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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1996
- **Citation:** 518 U.S. 1019

## Text

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

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4
;

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PE PON en PO NL
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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_1829%3A01. Public record. Not legal advice.