evidence. The Tenth Circuit’s conclusion that the

Contracts are unambiguous is an incorrect determination of a

question of law and should be reversed.

The existence of an ambiguity in a written contract is a

question of law.” The meaning of a written contract, however,

’ Fed. R. Civ. P. 56(c).

: Eastman Kodak, 504 U.S. at 456; Oklahoma Radio Ass’n v. F D.ILC.,

987 F.2d 685, 690 (10th Cir. 1993); Otteson v. United States, 622 F.2d 516,

519 (10th Cir. 1980).

Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986).

; schutz Corp., 7 F.3d 909, 917 (10th Cir.

1993) Caseeieain Gaaete law), Vv

Inc., 833 P.2d 786, 788 (Colo. Ct. App. 1991), aff'd, 854 P.2d 1232 (Colo.

1993).

11

is a question of fact to be resolved in the same manner as other

factual disputes. '®

In determining whether the Contracts are ambiguous,

this Court must examine the entire contract and not isolate

particular phrases or clauses."' This Court should construe the

provisions of the Contracts in harmony with their ordinary

meaning with reference to all other provisions of the

Contracts.”

This Court should also consider certain extrinsic

evidence in determining whether the Contracts are ambiguous.

The Court should consider the nature of the transaction,” the

commercial context of the Contracts, the purpose of the

Contracts, and the circumstances surrounding the execution and

performance of the Contracts."

Ambiguity often arises from the application of

the contract to the subject matter of the

2 Amoco Rocmount, 7 F.3d at 917.

K Amoco Rocmount, 7 F.3d at 917; United States Fidelity

& Guar. Co. v. Budget Rent-A-Car Sys., Inc., 842 P.2d 208, 213 (Colo.

1992).

. Wota v. Blue Cross & Blue Shield, 831 P.2d 1307, 1309 (Colo.

1992).

™ Amoco Rocmount, 7 F.3d at 917; In re Thomason, 802 P.2d 1189,

1190 (Colo. Ct. App. 1990).

7 Prenalta Corp. v. Colorado Interstate Gas Co., 944 F.2d 677, 688

(10th Cir. 1991); Evensen v. Pubco Petroleum Corp., 274 F.2d 866, 871 (10th

Cir. 1960).

12

:

4

;

aed SAM oie pee ae we

PE PON en PO NL

a saa 7% : ~

intiya re B ran Gist Me ool he

Saint ba

es

agreement, and extrinsic evidence is admissible

to remove and explain any ambiguity in the

contract as applied. Ambiguity easily arises

when the contract is applied to its subject matter

in changed circumstances... . A contract

should be interpreted in light of the changed

circumstances to accomplish what the parties

intended.’

The ambiguity in the Contracts arises in part as a result of

dramatically changed circumstances. First, at the time the

parties negotiated the Contracts they believed that the

then-regulated price of natural gas would continue to rise.

Next, unlike the time period during which the Contracts were

negotiated, the price of natural gas is no longer subject to

federal regulation. Finally, FERC’s new regulatory scheme has

dramatically changed the nature of WNG’s business. WNG is

now purely a gas transporter and no longer performs a merchant

(purchasing and selling gas) function. A reasonable

consideration of those circumstances compels the conclusion

that the Contracts’ provisions concerning the term of WNG's

purchase obligation are ambiguous.

1. The Contracts Contain Internally

Inconsistent Language.

The parties clearly and uniformly expressed WNG's

obligation to perform elsewhere in the Contracts. The lack of

any language which can fairly be interpreted as imposing an

~ Amoco Prod. Co, v. Western Slope Gas Co., 754 F.2d 303, 309

(10th Cir. 1985) (quoting Pennzoil v. F. E.R.C., 645 F.2d 360, 388 (Sth Cir.

1981), cert. denied, 454 U.S. 1142 (1982)).

13

obligation on WNG in the preferential right section strongly

suggests that the parties intended 10 impose no such Obligation.

At a minimum, the lack of any such definitive language raises an

ambiguity contrary to the Tenth Circuit’s decision.

The Tenth Circuit’s reading of the Contracts also

ignores the directly conflicting language of the remainder of the

Contracts. The term provision of the Contracts provides that

they "shall extend for a period of twenty (20) years from the

date of initial delivery of gas." That language is not qualified by

the possibility of a unilateral extension. The clear and

unambiguous meaning of that provision directly contradicts the

Tenth Circuit’s conclusion that the respondents can unilaterally

extend the term of the Contracts beyond twenty years.

Other aspects of the preferential right section raise

ambiguities. The title of the provision itself suggests that the

parties included it in the Contracts to grant WNG a right, rather

than an obligation, to purchase gas beyond the twenty-year term

of the Contracts. A right of WNG to extend the term is directly

contrary to the Tenth Circuit’s conclusion that the respondents

obtained a unilateral right to control any extension to the

exclusion of WNG. The first sentence of the clause confirms

the intent expressed in the title: "Upon the expiration of the

primary term of this Contract, [Talus] hereby grants to [WNG]

the preferential right and the right of first refusal to purchase

gas." (emphasis added). These provisions directly contradict

the Tenth Circuit’s conclusion and raise fundamental ambiguity

inherent in the language of the Contracts.

14

Pot a a ee en don

y * Circumstances External to the Contracts

Also Kaise Ambiguities.

Even if the language of the Contracts does not raise an

ambiguity, a proper consideration of the circumstances

surrounding the Contracts, their purpose, and their commercial

context demonstrates the ambiguity. The parties executed the

Contracts at a time when FERC strictly regulated the price of

gas. It was widely believed (including by these parties) that the

price of gas would continue upward following deregulation.”

In this context, the parties apparently did not anticipate what

would happen at the end of the twenty-year term if, as turned

out to be the case, the price of gas decreased following

deregulation. Even more obvious is the fact that the parties

could not and did not anticipate that the price under the

Contracts would eventually reach more than 400% of the actual

market value of the gas. In fact, the language employed by the

parties carefully provides for the period after 2002 based on

what the parties thought would happen. The same language is

ambiguous, however, when viewed in the context of changes in

federal regulation and pricing of the underlying product.’

2 Northwest Cent. Pipeline Corp. v. JER Partnership, 943 F.2d 1219,

1222-23 (10th Cir. 1991).

Z See City of Wichita v. Southwestern Bell Tel. Co., 24 F.3d 1282,

1287 (10th Cir. 1994) (finding ambiguity based on regulatory changes):

Amoco Prod. Co. v. Kansas Power & Light Co., 505 F. Supp. 628, 630 (D.

Kan. 1980) (finding ambiguity as the result of regulatory changes in the natural

gas industry).

15

3. The Absurdity of the Contracts’ Operation

Evidences Their Ambiguity.

Ambiguity can also be based on the fact that a literal

reading of the contract will lead to an unreasonable or absurd

result.'* In Western Gas Processors, Ltd. v. Woods Petroleum

Corp., the court found that the "unambiguous" definition of a

term proffered by the plaintiff was so broad that adoption of

that interpretation would lead to an unreasonable result.’ The

court concluded that the term in question was therefore

ambiguous.” Here the "unambiguous" interpretation urged by

the respondents and adopted by the Tenth Circuit would

similarly lead to an absurd result. If the Tenth Circuit’s decision

is affirmed, WNG, its customers, and their residential users will

be forced to purchase gas for an indefinite term at a price that

currently exceeds the market value of the gas by more than

400%. This grossly overpriced transaction will continue in

perpetuity even though the parties clearly and unequivocally

provided for a fixed term of twenty years and none of the

parties contemplated the possibility of a unilateral, perpetual

extension.” Such a result is anything but reasonable and

demonstrates the ambiguity inherent in the Contracts as well as

the significant public importance of this decision.

= See Evensen v. Pubco Petroleum Corp., 274 F.2d 866, 871 (10th Cir.

1960).

- 15 F.3d 981, 987 (10th Cir. 1994).

20 Id.

” See discussion of WNG’s evidence, infra, at 18-22.

16

The most appropriate guidance in this matter comes

from the Tenth Circuit's prior interpretation of the very

Contracts that are the subject of this Petition.” The court

considered the interpretation of the pricing provisions of the

Contracts following a trial on the merits. Both the district court

and the Tenth Circuit found that the Contracts are "poorly

written" and ambiguous.” Now that the contentions of the

parties on this question are reversed, the Tenth Circuit has

somehow miraculously found clarity where only confusion and

uncertainty existed before. That decision is contrary to the law

of this case and the clear ruling of the court in Northwest

Central.

The Tenth Circuit’s prior decision in Northwest Central

found ambiguity in a different part of the Contracts.

Nonetheless, the court's reasoning should apply with equal force

to the preferential right section. The court found that the

lengthy provisions concerning the price of gas, while dealing

extensively with what would appear to be every possible future

contingency, were nonetheless confusing because they were

susceptible of two different and mutually exclusive inferences.”

The court held:

In short, we refuse to legally preclude the sort

of ambiguity created by conflicting inferences

that can be drawn from incomplete contract

language. Since the pricing provision's language

7 Northwest Cent. Pipeline Corp. v. JER Partnership, 943 F.2d 1219

(10th Cir. 1991).

2 Id. at 1227, 1229.

m Id, at 1227.

17

is susceptible of more than one reasonable

interpretation, we agree with the district court

that it is ambiguous.”

The court also found ambiguity in the fact that the language of

the Contracts is not internally consistent.”

The preferential right section of the Contracts compels

exactly the same conclusion. The parties failed to anticipate

what would happen in the future and therefore failed to provide

explicitly for the term of the Contracts where lower prices,

deregulation, and industry restructuring intervened. This is

exactly the sort of ambiguity the Tenth Circuit found in other

provisions of the Contracts. The Tenth Circuit erred in failing

to find the same ambiguity here. That ruling is incorrect as a

matter of law and should be reversed.

C, The Tenth Circuit Erroneously Refused to

Consider WNG’s Extrinsic Evidence.

Having incorrectly ruled that the Contracts are

unambiguous, the Tenth Circuit refused to consider evidence of

substantial disputes regarding material extrinsic evidence

concerning the intent of the parties. The court also failed to

correctly apply the Colorado version of the UCC. The Tenth

Circuit’s refusal to consider the factual disputes presented by

WNG's extrinsic evidence is reversible error because, if that

evidence had been considered, summary judgment would have

been precluded.

o Id. (citation omitted).

” Id. at 1228-29.

The ambiguity in the Contracts discussed above required

that the Tenth Circuit consider extrinsic evidence of the parties’

intent.” WNG offered a significant amount of extrinsic

evidence that raised substantial disputes concerning material

facts. The most important evidence of the Respondents’ true

intent is their assertion of a delayed drilling claim in related

litigation. The respondents argued, in writing, that they were

entitled to recover for gas that they would have been able to

produce during the fixed twenty-year term of the Contracts but

for WNG’s litigation. That claim is wholly dependent on the

fixed termination of the Contracts after twenty years because a

perpetual contract would render the claim worthless by

permitting the respondents to recover all of the gas on their

property.

In addition to the compelling evidence of the delayed

drilling claim, WNG presented the district court with reserve

estimates that reflected anticipated prices for the gas subject to

the Contracts. The estimates were prepared at the respondents’

direction. Portions of those estimates projected prices through

2002 at a constant level reflective of the price established by the

Contracts. After 2002, prices fluctuate. That fluctuation is

consistent only with sales of gas after 2002 under some

arrangement other than the Contracts, because the Contracts

establish a single price for future production. Also, in

November 1981, several months before the execution of the

Contracts, WNG and Respondents entered into a Letter

Agreement. App. D. That agreement sets forth the key

1219, 1226 (10th Cir. 1991); Colorado Interstate Gas Co. v. (

833 P.2d 786, 789 (Colo. Ct. App. 1991), affd, 854 P.2d 1232 (Colo. 1993).

19

elements of the arrangement that eventually became the

Contracts. Among other terms, it includes the term of the

Contracts as twenty years. The parties had the opportunity in

the Letter Agreement to provide for a longer term or for

unilateral extensions but did not.

Finally, review of the lengthy litigation history

concerning the Contracts reveals the fact that everyone involved

has always acted as though the Contracts had a fixed term of

twenty years:

1) John Lockridge, one of the principals of

Respondents, testified previously that the Contracts covered a

term of twenty years.

2) Respondents have argued in briefs that the

Contracts provide for a twenty-year term.

3) Respondents’ Complaint in one of the prior

lawsuits states that the Contracts are “in full force and effect

through May 2002" and that they have a “term of 20 years.”

4 The district court twice expressly found that the

Contracts were effective for a twenty-year term.

5) The Tenth Circuit recited and approved that

finding. *

That conclusion is inconsistent with the respondents’

interpretation and supports WNG’s reading of the Contracts.

” Northwest Cent. Pipeline Corp., 943 F.2d at 1221.

20

While these statements of the parties and the courts’

understanding of the Contracts do not specifically address the

issue raised in this case, they are circumstantially supportive of

WNG’s interpretation of the Contracts and inconsistent with

Respondents’ interpretation. These expressions raise sharp

factual disputes when viewed in light of Respondents’ allegation

that they always interpreted the Contracts as including the

unilateral right to extend them beyond twenty years. Those

factual disputes preclude summary judgment against WNG.

Even if the Tenth Circuit correctly determined that the

Contracts are unambiguous, it failed to consider WNG’s

evidence regarding additional terms to the Contracts.” The

extrinsic evidence WNG presented to the Tenth Circuit shows

that the parties intended, consistent with the provisions of the

Contracts, that the preferential right section would grant the

parties the right to mutually extend the Contracts, but would

not grant the respondents the unilateral right to extend them.

As discussed above, the parties failed to define the key terms

used in the preferential right section. Because the district court

had previously held that the Contracts are not complete

integrations,” it should have considered evidence of consistent

additional terms -- the definition of key phrases. That evidence

was disputed and therefore summary judgment was precluded.

The Tenth Circuit’s refusal to consider the factual

disputes raised by the extrinsic evidence violates Colo. Rev.

Stat. Section 4-2-202. That provision changes the common law

2 Colo. Rev. Stat. § 4-2-202(b) (1994).

40 Northwest Cent. Pipeline Corp., 943 F.2d at 1226. The Tenth Circuit

recited its earlier finding on integration in this proceeding. Apo A at 11.

21

regarding the admission of parole evidence. Under Section 2-

202, "the lack of facial ambiguity in the contract language is

basically irrelevant to whether extrinsic evidence ought to be

considered by the court... .”" Regardless of whether the

Contracts are ambiguous, the Tenth Circuit should have

considered WNG's evidence concerning the circumstances

surrounding the Contracts and the parties’ conduct during

performance.

Because the Contracts are ambiguous and are not

complete integrations, the Tenth Circuit had the obligation to

consider extrinsic evidence of the parties’ intent. If the Tenth

Circuit had considered the extrinsic evidence, it would have

been compelled to reverse the district court’s summary

judgment in favor of Respondents. In failing to do so, the court

committed reversible error.

The Tenth Circuit also erroneously refused to consider

WNG’s evidence of additional terms because the court ruled

that the terms were not consistent with the rest of the

Contracts. A review of the Contracts and WNG’s proffered

interpretation, however, makes it clear that WNG’s

interpretation is consistent with the language of the Contracts.

WNG's interpretation of the Contracts gives effect to

every provision of the Contracts, and the Tenth Circuit,

therefore, should have adopted this interpretation. WNG

contends that the Contracts give the parties the power to

continue the purchasing relationship after the conclusion of the

twenty-year term only if WNG agrees. This interpretation gives

- Amoco Prod. Co. v. Western Slope Gas Co., 754 F.2d 303, 308

(10th Cir. 1985) (interpreting Colorado law).

22

OSS SS...

meaning to the grant to WNG of a preferential right to purchase

gas. It also gives full effect to the parties' agreement to a term

of twenty years. Further, it gives effect to the second and third

sentences of the preferential rights section:

At least thirty (30) days, but not more than

ninety (90) days, before the expiration of this

contract, [Talus] may make a bona fide offer to

[WNG] to sell that natural gas which may

thereafter be produced from such wells, leases

and lands. If no offer is made by [Talus] to :

[WNG] within the time above described, then

that natural gas thereafter produced from the

wells, leases.and lands described on Exhibit "A"

will continue to be sold to [WNG] under the

terms and conditions of this Contract.

Under WNG's interpretation of the Contracts, the

respondents are empowered to make an offer to WNG during

the sixty-day period ending thirty days before the expiration of

the Contracts. If they choose not to make an offer, the

Contracts will continue during the remaining thirty days, subject

to all of the terms and conditions of the Contracts. Those terms

and conditions include the immediately preceding paragraph

stating that the Contracts extend only until twenty years after

first production. At the end of the twenty-year term, the

Contracts would terminate. Not only the evidence of the

parties’ intent but also the language of the Contracts read in

light of the well-established rules of construction compels this

conclusion. The Tenth Circuit should have considered WNG’s

evidence concerning consistent additional terms.

23

D. The Tenth Circuit Erroneously Failed to

Direct the District Court to Consider WNG’s

Reformation Claim.

WNG's counterclaim stated a cause of action for

reformation. Despite the parties’ arguments on the issue and the

proper framing of the issue in the pleadings, the district court

concluded that the respondents are empowered to unilaterally

obligate WNG to purchase gas after the end of the twenty-year

term and stated, "[b]ased on that conclusion, I need not reach

the parties’ arguments concerning reformation of the contracts."

App. B at 16. That conclusion is incorrect as a matter of law,

and the Tenth Circuit’s failure to direct the district court to

consider WNG's claim for reformation is reversible error.”

Reformation is an equitable remedy available to correct

a mistake in drafting when the final expression of the parties’

agreement does not express their true intent.” The mistake may

be unilateral if the other party knows of it.*

The record before the Tenth Circuit established factual

disputes with respect to the elements of WNG’s reformation

action. The 1981 Letter Agreement is one expression of the

” The Tenth Circuit even admitted that it was confused by the

reformation claim. App. A at 14. That confusion is apparent from the

substance of the court’s conclusion.

See Segelke v. Kilmer, 360 P.2d 423, 426 (Colo. 1961); Boyles

Bros. Drilling Co. v. Orion Indus., Ltd., 761 P.2d 278, 281 (Colo. Ct. App.

1988).

s

v. Glaskin, 805 F. Supp. 866, 873 (D. Colo.

1992); In re Manzo, 659 P.2d 669, 672 (Colo. 1983).

24

parties’ agreement that predates the Contracts. App. D. The

Letter Agreement clearly sets forth a term of twenty years for

WNG's purchase obligation. The parties did not agree that the

respondents would retain a unilateral right to extend the

obligation beyond twenty years. The testimony of Robert

Bemey, the person who executed the Letter Agreement and the

Contracts for WNG, confirms the expression set forth in the

Letter Agreement. App. E. Mr. Berney testified that the

parties agreed to a straight twenty-year term. App. E.

Thereafter, the parties all acted as though the Contracts would

last for only twenty years. The parties and the courts made

statements that support that conclusion. Respondents employed

a party to create reserve studies that are predicated on a twenty-

year term. Counsel for the respondents calculated damages on

a basis consistent solely with a twenty-year term, and the

principals of the respondents adopted the claim. Respondents

asserted their claims up to the time that the parties settled their

prior disputes. Parole evidence is admissible to establish a claim

for reformation.2® All of this admissible evidence raised factual

disputes concerning the elements of WNG’s reformation action

and therefore precluded summary judgment.

Contrary to the Tenth Circuit’s assertions, WNG’s

reformation claim does not negate the other language in the

Contracts. The reformation of the Contracts would merely

cause them to operate in the manner originally intended by the

parties. As reformed, the Contracts would simply last for the

agreed-upon twenty-year term and would provide the parties

with the option to extend the Contracts for a longer period. As

Chilson v. Reed, 389 P.2d 87, 89 (Colo. 1964), Bovies Bros., 761

P.2d at 282.

25

reformed, the Contracts would retain their original character

rather than have their original terms negated.

The district court erred when it concluded that it need

not reach the reformation action. The action was appealed to

the Tenth Circuit and the record established substantial disputes

concerning material facts. The conclusion that the Contracts

unambiguously provide as the district court held did not relieve

the district court or the Tenth Circuit of the burden of resolving

the claim. Instead, resolution of the reformation claim is

required because the courts interpreted the Contracts adversely

to WNG. Logically, the courts could have avoided WNG's

reformation claim only if they had interpreted the Contracts in

the manner urged by WNG. The Tenth Circuit’s failure to

direct the district court to consider the reformation action is

reversible error.

” The Tenth Circuit conceded as much when it relied on dicta from a

prior decision that permits the appellate court to affirm a decision on grounds

not considered by the lower court. App. A at 12-13.

26

CONCLUSION

The impact of the Tenth Circuit’s decision is a matter of

great importance to the interstate natural gas industry in the

United States, and this Court should issue the requested writ.

On review, this Court will be compelled to conclude that the

Tenth Circuit’s actions were erroneous as a matter of law.

Respectfully submitted,

3 Gary W. Boyle

Counsel of Record

Jay V. Allen

Williams Natural Gas Company

4100 One Williams Center

Tulsa, Oklahoma 74172

(918) 588-2359

Attorneys for Petitioner

Williams Natural Gas Company

March 4, 1996

27