American National Petroleum Co. v. Transcontinental Gas Pipe Line Corp.

798 S.W.2d 274, 1990 WL 150070

• Court: Texas Supreme Court
• Decided: November 28, 1990
• Docket: C-8350
• Status: Published

Opinions

OPINION

RAY, Justice.

This is a breach of contract and tortious interference with contract case. Trial was to a jury, which found that Transcontinental Gas Pipe Line Company (Transco) breached its “take or pay” contracts with American National Petroleum Company (ANPC) and Oil Investments, Ltd. (Oil), and tortiously interfered with gas balancing agreements ANPC and Oil had with third parties. The jury found exemplary damages of $16 million for the tortious interference, and the trial court rendered judgment for ANPC and Oil on both theories, including the exemplary damages. The court of appeals, with other judgment modifications, reversed the judgment for exemplary damages, holding, in part, that ANPC and Oil’s failure to obtain a separate finding of tort damages precluded recovery of the exemplary damages. 763 S.W.2d 809. We hold that Transco’s express statement that it did not object to the failure to submit a tort damages jury question because the damages for tort and contract were the same, was sufficient to waive any error in the failure to submit a separate tort damages question. We reverse the judgment of the court of appeals and remand the cause to that court for it to consider points not previously addressed, including factual sufficiency points.

ANPC and Oil are independent producers who own working interests in two gas wells in the Vermilion field in the Gulf of Mexico. ANPC also owns a working interest in five gas wells in the Oakvale field in Mississippi. Transco buys gas from ANPC and Oil, and is in fact the only pipeline company servicing the Vermilion field. Both the Vermilion contract and the Oak-vale contract obligated Transco to take-or-pay for specified annual and monthly percentages of ANPC’s and Oil’s gas delivery capacity. ANPC and Oil granted Transco the exclusive contract rights to their gas.

ANPC and Oil entered into an operating agreement with Samedan Oil Corporation and the other working interest owners in the Vermilion field. Samedan was designated as the gas operator for the field. Under the operating agreement, if a particular owner’s working interest was under-produced and another owner’s interest was overproduced, the underproduced owner could ask Samedan to bring it back into balance with the other working interest owners by reallocating an appropriate amount of the sales proceeds from gas taken by Transco. Samedan received monthly a notice of how much gas Transco intended to buy. Samedan would then instruct Transco on how to allocate the payments to the various working interest owners in accordance with their fractional interests and with due regard for the under-balanced/ overbalanced situation.¹

ANPC entered into a similar operating agreement and gas balancing agreement for the Oakvale field. APC Operating Partnerships, known as “Apache,” was the designated gas operator for the Oakvale field.

In the early 1980s a surplus of deliverable natural gas created a financial crisis for Transco. In 1983, at Transco’s request, the Vermilion contract was modified to reduce Transco’s annual take-or-pay percentage obligation and to add a “market-out” clause.² The “market-out” clause permitted Transco to reduce the contract price to be paid ANPC and Oil for their gas when, in Transco’s “sole opinion,” the existing contract price would render the gas “uneconomic” to Transco or its customers. The amended Vermilion contract provided that, if ANPC and Oil were dissatisfied with a market-out price established by Transco, their sole remedy was to request that Tran-sco release all of their gas obligations. This remedy could be exercised if ANPC and Oil had another buyer willing to pay a gas price higher than that set by Transco as the new market-out price. The Oakvale contract was modified in 1984 to delete Transco’s take-or-pay obligation in its entirety and to substitute a provision that required Transco to take ANPC’s gas production ratably with other producers in the Oakvale field.

By 1985 gas prices had dropped dramatically. Transco engaged in a course of action to reduce its obligations to take higher-priced gas under contracts such as the Vermilion and Oakvale contracts. Transco developed an “omnibus agreement” under which gas producers waived any outstanding liability claims against Transco and agreed to a lower price and reduced purchase obligations. To pressure producers into signing the omnibus agreement, Tran-sco adopted a policy of taking only 3% of the gas capacity of each non-signing producer regardless of take-or-pay or other minimum take provisions in its contracts. The policy was discriminatory against non-signers. A Transco officer admitted that the company took more than 3% from producers who signed the omnibus agreement. The Transco officer further testified that the objective of the 3% policy was to put financial pressure on the non-signers to force them to sign.

Transco elected to establish its market-out price on the market price for “spot” gas, which is gas not dedicated to a specific buyer sold on a short term, interruptible basis. It was less expensive than the “system” gas sold under the long-term dedicated and uninterruptible contracts between Transco and its producers such as ANPC and Oil. Transco thus set its market-out price below the prevailing price for comparably situated gas. To justify this policy, Transco asserted that federal regulations required it to buy gas at the lowest price available, which it construed to be the “spot” gas price.

Transco applied its 3% policy to ANPC’s and Oil’s gas in both the Vermilion and Oakvale fields, although ANPC and Oil offered all of their reserves to Transco. Moreover, Transco set the Oakvale contract gas price for ANPC using a market-out method, even though the Oakvale contract had no such provision. A Transco officer testified that the company used the market-out price policy to pressure producers who refused to sign the proposed omnibus agreement without regard to whether Transco had a contractual or other right to reduce the prices. The Transco officer further admitted that Transco paid more to the settling producers for their gas from the same field than it did for the gas purchased from ANPC and Oil and other “non-settling producers” who refused to waive their liability claims or to sign the omnibus agreement.

As a result of the 3% policy, Transco did not take the monthly minimum required volumes of ANPC’s and Oil’s production capacity from November 1985 through July 1986, nor the contract annual minimum for the fiscal year ended June 30, 1986. As another result of its 3% policy, ANPC and Oil became underbalanced in the Vermilion field. The 3% policy also caused ANPC to become underbalanced in the Oakvale field because that contract called for Transco to take the gas ratably among all producers.

In November 1986 ANPC and Oil requested their gas operators, Samedan and Apache, to bring them back into balance in the Vermilion and Oakvale fields, respectively. Copies of the requests were forwarded to Transco, which responded in December. A Transco vice president wrote ANPC and Oil, with copies to the respective operators, that until ANPC (respectively Oil) agreed to the omnibus agreement Transco refused to reallocate payments for future production to bring ANPC (respectively Oil) back into balance. The same vice president testified at trial as to the meaning of the letter:

Q. Then likewise you sent the same letter to Samedan so they would know the same thing, I guess, is that correct, sir?

A. That’s correct.

Q. All right.

What you were trying to get to Sam-edan was to the effect the purpose of the letter is to tell Samedan was until we settle with ANPC we are not going to take gas in accordance with your allocation. We are not going to pay you for the gas that way.

A. That’s correct.

* ⅜ ⅜ * ⅜: s$c

Q. And what you were trying to tell Samedan and Apache that if you do that [ask that ANPC and Oil be brought back into balance] we will not buy any gas. That was the purpose of your letter, wasn’t it?

A. I believe that is right.

In context, the jury was entitled to conclude from this testimony that at the very least Transco would refuse to take even the 3%, thus putting ANPC and Oil further out of balance with the other interest owners serviced by the operator. The context of the testimony also admits of the interpretation that Transco threatened not to take any gas from the wells operated by Same-dan (or Apache) in which ANPC or Oil was an interest owner. Thereafter both operators told ANPC and Oil that “their hands were tied” and that “they couldn’t do any thing about” enforcing the provisions of the gas balancing agreements with other producers in the Vermilion and Oakvale fields.

Transco further admitted that in order to bring ANPC and Oil back into balance, Transco would not have had to take any additional gas. It would merely have had to reallocate payments for gas already taken. Further, the reallocation requested through the operators would have permitted Transco to pay less for the gas taken because of other transactions affecting Transco’s purchasing prices at that time.

In addition to breach of contract and bad faith findings, the jury found that Transco tortiously interfered with the gas balancing agreements among ANPC, Oil and their co-interest owners in the Vermilion and Oakvale fields; that such interference was without legal justification or excuse; that such interference proximately caused damages to ANPC and Oil; and that Transco acted with malice in committing its actions of tortious interference. The jury further found that $16,000,000 should be awarded against Transco to ANPC and Oil as exemplary damages. There was no separate finding of tort damages for the interference. In objecting to the cluster of jury questions relating to the tortious interference theory of recovery, counsel for Tran-sco stated:

We object to the submission of Special Issue No. 5 and 6 and 7 on the interference for the same reason, that is because of any actual damages which they may have sustained are the same as the Vermilion take or pay claim and the minimum take claim and the submission of those issues are unnecessary.

Just to be clear we are not objecting to the failure of the plaintiff to submit a damage issue in connection with Special Issues 5, 6 and 7 on the interference claim for the same reason we stated earlier in that we agree in the damages which would be recoverable from the defendant in an affirmative finding are the same as the damages recoverable for the Vermilion take or pay claim and the minimum pay claim and the Oak Vale claim.

Without citing any authority, the court of appeals concluded that such “remarks of TRANSCO’s counsel constitute neither a judicial admission nor a stipulation which dispensed with the requirement for the submission of an issue to the jury regarding the amount of actual tort damages.” 763 S.W.2d at 821. Such conclusion was error. The trial court was entitled to rely on the statement and to find damages for the tort cause of action the same as for the contract cause of action that was submitted to the jury. A cluster of jury questions on tortious interference with contract was submitted to the jury. Transco’s failure to object to the omission of a tort damages question as part of that cluster alone waived the requirement of submitting the correct damages issue to the jury. Tex.R.Civ.P. 279; Turner, Collie & Braden, Inc. v. Brookhollow, Inc., 642 S.W.2d 160, 164 (Tex.1982); Transport Ins. Co. v. Mabra, 487 S.W.2d 704, 707-708 (Tex.1972). Transco went further by stating that the reason there was no objection was that it agreed damages recoverable for affirmative findings on the tort liability theory are the same as the damages question asked under the contract theory. The trial court may hold a party to its position. See Johnson v. Swain, 787 S.W.2d 36, 39 (Tex.1989). On appeal Transco is bound by a deemed finding of actual tort damages by the trial court if there is any evidence of damages from the tortious interference. Tex.R.Civ.P. 279; Roark v. Allen, 633 S.W.2d 804, 808-809 (Tex.1982); Kirk v. Standard Life & Acc. Ins. Co., 475 S.W.2d 570, 572 (Tex.1972).

The court of appeals alternatively held there was no evidence of the extent of damages for tortious interference with contract. We must review the record to determine if there is any evidence from which the trial court could have found an amount (however minimal) of actual damages for tortious interference with contract, under the measure of actual damages for that tort.

In a commercial relations tort, the fact that the damages are “economic” does not mean that they may not be damages for the tort. The basic measure of actual damages for tortious interference with contract is the same as the measure of damages for breach of the contract interfered with, to put the plaintiff in the same economic position he would have been in had the contract interfered with been actually performed. See Capital Title Co. v. Donaldson, 739 S.W.2d 384, 391 (Tex.App.—Houston [1st Dist.] 1987, no writ); Prowse v. Whitehurst, 313 S.W.2d 126, 130-31 (Tex.Civ.App.—San Antonio 1957, writ ref’d n.r.e.).

Had Transco permitted the reallocation of the payments for the gas actually taken, i.e., had Transco not interfered with the gas balancing agreements, the amount Transco would have paid ANPC and Oil would not necessarily have been the amount Transco should have paid ANPC and Oil under its direct contracts with those parties. Transco was paying ANPC and Oil a price rate based on the market price for “spot” gas, and the jury apparently found that to be an improper price under the contract. The gas balancing agreement with the operators and among the interest owners only dealt with how the relative amounts of gas actually taken would be allocated to the interest owners, not the price the pipeline company was paying that interest owner for the gas.

Thus in at least this one respect, the damages for the contract interfered with (the gas balancing agreement) could and apparently did differ from the total damages for Transco’s breach of contract. The jury and trial court determined that Tran-sco was paying at a rate too low under its contracts with ANPC and Oil. The responsibilities of the co-interest owners under the gas balancing agreement would not have included the underpayment amount, which was strictly a matter between Tran-sco and ANPC (respectively, Oil). The tor-tious interference with contract actual damages would have differed by at least that amount.

Nevertheless, there was evidence of the rate Transco was paying ANPC and Oil sufficient for the jury or trial court to have found actual damages for the breach of the gas balancing agreement, which would have been an element of actual damages for the tortious interference claim against Transco, had Transco not waived the requirement of such a finding. Since there was some evidence to support a deemed or implied finding, the court of appeals should have upheld the judgment for tort recovery, subject to review for factual sufficiency of the evidence.

Transco further argues it established it was privileged to interfere with the gas balancing agreements. Privilege to interfere with a contract is an affirmative defense on which Transco had the burden of persuasion. Sterner v. Marathon Oil Co., 767 S.W.2d 686, 690 (Tex.1989). The jury expressly found the interference was without legal justification or excuse. Transco’s arguments that it was privileged to interfere amount to the assertion that an act that is a breach of a direct contract can never also be tortious interference with a different contract. That is not the law. Transco breached its contract to coerce ANPC and Oil to settle outstanding liability claims. Trying to coerce a party into a favorable settlement by threats under existing or potential future contracts with third parties is not privileged. Griffin v. Palatine Ins. Co., 235 S.W. 202, 204, modified on rehearing on other grounds, 238 S.W. 637 (Tex.Comm’n App.1922, judgmt adopted). The evidence construed favorably to support the jury verdict was that Transco threatened the gas operators (and through them the other interest owners) that if those third parties insisted on performance of their gas balancing agreement with ANPC and Oil, then Transco would breach its own contracts with those third parties to their economic detriment. Such a threat may constitute tortious interference with contract. Sterner v. Marathon Oil Co., 767 S.W.2d at 691. A knowing and intentional breach of one's direct contract may also be an act tortiously interfering with a third party’s contract, if it is done with a purpose and effect of preventing the third party from performing its contract with another. See generally, Black Lake Pipe Line Co. v. Union Construction Co., 538 S.W.2d 80, 91 (Tex.1976); Raymond v. Yarrington, 96 Tex. 443, 452, 73 S.W. 800, 804 (1903); Armendariz v. Mora, 553 S.W.2d 400, 405 (Tex.Civ.App.—El Paso 1977, writ ref’d n.r.e.). There was evidence that Transco knew its actions were a breach of its contracts with ANPC and Oil and would cause the operators to breach the balancing agreements, and that Transco purposefully engaged in that course of action to put economic pressure on ANPC and Oil to settle the outstanding liability claims they had against Transco. There was some evidence from which the jury could conclude the conduct was not privileged, and thus Transco’s claim of privilege was not established as a matter of law.

In light of our holding on actual tort damages, we need not reach ANPC’s alternative theory that a tort duty of good faith and fair dealing should be implied in a gas pipeline contract. Our holding requires us, however, to make some mention of ANPC’s attorney fee points.

The court of appeals held that the failure to segregate attorney time spent prosecuting the breach of contract claim (which that court affirmed as modified) and the tor-tious interference with contract claim (which the court reversed and rendered), required a reversal and remand of the amount of attorneys’ fees. Since we have held that the court of appeals erred in overturning the tort ground of recovery on the reasons it stated, recovery of attorneys’ fees for the tortious interference theory need not be deleted. Because there are factual sufficiency points, some of which are related to the attorneys’ fees, all of which are subject to the jurisdiction of the court of appeals, we will remand the whole case. The court of appeals may not reverse and render judgment denying attorney’s fees for the tortious interference claim. We reverse the judgment of the court of appeals and remand the cause for further proceedings consistent with this opinion.

GONZALEZ, J., dissents, joined by COOK, J.

1 . Such gas balancing agreements are common. A gas balancing agreement is a contract executed by the various mineral interest owners of a gas well or field or similar tract in which the mineral estate is owned in co-tenancy setting forth the manner in which production from the well, field or tract will be balanced among the owners in the event that one owner sells more of the gas stream from the well or tract than the other owners. Imbalances inevitably occur when a buyer takes gas from a well or tract which is also owned in part by others than his seller. With the growth of “spot” market selling, gas balancing agreements are of increasing complexity and importance to attempt to balance sales proceeds with other producers draining the same reservoir. Johnson, Recent Developments in Natural Gas Sales and Transporta-no» Contracts — Chapter I, 1989 STATE BAR OF TEXAS ADVANCED OIL, GAS & MINERAL LAW COURSE at 19. An interest owner’s being out of balance is also a substantial problem for the operator. Gas produced from each well is theoretically owned in proportion to percentage ownership of the cotenants. Since large quantities of gas cannot be economically or prudently stored for long periods of time, a gas operator must have some method to deal with the under-balanced owner's share of the gas. The 1989 revision of the Model Form Operating Agreement of the American Association of Petroleum Landmen (A.A.P.L.) differs substantially from the 1982 version by providing additional rights in the operator to purchase or sell another party’s share of production when there is no gas balancing agreement among the parties. Pen-dleton, A Comparison of the 1989 A.A.P.L. Model Form Operating Agreement with the 1982 Model Form Operating Agreement, 1990 STATE BAR OF TEXAS OIL, GAS, AND MINERAL LAW FOR LAWYERS AND LEGAL ASSISTANTS INSTITUTE, at G18. The 1989 Model Agreement, like the 1982 version and its predecessors, has two options — one incorporating by reference the gas balancing agreement of the interest owners in the "Contract Area,” and the other for use when there is no gas balancing agreement. Id. at G42-G43.

2 . “Market-out” clauses allow the purchaser to reduce the price it pays whenever it determines that the market into which it sells will not bear the currently-demanded price. R. Hemingway, The Law of Oil and Gas § 7.4 (2d ed. 1983).