Effects of the Uniform Commercial Code on the Operation and Litigation of Natural Gas Contracts

JurisdictionColorado,United States
CitationVol. 14 No. 9 Pg. 1809
Pages1809
Publication year1985
14 Colo.Law. 1809
Colorado Lawyer
1985.

1985, October, Pg. 1809. Effects of the Uniform Commercial Code on the Operation and Litigation of Natural Gas Contracts

Vol. 14, No. 9, Pg.1809



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Effects of the Uniform Commercial Code on the Operation and Litigation of Natural Gas Contracts

by Theodore M. Smith

Natural gas constitutes "goods" under the sales provisions of the Uniform Commercial Code ("Code"). Code § 2-107 provides that "a contract for the sale of timber, minerals, or the like...is a contract for the sale of goods within this article if they are to be severed by the seller...."(fn1) The Code has been applied to gas contracts by the Federal Energy Regulatory Commission ("FERC") and by state and federal courts. In February 1985, the Tenth Circuit and the Colorado Supreme Court also applied the Code.(fn2) The Code is applied broadly to sales by producers, transactions between federally regulated pipelines and purchases by commercial end users.(fn3)


Formation of the Contract

The Code permits contracts for sales of natural gas as "goods" to come into existence in ways less formal than those historically envisioned by the industry. Code § 2-201 is a statute of frauds and specifically requires a writing if a natural gas contract (in excess of $500) is to be enforceable. However, little formality is necessary and few details are required. Comment 1 to Code § 2-201 states that "[t]he only term which must appear is the quantity term which need not be stated accurately...." Many blanks can be "filled in" by the courts.(fn4)

There is also a departure from the common law rule that the writing be signed by the party to be charged. Under Code § 2-207(3), conduct alone may create a contract. Furthermore, if the parties to the putative contract are "merchants," as are most parties in the gas industry,(fn5) the party against whom the contract is being enforced does not have to sign anything if that party received a confirmatory writing and did not object within ten days.(fn6)

In the Second Circuit's decision in Apex Oil Co. v. Vanguard Oil & Service Co.,(fn1) an oral "spot-market" purchase might well have been unenforceable under the Code's statute of frauds. However, Apex, the buyer, sent a telex to the seller merely stating "this is to confirm Apex will purchase." The telex included the quantity, price and date of sale. The seller, Vanguard, did not reject the telex within ten days, so it was bound even though it had signed nothing. This rule will become more important with the growth of spot-market sales of natural gas.

Furthermore, existing contracts may be amended with much less formality than before. An amendment needs no independent consideration. Additional or conflicting terms in an acceptance of an offer may operate to create a new agreement. An oral amendment, if otherwise ineffective, may at least constitute a waiver. However, the agreement can require amendments to be in writing, and such a provision may be desirable in gas contracts.(fn8)

In any event, parties should be alert to the possibility that informal acts during the existence of a contract may amount to an amendment, and the litigator should review contract history carefully for such amendments.


Interpretation of Contracts

Most of the reported natural gas cases under the Code have been contract interpretation cases, often dealing with area rate or other price clauses. An unfortunate amount of confusion has arisen. For example, the Tenth Circuit's decision in Amoco Production Co. v. Western Slope Gas Co. states that parol evidence may be excluded only if a trial judge finds the contract unambiguous. The decision went on to consider testimony as to subjective intent.(fn9)


However, the Code does not automatically admit all parol or extrinsic evidence. Instead, it establishes a hierarchy of categories of evidence admissible to interpret a contract, some of which include parol. First, along with the document itself, evidence may always be presented of the commercial context in which the document was executed and of other surrounding circumstances.(fn10)

This column is sponsored by the Environmental Law, Water Law and Mineral Law Sections of the Colorado Bar Association. This month's article was written by Theodore M. Smith, a shareholder in the Denver firm of Inman, Erickson & Flynn, P.C.

Second, Code § 2-202 establishes three other categories of evidence which may always be admitted.(fn11) They are "course of dealing," "usage of trade" and "course of performance."




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"Course of dealing" refers to the business relationships of the parties before they executed the agreement in question.

"Usage of trade" refers to customs among persons in the industry or even to customs in a particular "place." An objective test applies: the usage must be so regularly observed that it would be expected to be observed in the particular agreement.(fn12) With the emphasis given usage of trade in reported gas cases, counsel interpreting or litigating a gas contract must look into the history of the parties, the industry and even the place. A caveat to the litigator is that Code § 1-205(6) makes evidence of usage of trade inadmissible unless the adversary is given sufficient notice.

Course of dealing and usage of trade ordinarily pertain to things that happened before or at the time of execution of the agreement. However, "course of performance" refers to the way the parties carry out the agreement after its effective date. Performance of a gas contract has been called the "best evidence" for interpretation.(fn13) Code § 2-208(1) says the performance may be unilateral actions of one party to...

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