Opinion ID: 510053
Heading Depth: 3
Heading Rank: 2

Heading: The Mutual Intent of the Parties

Text: 27 The producers contend that the Commission departed from the principles of Pennzoil II by failing to give adequate evidentiary weight to the contracting parties' assertion of mutual intent and by giving undue evidentiary weight to the language of the contracts. Specifically, the producers contend that the Commission, perceiving a basic inconsistency between the language of the type I area rate clauses and the parties' averment of intent, rejected the extrinsic evidence of intent in toto and based its conclusion to sustain the third-party protests to the type I clauses exclusively on what the Commission devised to be the plain meaning of the words of the area rate clauses. Since the Commission adopted the presiding ALJ's analysis in this regard on remand, we look to the presiding ALJ's decision to determine if the producers are correct in their assertion. In this respect, we note that the instant contention made by the producers primarily finds fault with the presiding ALJ's approach to resolving the factual inquiry of the parties' intent, an approach which this Court has previously found to be an eminently reasonable and practical approach to this mammoth proceeding which might serve as a model on remand. Pennzoil II, 789 F.2d at 1145 n. 44. 28 Turning to the presiding ALJ's description of the method of discerning the parties' intent, we find that the presiding ALJ initially concluded that the plain meaning of the language of the type I area rate clauses supports a construction that the contracting parties did not authorize the collection of NGPA rates; however, he further stated: the fact that a price escalator clause speaks only of rates established by agency action does not necessarily mean that the parties intended to exclude statutory rates. Opinion No. 77, 10 F.E.R.C. at 61,401. Accordingly, the presiding ALJ reasoned that Opinion No. 77 required that the contract language be examined in conjunction with the contracting parties' assertion of mutual intent to collect NGPA rates, the extrinsic evidence submitted by the third-party protestors and the producers, and the regulatory setting in which the parties executed the contracts. 29 Extrinsic evidence of the parties' intent adduced at the evidentiary hearing before the presiding ALJ included the April 23 letter of United to the producers to the effect that the area rate clauses did not authorize NGPA rates for stripper well gas, the August letter of United retracting the April 23 letter, and testimony by the producers of their consistently voiced position that they were entitled to the highest legal price for their natural gas. Additionally, course of performance evidence regarding United's refusal to pay NGPA rates for stripper well gas during the period between its April and August letter was introduced, as was course of performance evidence to the effect that United consistently paid the highest legal price for gas prior to the April letter and subsequent to its August retraction. Finally, the presiding ALJ examined the regulatory atmosphere surrounding the execution of the contracts at issue, noting that the contracts were executed at a time prior to the passage of the NGPA when no national area rate existed. The presiding ALJ further contrasted the language of the type I clauses with the language of the other types of area rate clauses as to which the Chief ALJ dismissed the third-party protests, concluding that the parties were contemplating, at least as to the type I clauses, an area rate for stripper well gas that the Commission would find to be just and reasonable at the conclusion of a proceeding. 22 30 The presiding ALJ detailed his process of reasoning and conclusion in these words: 31 I have carefully considered the language of the involved clauses, the oral and written evidence of intent, and the evidence of course of performance of the parties. This language expresses the expectation of the parties that there would be some kind of Commission action in which the parties would have an opportunity to be heard. This expectation cannot be ignored. Their language does not contemplate the collection of Section 108 rates. 32 The extrinsic evidence of intent in the record does not warrant a different conclusion. The extrinsic evidence is, itself, ambiguous. Moreover, the interpretation of this evidence advanced by United and the producers is incompatible with the language of the contracts. In this event, I am forced to rely on the contract language as the only reliable evidence of the parties' intent. As noted, that language supports the protestors. The protest is upheld with respect to the Type I clauses. I find that these clauses do not authorize collection of Section 108 rates. 33 20 F.E.R.C. at 61,226. The producers assert that the above language in the presiding ALJ's opinion indicates that he relied exclusively on the language of the contracts in reaching his determination that the parties did not intend to authorize the collection of the NGPA rate for stripper well gas. The producers argue that the presiding ALJ's approach therefore embodies the exact proposition condemned by this Court in Pennzoil II that the parties' averment of mutual intent may be negated by an incompatibility with the language of the area rate clause alone. We agree. 34 Pennzoil II requires that the Commission, in ascertaining the parties' intent, construe the language of the contracts, considering not only the language of the contracts, but all the extrinsic evidence of intent presented, including the parties' assertion of mutual intent. The Commission is not to disregard the contracting parties' assertion of mutual intent after the Order 23 presumption is dispelled. 35 In the instant case, the presiding ALJ concluded that the area rate clauses did not clearly contemplate the application of NGPA rates. The problem is that this contract construction became the be-all and end-all of his reasoning. Although he stated that he considered the extrinsic evidence of the parties' intent, including United's refusal to pay stripper well rates in the four month period between its April 23rd letter, its August retraction, and prior and subsequent payments of such NGPA rates, it is clear that he could not have done so and at the same time given the contract language preclusive effect. 36 Pennzoil II requires that all evidence--contract language, oral and written extrinsic evidence and evidence of course of performance--be balanced to determine the parties' intent. 789 F.2d at 1141. Pennzoil II does not permit ambiguities or conflicts to negate consideration of any part of the overall picture. A proper application of Pennzoil II requires that all of the extrinsic evidence and contract language be weighed to determine the factual question of the parties' intent. 37 Both United and the producers started off agreeing that NGPA rates applied. United unilaterally decided to take the position that they did not. United stopped paying the rates and so advised the producers. The producers immediately protested and continued to protest until United changed its unilateral position. United thereupon resumed paying NGPA rates and continued to do so without fail. The action of one party to a contract who applies a different construction but then backs down when challenged, does not constitute mutual agreement. Such action does not create an ambiguous course of performance. Rather than giving this course-of-performance evidence equal weight with the contract language, the presiding ALJ labeled it ambiguous and ignored it. 38 By adopting this reasoning, the Commission clearly failed to comply with the mandate of Pennzoil II. This failure to acknowledge the controlling weight of this substantial evidence leaves this part of the Commission's order without support, and it must be vacated with regard to type I clauses. 23