Court Opinion

ID: 9679834
Source: CourtListenerOpinion
Date Created: 2023-08-24 07:10:31.719005+00
Date Added: 2024-06-11T18:17:21.922875
License: Public Domain

ENOCH, Justice,
delivered the opinion of the Court on Mbtion for Rehearing,
in which CORNYN, SPECTOR, BAKER, and ABBOTT, Justices, join.
We grant Petitioners’ motions for rehearing. We withdraw our opinion and judgment of August 1, 1995 and substitute the following opinion.
The principal issue in this ease is whether the good faith and proportionality restrictions of section 2.306 of the Uniform Commercial Code, Tex.Bus. & Com.Code § 2.306, apply to the take-or-pay gas purchase agreement between Lenape Resources Corporation and Tennessee Gas Pipeline Company. The court of appeals held that the take-or-pay contract was an output contract subject to section 2.306. 870 S.W.2d 286. We disagree. We reverse in part and affirm in part the judgment of the court of appeals.
Tennessee transports and stores natural gas for distribution to customers who provide natural gas to consumers throughout the southern United States. Tennessee entered into the Gas Purchase Agreement (GPA) in 1979 with Lenape’s predecessor in interest. Under the GPA, Tennessee agreed to take, or pay for if not taken, gas produced from gas reserves committed under the GPA The committed reserves include the Fantina Yzaguirre Gas Unit and the Jesus Yzaguirre Gas Unit in Zapata County.
In entering into the GPA in August 1979, Tennessee sought to obtain as much gas as could be produced from the committed reserves. The GPA plainly reflects this objective. Specifically, the GPA provides that Le-nape is not obligated to deliver to Tennessee any predetermined quantities of gas or to maintain any predetermined level of delivera-bility; that Lenape may unitize its leases with other properties in the same field; and that Lenape, in its sole discretion, may drill new wells to all depths and horizons and repair or rework old wells.
From the beginning of the GPA term in 1979 until 1989, Lenape produced gas from *568only two wells on the committed acreage, one of which was a low-producing stripper well. Despite this low production, Tennessee sought to be released from its obligations under the GPA. In the early 1980s, market conditions for natural gas changed dramatically. The price and demand for natural gas plummeted. Roland, Comment, Take-or-Pay Provisions: Major Problems for the Natural Gas Industry, 18 St. Maey’s L.J. 251, 262 (1986). In 1983, Tennessee sent its producers, including Lenape, notice that it was instituting an “emergency gas purchase policy,” whereby Tennessee proposed to reduce its purchases and limit its take-or-pay obligations and refused to recognize any take-or-pay obligations for producers who refused to amend their contracts as Tennessee demanded. See Mandell v. Hamman Oil & Ref. Co., 822 S.W.2d 153, 156-57 (Tex.App.—Houston [1st Dist.] 1991, writ denied) (Tennessee reduced its take-or-pay obligations with gas producer by half under emergency gas purchase policy). Again in 1985 and 1986, Tennessee sought to be released from its obligations under the GPA first by seeking to amend the GPA and next by asserting a force majeure defense based on depressed market conditions.
In light of these developments, Lenape had little incentive to increase production or develop new wells. Lenape’s lessors grew impatient with the low production and sued Lenape for breach of its implied covenant to develop the leases underlying the committed acreage, for failure to produce in paying quantities, and for abandonment of the leases. Tesoro Exploration and Production Company obtained lease options from the lessors and backed the lessors in their lawsuit against Lenape. Lenape settled the lawsuit with its lessors and agreed to unitize part of the committed acreage with adjacent property. The unitization formed the Guerra A and B units, each comprised of one-half of the committed acreage and additional acreage outside the GPA’s committed acreage. After unitization, Lenape entered into a farmout agreement with Tesoro and Coastal Oil & Gas Corporation. As a result of the farmout, Tesoro and Coastal became “Sellers” under the GPA. Tesoro drilled three wells, one bottomed on the committed acreage and two inside the Guerra A and B units on acreage outside the acreage originally committed to the GPA. The two wells on the Guerra A and B units were highly successful.
The successful Guerra A and B wells would vastly increase Tennessee’s take-or-pay obligations. Tennessee sued Lenape and the other Sellers in August 1990 seeking a declaration under various theories that it was not obligated to take or pay for any of the increased production resulting from the Guerra A and B wells. Specifically, Tennessee sought a declaration that:
(1) the GPA is governed by section 2.306 of the UCC and that current and anticipated gas production from the Guerra A and B wells1 is in bad faith and unreasonably disproportionate to prior production in violation of section 2.306;
(2) alternatively, if not governed by section 2.306, the GPA is void and unenforceable for indefiniteness and lack of mutuality;
(3) alternatively, Tennessee is not obligated to take or pay for quantities of gas tendered in bad faith and which do not comport with prior history and course of performance;
(4) the GPA covers only the Sellers’ interest in the reserves physically located under the leases originally dedicated to the GPA and Tennessee is not obligated to purchase gas produced from wells outside the original leases;
(5) the GPA does not permit pooling;
(6) the Fantina Yzaguirre Gas Unit leases terminated for Lenape’s failure to produce in paying quantities, failure to reasonably develop, and abandonment of the leases and thus are no longer subject to the GPA; and
(7) the parties did not intend for the price of non-regulated gas to escalate by the *569annual inflation adjustment factor plus a growth factor.
In addition, Tennessee asserted that Lenape, Tesoro, and Coastal’s conduct, including their “bad faith pooling,” violated the Deceptive Trade Practices and Consumer Protection Act. Tex.Bus. & Com.Code §§ 17.41-63.
Lenape counterclaimed, alleging breach of contract, anticipatory repudiation, and that Tennessee’s DTPA claims were asserted in bad faith. Tesoro and Coastal asserted similar counterclaims. These counterclaims and the DTPA claims have been resolved and are not at issue in this appeal.
The trial court granted a partial summary judgment for the Sellers, determining: (1) the GPA is not an output contract subject to section 2.306; (2) the GPA permits pooling/unitization; and (3) Tennessee could not contest the validity of the leases underlying the GPA. After a bench trial on the remaining issues, the trial court rendered judgment for the Sellers on all of Tennessee’s remaining claims. Specifically, the trial court found: (1) the Sellers had not acted in bad faith in drilling the new wells or forming the Guerra A and B units; (2) the GPA is not void for indefiniteness or lack of mutuality; (3) the GPA allows for unitization and obligates Tennessee to purchase the Sellers’ interest in gas produced anywhere within the pooled units; (4) the GPA mandates that the price for non-regulated gas escalate in accordance with section 102(b)(2) of the Natural Gas Policy Act; and (5) escrow monies and attorneys’ fees should be paid to the Sellers.
The court of appeals reversed the trial court’s summary judgment on the section 2.306 issue, holding that the GPA is an output contract subject to the good faith and proportionality restrictions of section 2.306. 870 S.W.2d at 291-92. With the exception of Tennessee’s DTPA claims, which were voluntarily resolved by agreement of the parties, the court of appeals affirmed the remainder of the trial court’s judgment. All parties sought writ of error in this Court. We consider the Sellers’ contentions first, then those of Tennessee.
I
Whether section 2.306 of the UCC applies to this take-or-pay contract is a question of first impression in this jurisdiction. Section 2.306 applies only if (1) the take-or-pay contract is an output contract, and (2) the parties have not otherwise opted to vary the quantity obligations by agreement. Tex. Bus. & Com.Code § 2.306; Jon-T Chems., Inc. v. Freeport Chem. Co., 704 F.2d 1412, 1416 (5th Cir.1983). The GPA defines the quantity of gas Tennessee must take or pay for as a percentage of the Sellers’ capacity to deliver gas. Specifically, section 3(a) of the GPA provides:
3. Quantity:
(a) Seller agrees to sell and deliver to Buyer, and Buyer agrees to purchase and receive, or pay for if available and not taken, Seller’s pro rata part of the following quantities of gas produced from the committed reserves:
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(ii) A quantity of gas well gas equal to eighty-five percent (85%) of Seller’s delivery capacity.
Delivery capacity is defined in section 1(f) of the GPA as:
Seller’s pro rata part of the average amount of gas well gas per day which can be efficiently withdrawn from the wells on the lease(s) in the course of a delivery capacity test conducted as provided in section 3(f) hereof under applicable rules and regulations and in accordance with prudent operating practices, the production from which is covered by this Agreement and which is available for delivery ...
Tennessee asserts the GPA is an output contract simply because the quantity is defined in terms of Lenape’s delivery capacity, i.e., its capacity to produce natural gas from the covered acreage. This construction, while alluring in its simplicity, ignores the realities of gas production.
An output contract is one in which the buyer agrees to buy the seller’s entire output of production. Under a take-or-pay contract, the buyer does not have to buy any production. The take-or-pay contract provides for alternative performance by the buyer: either *570purchase a specified quantity of gas or pay the producer for the right to purchase that quantity of gas in the future. Prenalta Corp. v. Colorado Interstate Gas Co., 944 F.2d 677, 689 (10th Cir.1991). Because of this alternative performance, the pay option under a take-or-pay contract is not a payment for the sale of gas. Id.; Diamond Shamrock Exploration Co. v. Hodel, 853 F.2d 1159, 1167-68 (5th Cir.1988); see also Mandell, 822 S.W.2d at 164-65; Killam Oil Co. v. Bruni, 806 S.W.2d 264, 268 (Tex.App.—San Antonio 1991, writ denied). Rather, it is a payment for the exclusive dedication of reserves for a fixed period of time. International Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879, 882 (10th Cir.1985), cert. denied, 475 U.S. 1015, 106 S.Ct. 1196, 89 L.Ed.2d 310 (1986); Medina et al., Take or Litigate: Enforcing the Plain Meaning of the Take-or-Pay Clause in Natural Gas Contracts, 40 Ark. L.Rev. 185, 188 (1986). If a buyer opts not to take any gas, the gas remains in the well unprodueed. Thus, the quantity of gas actually produced and purchased by the buyer is determined in large part by the buyer’s nominations.
Other forces delimit gas production as well. The laws of physics obviously affect a producer’s ability to produce gas. Further, regulatory constraints of the Texas Railroad Commission limit the amount of gas that may be produced. To say that the quantity is determined solely by the Sellers’ output or delivery capacity thus oversimplifies the physical realities of gas production and overstates the Sellers’ control over the quantity of gas produced.
Regardless of whether the take-or-pay contract is an output contract, section 2.306 does not apply to this gas purchase agreement because the parties agreed to quantity obligations that differ from those imposed by section 2.306. Section 2.306, like many other provisions of Article 2 of the UCC, is a gap-filler and may be varied by the parties’ agreement. Tex.Bus. & Com.Code § 1.102(c); Jon-T Chems., 704 F.2d at 1416; White & Summers, Uniform Commercial Code 111-12 (2d ed. 1980); see also Prenalta, 944 F.2d at 687 (gas purchase contracts are contracts for the sale of goods and are governed by Article 2, but parties can vary the provisions of the UCC by agreement); Colorado Interstate Gas Co. v. Chemco, Inc., 854 P.2d 1232, 1236 (Colo.1993) (parties to take-or-pay gas contract may vary provisions of the UCC by agreement); Weistart, Requirements and Output Contracts: Quantity Variations Under the UCC, 1973 Duke L.J. 599, 622 (as an alternative to section 2.306, contracting parties will be mindful of the Code’s invitation to modify its basic rules by agreement).
As a gap-filler, section 2.306 operates to render output and requirements contracts definite. Under the UCC, a contract for the sale of goods for the price of $500 or more is not enforceable absent some writing evidencing a contract for the sale that has been signed and that specifies a quantity. Tex. Bus. & Com.Code § 2.201(a). A contract does not fail for indefiniteness if the parties intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy. Id. § 2.204(c). Section 2.306 renders output and requirements contracts sufficiently definite as to quantity and enforceable by reading into such contracts a quantity that is the actual good faith output or requirements of the particular party. Id. § 2.306 cmt. 2.
Section 2.306 fills in the quantity term only when a contract does not unambiguously specify the quantity of the output of the seller or the requirements of the buyer. Id. § 2.306(a). It does not apply when the contract either specifies a numeric quantity or provides a standard for determining a specific quantity. See Riegel Fiber Corp. v. Anderson Gin Co., 512 F.2d 784, 790 (5th Cir.1975) (contract for sale of cotton sufficiently definite when quantity may be determined from acreage covered by contract and estimated yield of acreage); Fort Hill Lumber Co. v. Georgia-Pacific Corp., 261 Or. 431, 493 P.2d 1366, 1368 (1972) (contract not indefinite when contract for purchase of all timber logged provided method for determining quantity).
The GPA requires Tennessee to purchase a set quantity of gas produced from the committed reserves defined as eighty-five percent of Lenape’s delivery capacity. Le-*571nape’s delivery capacity is a readily ascertainable quantity, measured as often as once every three months through a delivery capacity test. The specific quantity of natural gas for which Tennessee must take or pay is a simple mathematical calculation: .85 multiplied by Sellers’ delivery capacity. Section 2.306 does not apply to fill in the quantity— good faith tender — because the quantity is specified as a determinable amount, Sellers’ delivery capacity.
Tennessee- insists that unless section 2.806 is read into the GPA to vary its terms, the GPA’s quantity provisions effect a waiver of the good faith and reasonableness standards of the UCC, contrary to section 1.102(c) of the UCC. Section 1.102(c) provides:
[T]he obligations of good faith, diligence, reasonableness and care prescribed by this title may not be disclaimed by agreement but the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable.
Tex.Bus. & Com.Code § 1.102(c). We do not agree that the GPA disclaims any good faith or reasonableness standards.
The GPA does permit the Sellers to increase delivery capacity by drilling new wells and by unitizing the committed reserves. But nothing in the GPA permits the Sellers to undertake these activities in bad faith. Any increase in delivery capacity is still subject to the good faith obligation of section 1.203 as defined in sections 1.201(19) (honesty in fact) and 2.103(a)(2) (for merchants, honesty in fact and observance of reasonable commercial standards of fair dealing in the trade). The UCC limits Tennessee’s take-or-pay obligations to good faith increases in delivery capacity.
Moreover, Tennessee’s reading of the GPA would render the quantity term of the GPA uncertain. Instead of defining Tennessee’s take-or-pay obligations in terms of a fixed percentage of Sellers’ delivery capacity, Tennessee would have us read the GPA as requiring Tennessee to purchase only a portion of gas that may be tendered as reasonably proportionate to any normal or otherwise comparable prior output. The quantity of gas which Tennessee must either take or pay for would depend on a number of indeterminate variables: prior output; normal prior output; comparable prior output; proportionality to either normal or comparable prior output; and reasonableness of the proportionality. Reading these factors into Tennessee’s take-or-pay obligations, any increase in production and delivery capacity would be measured after the fact by these variables, thus injecting uncertainty into the parties’ obligations under the GPA.
Not only does the contract specify the quantity with sufficient definiteness, but the GPA also expresses the parties’ agreement to provide for production increases subject to Tennessee’s take-or-pay obligations. The take-or-pay contract specifically provides that the Sellers are not obligated to deliver to Tennessee any predetermined quantities of gas or to maintain any predetermined level of deliverability. Additionally, the GPA gives the Sellers the right to increase production, and thereby increase delivery capacity, through unitization. The GPA further provides that the Sellers may, in their sole discretion, drill new wells. It does not limit production to existing wells in discovered reservoirs. Accordingly, the GPA anticipates that the Sellers may drill new wells in new depths and horizons and increase production and delivery capacity in discovering new reserves.
These provisions taken together demonstrate that the parties to the GPA, both sophisticated players in the oil and gas industry, expected that production and delivery capacity could increase significantly. To read section 2.306 as limiting the quantity obligations under the take-or-pay contract here would eviscerate the contract the parties bargained for in 1979.
Tennessee bargained for the exclusive right to purchase “all gas produced from the committed reserves.” Tennessee also contracted to encourage increased production by Lenape by giving Lenape the right to develop new wells and to unitize any of its leases. In exchange for the exclusive dedication and access to Lenape’s reserves, Tennessee gave Lenape a take-or-pay clause ensuring Le-*572nape a set market for its gas production and a steady cash flow. International Minerals, 770 F.2d at 882; Medina, Take or Litigate, 40 Ark.L.Rev. at 188.
Tennessee would have this Court rewrite the parties’ contract on Tennessee’s concession that it no longer will demand the exclusive dedication of the gas reserves. Tennessee concedes that any gas produced in violation of section 2.306 may be sold by Lenape to third parties. While a party may concede certain facts that have implications under the law, here Tennessee is making a concession of a contractual obligation (waiving its right to exclusive dedication of reserves) in exchange for a restriction on Le-nape’s rights under the GPA (application of section 2.306 to limit production). Tennessee’s concession is not really a concession. It is simply another way of arguing that it should be relieved of its obligation to take or pay for eighty-five percent of Lenape’s delivery capacity.
Applying section 2.306 to the take-or-pay clause, as Tennessee urges, would fundamentally alter the risk allocation of the take-or-pay clause in gas purchase contracts. We recognized recently that the “central purpose underlying take-or-pay contracts” is to “allow the risk of fluctuations in market demand to be allocated to the buyer.” Exxon Corp. v. West Texas Gathering Co., 868 S.W.2d 299, 302 (Tex.1993). In applying section 2.306 to the take-or-pay clause, Tennessee retains the benefits of the exclusive dedication of Le-nape’s reserves essentially under a right of first refusal, but Lenape no longer has a certain market for its natural gas. Any increase in production will be subject to an after-the-fact determination of whether the increased amount is “unreasonably disproportionate” to prior normal or comparable production and, if so, will relieve Tennessee from its minimum take-or-pay obligation.
Shifting the market risk back to the producer will inevitably chill exploration and production. Pierce, Reconsidering the Roles of Regulation and Competition in the Natural Gas Industry, 97 Harv.L.Rev. 345, 357 (1983). Why develop new wells if there is no buyer? In the event of a decline in the market, producers may well be left with an unmarketable produet. Further, producers rely on the steady cash flow of take-or-pay contracts to cover operating expenses as well as exploration and production costs of new wells. Thus, a revision of the take-or-pay relationship that reduces the certainty of cash flow creates financial uncertainty for the gas producer that will discourage investment in the natural gas industry. Roland, Comment, 18 St. Mary’s L.J. at 261 n. 51, n. 57; see also Johnson, Natural Gas Sales Contracts, 34 Inst, on Oil & Gas TeRms 83, 111 (1983) (guaranteed income from take-or-pay clause used as collateral). Altering the market risk thus injects into the producer-pipeline relationship instability that discourages investment in the industry. See Roland, Comment, 18 St. Mary’s L.J. at 261 (take-or-pay provision adopted to minimize instability).
The instability is compounded by compromising the lessor-lessee relationship as well. Texas law places upon lessees an implied obligation to reasonably develop the land covered by the oil and gas lease. Grubb v. McAfee, 109 Tex. 527, 212 S.W. 464, 465 (1919). Thus, to fulfill its obligations to its lessors, a gas producer must drill additional wells as would a reasonably prudent operator. Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684, 693-94 (1959). Applying section 2.306 in these circumstances would dissuade a producer from drilling new wells, contrary to the producer’s obligations under an oil and gas lease. As a result, if a producer does not drill additional wells, it may be liable to its lessors for breach of the implied covenant to reasonably develop the lease; if a producer does drill additional wells that produce in large quantities, it may be unable to market the increased production. Further, it is questionable whether a reasonably prudent operator would drill additional wells if the producer has either no market or an uncertain market for the increased production. Applying section 2.306 to this take-or-pay contract may have profound ramifications not only for the producer-pipeline relationship but also for lessor-lessee relationship and natural gas exploration in general.
In sum, we hold that section 2.306 of the UCC does not apply to rewrite the parties’ *573bargained-for contract. The GPA requires Tennessee to take or pay for eighty-five percent of Lenape’s delivery capacity, an amount readily ascertainable by simple mathematical calculation. It clearly expresses the parties’ expectations that Tennessee’s take-or-pay obligations would extend to any good faith increases in delivery capacity, even though such increases may be significant. To apply section 2.306 contrary to the express terms of the GPA not only rewrites the quantity term of the GPA, but also effects a fundamental shift in the party bearing the market risk and injects uncertainty into the natural gas production industry. The take-or-pay gas purchase contract is not subject to section 2.306. The court of appeals erred in holding otherwise.2
II
In its application for writ of error, Tennessee first complains that the court of appeals erred in holding that there was sufficient evidence to support the trial court’s finding that the parties intended to include a double escalation factor in the price of the unregulated natural gas subject to the GPA. We agree with the court of appeals.
When the parties executed the GPA on January 16, 1979, the price for natural gas was regulated by the Federal Energy Regulatory Commission. All of the gas produced from the Fantina Yzaguirre and the Jesus Yzaguirre wells has remained price-regulated under section 102(b)(2) of the Natural Gas Policy Act of 1978, Pub.L. No. 95-621, 92 Stat. 3350, 3358 (repealed 1989) (the “NGPA”). Section 8(c) of the GPA requires Tennessee to pay the highest maximum price allowed by regulation for gas produced that is subject to the regulations. The GPA also provides a mechanism to calculate the price of “new natural gas,” or gas not subject to the regulations, in the event that the production price became deregulated. The price for “new natural gas” was deregulated in 1985. As a result, all the gas produced from the Guerra A wells No. 1 and No. 4 and the Guerra B well No. 1 is classified as “new natural gas,” and section 8(a) of the GPA governs calculation of its price.
Section 8(a) provides as follows:
8. Prices:
(a) The price to be paid by Buyer to Seller from the effective date hereof for all gas delivered hereunder, or for the contract quantity if available and not taken by Buyer, shall be $2,067 per Mcf, escalating on the first day of January, 1979 and the first day of each month thereafter for the term of this Agreement to the product obtained by multiplying the price in effect hereunder for the preceding month by the monthly equivalent of the annual inflation adjustment factor applicable for such month, as such factor is defined in Section 102(b)(2) of the Natural Gas Policy Act of 1978, Public Law 95-621.
(emphasis added)
This language is inconsistent because the “annual inflation adjustment factor” is not defined in section 102(b)(2) of the NGPA. Rather, the annual inflation adjustment factor is defined in section 101(a) of the NGPA.3 Section 102(b)(2), the section specifically referenced in the above quoted paragraph, instead defines an inflation adjustment factor unique to gas that is subject to section 102.4 *574The unique inflation adjustment factor of section 102 incorporates not only the annual inflation adjustment factor defined in section 101(a) of the NGPA, but also an independent and additional growth escalation factor.
Tennessee contends that the section in question provides for the single annual inflation adjustment escalation factor defined in section 101(a) of the NGPA, even though that section is not referenced in section 8(a) of the GPA. The Sellers, on the other hand, contend that the same section provides for the application of the double escalation factor defined in section 102(b)(2) of the NGPA as specifically referenced in the GPA.
Our first task is to determine, as a matter of law, whether section 8(a) of the GPA is ambiguous. If a written instrument is so worded that it can be given a certain or definite legal meaning or interpretation, then it is not ambiguous and it can be construed as a matter of law. Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983). If its meaning is uncertain and doubtful or it is reasonably susceptible to more than one meaning, taking into consideration circumstances present when the particular writing was executed, then it is ambiguous and its meaning must be resolved by a finder of fact. Id. at 394; see also Sage Street Assocs. v. Northdale Constr. Co., 863 S.W.2d 438, 445-46 (Tex.1993) (trial court properly submitted ambiguity to jury when issue was tried by consent).
In construing a written contract, our primary concern is to ascertain the true intentions of the parties as expressed in the written instrument. Coker, 650 S.W.2d at 393. If the written instrument is ambiguous, the trier of fact may look to parol evidence to determine the parties’ intent. R & P Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517, 519 (Tex.1980); see also Paragon Resources Inc. v. National Fuel Gas Distribution Corp., 695 F.2d 991, 996 (5th Cir.1983). The court of appeals correctly held that section 8(a) is ambiguous.
Tennessee employs a number of rules of construction to support its interpretation that the parties intended section 8(a) to escalate the gas price by only the single inflation adjustment factor. Tennessee argues that when there is variance between unambiguous written words (“annual inflation adjustment factor”) and figures (“§ 102(b)(2)”), the written words control. See Guthrie v. National Homes Corp., 394 S.W.2d 494, 496 (Tex.1965). In addition, it argues that terms stated earlier in a contract (“annual inflation adjustment factor”) are favored over subsequent terms (“§ 102(b)(2)”). See Coker, 650 S.W.2d at 393. Moreover, the language used by the parties (“factor,” not “factors”, modified by “defined in”) should be accorded its plain, grammatical meaning unless it definitely appears the parties’ intent would thereby be defeated. See Lyons v. Montgomery, 701 S.W.2d 641, 643 (Tex.1985).
Each application of these rules of construction propounded by Tennessee leads to the complete negation of the line “defined in Section 102(b)(2) of the Natural Gas Policy Act of 1978.” In construing a contract, we strive to give meaning to each provision. Southland Royalty Co. v. Pan Am. Petroleum Corp., 378 S.W.2d 50, 53 (Tex.1964). Moreover, we have stated that a court should construe a contract from a utilitarian standpoint, bearing in mind the particular business activity sought to be served. Thus, a court need not embrace strained rules of construction that would avoid ambiguity at all costs. Reilly v. Rangers Management, Inc. 727 S.W.2d 527, 530 (Tex.1987). On balance, we conclude that section 8(a) of the GPA is ambiguous as a matter of law, so that the trial court’s consideration of parol evidence was proper.
Based on that parol evidence, the trial court found that the parties intended to include two escalating factors in the price escalation of the non-regulated gas. Tennessee contends that the court of appeals erred in holding that some evidence supported this finding. We disagree.
The Sellers’ expert testified that the term “annual inflation adjustment” has a unique meaning in the industry, encompassing both growth and escalation adjustment factors. In addition, the only remaining living person who participated in the negotiations, Charles Faulk, testified that the base price stated in section 8(a) came from section 102 of the *575NGPA, and that the reference to section 102(b)(2) in section 8(a) is intentional. Faulk, a Tennessee employee who negotiated on Tennessee’s behalf, further testified that the reference was discussed with and approved by Tennessee’s attorneys and that it was a part of the standard agreement used by Tennessee.
We therefore hold that the court of appeals did not err in holding that the provision was ambiguous and in affirming the trial court’s finding that the parties intended the price of non-regulated new natural gas to escalate by both factors included in section 102(b)(2) of the NGPA.
Ill
Tennessee next complains that although the GPA gives the Sellers the right to unitize, it did not afford the Sellers the right to force Tennessee to purchase a proportionate share of the gas produced from unitized acreage.
As we note above, Lenape’s lessors sued to terminate the leases in the Fantina Yza-guirre gas unit. By a settlement on August 17,1989, however, all parties agreed that the Fantina Yzaguirre leases remained intact and had remained intact at all times. Le-nape unitized the committed acreage, forming the Guerra A and B units, each consisting of one-half of the committed acreage from the Fantina unit and one-half new acreage. The trial court found that because half of the land within the units is GPA acreage, Tennessee was obligated to purchase fifty percent of eighty-five percent of the Sellers’ delivery capacity from the new wells. The court of appeals affirmed the trial court’s finding. 870 S.W.2d at 299-300. We agree.
The GPA specifically granted to the Sellers the power to “unitize its lease(s) with other properties of Seller[s] and of others in the same field.” The district court found that the Sellers’ unitization was not done in bad faith, and Tennessee does not challenge that finding.
Tennessee argues it is only required to take or pay for whatever gas is produced from “committed reserves.” “Committed reserves” is defined in section 3(e) of the GPA as follows:
(e) The term “committed reserves” shall mean all of the gas reserves located in and under the lease(s) described in Exhibit “B” and outlined in Exhibit “C” hereto which are attributable to the interest of Seller therein.
Tennessee claims that because of this definition, it is required to take or pay for gas produced only from below the committed acreage and not gas produced from land unitized into the tract. We disagree.
Section 5(e) of the Gas Production Agreement provides that production of gas from wells located on any tract included in the unit will be considered production under the GPA:
5. Reservations of Seller: Seller reserves the following prior rights with sufficient gas to satisfy such rights:
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(e) To unitize its lease(s) with other properties of Seller and of others in the same field, in which event this Agreement will cover Seller’s interest in the unit attributable to the reserves committed hereunder.
(emphasis added) The GPA’s committed acreage comprises fifty percent of the new units. Tennessee does not dispute that as between the Sellers and the other owners of interests in the unit, “Sellers’ interest in the unit attributable to the reserves committed hereunder” is fifty percent. Therefore, the court of appeals correctly concluded that Tennessee is obligated to purchase fifty percent of eight-five percent of the Sellers’ delivery capacity of gas produced from the wells anywhere on the units.
IV
The last issue that we must consider is whether Tennessee may properly contest the continued viability of the GPA under section 5 of that contract based on a termination of the underlying leases between the Sellers and the lessors for failure to produce in paying quantities. The trial court granted summary judgment to the Sellers, holding that Tennessee was not entitled to establish *576that the leases were no longer in force. The court of appeals affirmed. 870 S.W.2d at 294-95. Again, we agree.
Tennessee relies on section 5(a) of the GPA, which expressly provides:
5. Reservation of Seller: Seller reserves the following prior rights with sufficient gas to satisfy such rights:
(a) To operate its property free from any control by Buyer in such a manner as Seller, in its sole discretion, may deem advisable, including without limitation, the right, but never the obligation, to drill new wells, to repair and rework old wells, and to plug any well or surrender any lease or portion thereof when no longer deemed by Seller to be capable of producing gas in paying quantities under normal methods of operation; provided, however, in the event Seller should terminate or surrender any lease described in Exhibit “B” and outlined in Exhibit “C” hereto, written notice of same shall be given to Buyer within thirty (30) days. Should Seller terminate or surrender any lease, or a portion thereof, covered by this Agreement, said lease or portion shall be released from the terms of this Agreement effective as of the date of such termination or surrender. Upon Seller’s request, Buyer agrees to amend this agreement to effect such a release.
Under this provision, Tennessee maintains that the GPA is no longer in force for any lands on which it could show that the oil and gas lease had terminated or reverted back to the landowners pursuant to the operation of the lease’s terms for failure to produce in paying quantities. In settling their lawsuit against Lenape, however, Lenape’s lessors agreed:
to confirm and declare that said Fantina Yzaguirre leases in all of their terms, conditions and provisions have been from the dates of the leases, and currently are, binding upon Plaintiffs [lessors] and ... and that the Fantina Yzaguirre leases are valid and subsisting oil, gas and mineral leases ... and have been at all times since the dates of such leases.
Tennessee was not notified of the lawsuit or the settlement. It seeks now to prove the occurrence of an event, namely the termination of the underlying leases, that releases it from its duty to purchase gas pursuant to the GPA.
The unambiguous language of section 5(a) of the GPA, however, grants to Sellers, not Buyer, the contractual right to surrender any lease when no longer deemed by Sellers to be capable of producing gas in paying quantities. The record is undisputed that Lenape has never surrendered any of the leases, nor has Lenape deemed any lease to be no longer capable of producing in paying quantities. Section 5(a) provides only that “Should Seller terminate or surrender any lease ... said lease ... shall be released from the terms of this agreement.” (emphasis added). There is no contention that the Sellers have affirmatively terminated or surrendered any lease. The provision at issue is found in a section entitled “Reservations of Sellers.” Thus, Tennessee is precluded from attempting to prove under section 5(a) of the GPA that the contract is no longer in effect due to the termination of the underlying leases. We express no opinion on whether Tennessee could prove that the GPA was no longer in effect based upon any theory or claim other than one based on section 5 of the GPA.
⅜ ⅜ ⅜ ⅜ ⅝ ⅜;
We hold that section 2.306 does not apply to the take-or-pay gas purchase agreement at issue here. We reverse those parts of the court of appeals’ judgment reversing the trial court’s partial summary judgment on section 2.306 of the UCC and the final judgment on escrow funds and attorneys’ fees and render judgment on those issues in accordance with the trial court’s judgment. We affirm the remainder of the judgment of the court of appeals.
PHILLIPS, C.J., files a concurring and dissenting opinion, in which GONZALEZ, HECHT and OWEN, JJ„ join.

. There is no evidence in the record of the extent of the increased production. Tennessee claims that if this cause were remanded, it would show that for the first twelve years of the GPA, it never paid more than $300,000 for gas produced in any single year. In 1993, by contrast, Tennessee claims it paid under protest $89 million for gas produced under the GPA.

. Because of our disposition on this issue, we need not address and express no opinion on the application of section 2.306 standards to output or requirements contracts governed by that section.

. Section 101(a)(1) provides that the "annual inflation adjustment factor” shall be the sum of (A) a factor equal to one hundredth of the quarterly percent change in the GNP implicit price deflator; plus (B) a correction factor of 1.002. NGPA § 101(a)(1), 92 Stat. at 3356.

. Section 102(b)(2) of the NGPA states:
The maximum lawful price under this section for any month shall be—
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(2) in the case of any month [after April 1977], the maximum lawful price, per million Btu’s, prescribed under this subsection for the preceding month multiplied by the monthly equivalent of a factor equal to the sum of (A) the annual inflation adjustment factor applicable for such month; plus (B) ... (ii) .04, in the case of any month beginning after April 20, 1981.
NGPA § 102(b)(2), 92 Stat. at 3358.