Rutgers, State University v. Martin Woodlands Gas Co.

• Court: Court of Appeals for the Fifth Circuit
• Decided: October 5, 1992
• Docket: 91-3615
• Status: Published

Opinion

United States Court of Appeals,

Fifth Circuit.

No. 91–3615.

RUTGERS, the State University, Plaintiff–Appellee Cross–Appellant,

v.

MARTIN WOODLANDS GAS COMPANY and Martin Blue Ridge Gas Company, etc., Defendants–Appellants Cross–Appellees.

Oct. 13, 1992.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before JOLLY, and DUHÉ, Circuit Judges, and PARKER1, District Judge.

ROBERT M. PARKER, District Judge:

Rutgers, the State University, (Rutgers) Appellee–Cross Appellant filed suit for declaratory

judgment seeking a declaration that the November 14, 1985 contract between Rutgers and Martin

Woodlands Gas Company (Martin Woodlands) was no longer in effect. Both parties sought

damages, alleging that the opposing party had breached the contract. The Court below found that

the contract had been modified from a five year contract to a month to month contract, and that

Rutgers had breached the contract by failing to give thirty days advance notice of cancellation. The

Court ordered Rutgers to pay damages calculated as the amount of profits defendants would have

realized in a thirty day period. Both parties appealed. We reverse in part and affirm in part.

In 1985 changes in federal regulations allowed Rutgers to purchase natural gas from private

sources at more competitive prices than they had been charged by public utilities in the past. Rutgers

negotiated a contract with Martin Woodlands to supply natural gas to some of its heating plants. The

Natural Gas Sales Agreement (hereinafter Contract) entered into by Rutgers and Martin Woodlands

and later assigned by Martin Woodlands to co-defendant Martin Blue Ridge Gas Company (Martin

Blue Ridge) provides that the laws of the state of Louisiana govern and control its construction.

1 Chief Judge of the Eastern District of Texas, sitting by designation. Under the heading Term, the contract provides, "this contract will continue in effect for five years ...

and continue thereafter until canceled on thirty days prior written notice." We must reconcile this five

year clause with price provisions set out later in the contract.

Because it is central to our analysis, the entire price provision is set out in full.

3. Price: For gas hereunder as measured on a dry basis at a pressure base of 14.65 psia, BUYER shall pay SELLER $2.305 per million British thermal units ("MMBtu") delivered into Texas Eastern Transmission Corporation in their transport Zone B, which shall be the price-location reference point hereunder. Should the Delivery Point be different from Zone B or should any of the transportation tariffs change between the point of delivery and BUYER's plant, the price shall be adjusted such that the actual net burner tip cost of $3.30 per MMBTU to Buyer shall remain the same. The Price will remain fixed for one year.

At the end of the initial year hereunder and annually thereafter the Price hereunder for the succeeding year shall have been agreed upon by BUYER and SELLER. It is agreed that said redetermined net burner-tip price shall not escalate more than ten percent for the second year hereunder. The price for the third year shall not increase more than fifteen percent of the second year Price; the fourth year Price not more than twenty percent over the third year Price; and the fifth year Price not more than twenty-five percent of the fourth year price. If less than the maximum allowed increase is hereafter agreed upon for a given year, the unused margin shall carry forward in computing the Price cap for future years.

At the end of the first contract year, the price of natural gas had decreased dramatically. The

parties engaged in price negotiations, but were unable to reach an agreement for the second year

price. In a September 28, 1987 letter from Rutgers to Martin Woodlands, Rutgers declined an offer

made by Martin to continue the contract at $3.30 per MMBtu. Rutgers instead proposed, "To

demonstrate our good faith we will make gas purchases at the $3.30 price on a month to month basis

while we continue discussing future pricing, without prejudice to Rutgers' right to terminate our

arrangement in the event we are unable to agree on price." Martin answered Rutgers' offer, but

continued to deliver gas and accept payment of $3.30 per MMBtu through the second year and into

the third year of the contract. Negotiations continued throughout this time. On January 10, 1989

Martin Woodlands assigned the contract to a sister company, Martin Blue Ridge without seeking or

obtaining the consent of Rutgers to the assignment. Martin Blue Ridge delivered gas to Rutgers from

the date of assignment to June 12, 1989, when Rutgers gave written notification of its termination

of and refusal to accept further deliveries of gas. In the Findings of Fact and Conclusions of Law, the Court below faced Rutgers' contention

that the contract terminated at the end of the first contract year for failure of the parties to reach an

agreement as to price, and was replaced by a month to month contract. The question of termination

is never explicitly decided in the Findings of Facts and Conclusions of Law. However, a careful

reading leads us to the conclusion that the Court below did not find that the contract terminated for

failure to reach an agreement on a price at the end of the initial year. The Court recites the fact the

contract provided for an initial price of $3.305 per MMBtu, and quotes the contract language

requiring the parties to agree on a price each year after the initial year. The language imposing a cap

on the price increases is referred to as an "escalator clause ... which allowed for upward adjustment

in price, with agreement of the parties." The Court then went into a discussion of the facts and the

law surrounding the question of modification, which culminated in a finding that the five year term

was modified in September of 1987 to a month to month contract. In the Judgment, entered by the

Court on the same day, the Court ordered that judgment on the main demand be entered in favor of

Defendants, the Martin Companies. The main demand referred to is presumably the Rutgers' pleading

for declaratory judgment that the contract had terminated.

Findings of fact shall not be set aside unless clearly erroneous and due regard shall be given

to the opportunity of the trial court to judge the credibility of the witnesses. Rule 52, Federal Rules

of Civil Procedure. However, construction of a written instrument is normally a question of law and

findings and conclusions of the trial court are not binding on the appellate court. Rockwood and Co.

v. Adams, 486 F.2d 110 (10th Cir.1973). Under Louisiana law, when a contract is subject to

interpretation from the four corners of the instrument , without necessity of extrinsic evidence,

interpretation of the contract is a matter of law subject to de novo review. Hunter v. Transamerica

Occidental Life Ins. Co., 847 F.2d 1151, 1155 n. 5 (5th Cir.1988).

Pursuant to paragraph 12 of the contract, the interpretation of the contract is governed by

Louisiana law. Louisiana statutory law provides that in order for there to be a binding contract of sale, there must be agreement as to the thing sold, the price and consent of the parties to the sale.

La.Civ.Code arts. 2439 and 2464; Shell Oil Co. v. Texas Gas Transmission Corp., 210 So.2d 554

(La.App. 4th Cir.1968), cert. denied, 252 La. 847, 214 So.2d 165 (La.1968). The question for this

Court to decide is whether the price provision contains sufficient definitiveness to establish a price

(and thus a contract) after the end of the first year, absent an agreement of the parties. Appellant

takes the position that the contract was for five years and provided a minimum price of $3.30 per

MMBtu. Under this theory, agreement between the parties was required to increase the price within

fixed ranges, but not to continue the existing price. Rutgers contends here, as it did below, that the

contract provides a set price for the initial year only, and failure of the parties to reach an agreement

in subsequent years results in a termination of the contract.

The price to be paid after the initial contract year under the original 1985 contract is not

specified within the four corners of the agreement, the contract contains no mechanism by which price

after the first year can be determined and, contrary to the Appellants' claim, the contract contains no

language establishing $3.30 per MMBtu as a base or floor price to be used in the event the parties

are unable to agree on another price.

The interpretation of a contract is the determination of the common intent of the parties.

La.Civ.Code art. 2045. When the words of the contract are clear and unambiguous and lead to no

absurd consequences, no further inquiry may be made into the parties' intent. Id. art. 2046. The fact

that one party can, in hindsight, create a dispute about the meaning of a contractual provision does

not render the pro vision ambiguous. The Court must give effect to the ordinary meaning of the

words and may not create an ambiguity where none exists. Esplanade Oil & Gas, Inc. v. Templeton

Energy Income Corp., 889 F.2d 621 (5th Cir.1989). Much like this case, Esplanade involved the

interpretation of a contract in hindsight, after a dramatic, unexpected drop in the price of oil. There,

the parties had a letter agreement that established a price for the purchase of some oil properties,

made co ntingent on the condition that there should occur no adverse material change to the properties or the Seller's interest therein before the date of closing. The price of oil dropped between

the date of the agreement and the date of closing. Neither party had anticipated such a drop or built

protective language into the contract to insure against this contingency. The District Court found that

no changes occurred in the Seller's right, title, or interest in the properties, or the condition of the

properties, but then held that under the circumstances the "adverse material change to the properties"

language reasonable encompassed a dramatic decline in the price of oil. The Fifth Circuit reversed,

holding, "[Buyer's] attempt to pour new content into the language of [the] condition in an effort to

avoid what market fluctuations caused to be an economically unwise business decision is unavailing."

Id. at 624. See also, Commercial Union Ins. Co. v. Advance Coating Co., 351 So.2d 1183, 1185

(La.1977).

The price provision provides a limit on increases only. The Martin Companies would have

us imply that because the parties to the contract provided explicitly for a maximum allowable

increase, that they meant to provide a floor price also. As a fallback position, the Martin Companies

would have us declare the contract ambiguous and consider the intent of the parties concerning the

lowest possible gas price under the contract. We hold that the contract is not ambiguous and that it

does not expressly or impliedly limit potential negotiated price changes to price increases. As

Appellants pointed out, no one expected dramatic decreases in gas prices when the contract was

signed in 1985. Consequently, no floor was built into the contract, because the parties anticipated

that increasing gas prices made that an unnecessary precaution. The parties failed to agree on a new

price at the end of the first year of the contract. We find that the contract lapsed at that time.

Appellants urge that the language, "This agreement shall continue in effect for five years ...

and continue thereafter until canceled on thirty (30) days prior written notice," precludes a finding

that the contract terminated for lack of agreement at the end of the first year. Alternatively, they

suggest that a five year contract with a one year price is inherently ambiguous and requires an

examination of circumstances outside the document to determine the intent of the parties. On the contrary, we find that the five year clause, like every other provision in the contract makes sense in

the context of the total contract. The parties mutually agreed to preclude certain options in their

relationship for five years (e.g. designation of delivery point, quality of product, assignment rights)

while allowing for price renegotiations each year that could, of course, result in the termination of

the whole relationship. Certainly, nothing absurd results from reading the contract as if the parties

intended the plain meaning of the words they used.

The District Court held that the parties modified the original contract to a month to month

contract in September of 1987, that Rutgers breached their duty to give thirty days written notice of

cancellation, and awarded damages to the Martin Companies to compensate for this breach. Having

found that the contract had lapsed at the end of the first year for lack of agreement on price, we now

hold that the letter written almost a year later offering to buy gas on a month to month basis and the

actions of the parties which followed that offer did not revive the original contract clause requiring

thirty day prior written notice of cancellation. Therefore we find Rutgers is not liable to the Martin

Companies for thirty days lost profits.

Both parties advance theories of how and when the opposition breached the contract. All

alleged breaches occurred after November 14, 1986. We hold that none of the alleged breaches could

amount to a breach of a contract that no longer existed.

We therefore REVERSE the District Court's Judgement in favor of Martin Woodland and

Martin Blue Ridge, and hold that the contract was terminated on November 14, 1986. Further, we

REVERSE the damage judgment entered in favor of Martin Woodlands and Martin Blue Ridge in

the amount of thirteen thousand nine hundred and eighty three and no/100 dollars ($13,983.00). We

AFFIRM the lower Court's holding that all other damages claimed by the parties are DENIED.