Chevron USA Inc v. GPM Gas Corporation

*Pursuant to 5TH CIR. R. 47.5, the Court has determined that this
opinion should not be published and is not precedent except under
the limited circumstances set forth in 5TH CIR. R. 47.5.4.
UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 99-50987
CHEVRON USA, INC.,
Plaintiff - Appellee-Cross-Appellant,
VERSUS
GPM GAS CORPORATION,
Defendant - Appellant-Cross-Appellee.
Appeals from the United States District Court
For the Western District of Texas
(MO-97-CV-199)
June 1, 2001
Before POLITZ, DeMOSS, and STEWART, Circuit Judges.
PER CURIAM:*
I.
Appellant GPM Gas Corporation (“GPM”) seeks to reverse the
final judgment of the district court on Appellee/Cross-Appellant
Chevron’s breach of contract suit. The three contracts at issue in

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2 Casinghead gas is defined as “gas issuing from wells, produced
from the same sand or strata which the oil is produced or as the
result of the induction of gas by any method for facilitating or
increasing the production of oil, and gas vaporized from oil after
production.”
2
the case were for the purchase of Chevron’s casinghead gas2, and
each contained a favored nations clause (“FNC”) which Chevron
alleged was violated by GPM. Following a bench trial, the district
court, Judge Lucius D. Bunton, III presiding, found in favor of
Chevron and awarded damages in the amount of approximately
$13.8 million, plus interest and fees. Both parties appeal various
aspects of the judgment. We affirm.
II.
This case involves a contract dispute between Chevron, the
current successor in interest of Gulf Oil Corporation and Pure Oil
Corporation (the seller under the contracts), and GPM, the current
successor in interest of Phillips 66 Natural Gas Company(the buyer
under the contracts). In November 1961, Chevron’s two predecessors
(Gulf and Pure) entered into three contracts to sell casinghead gas
to Phillips (GPM’s predecessor).
The first contract between Pure and Phillips covered land in
Ector County, Texas, in the Goldsmith San Andres Unit (“the GSAU
Tract 1 contract”). The second contract between Gulf and Phillips
covered certain other lands in the same area known as GSAU Tracts
2 and 3 (“the GSAU Tracts 2 and 3 contract). These first two
contracts are collectively referred to as the GSAU contracts.

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3
The third contract between Gulf and Phillips covered land in
Crane and Upton Counties, Texas, comprising 21 McElroy and other
leases (“the McElroy contract”). The McElroy contract originally
dealt with 21 leases, 5 of which later comprised the Adamc-Devonian
Unit. Seven amendments to the McElroy contract added acreage to
it. All of these leases, excluding the 5 that later became Adamc,
are collectively referred to as the McElroy leases. The GSAU
contracts and the McElroy contract are collectively referred to as
“the contracts.”
Each of the three contracts at issue contained a provision
identified as a favored nations clause (“FNC”) which provided as
follows:
18. FAVORED NATIONS - If at any time fifty
percent (50%) or more of the casinghead gas
purchased by Buyer and processed by Buyer in
its Goldsmith Gasoline plant is being
purchased by Buyer under a casinghead gas
contract or contracts which produce higher
prices for casinghead gas than the prices
payable to Seller hereunder, quality of gas
and conditions of delivery considered, then
Seller shall have and is hereby granted the
option to sell to Buyer, all casinghead gas
covered by this contract under the terms of
such other contract or contracts in lieu
hereof by so notifying Buyer in writing within
sixty (60) days from receipt by Seller from
Buyer of notice of the existence of such other
casinghead gas contract, provided that failure
to exercise such option, within such time and
in such manner, shall terminate such option.
Buyer shall notify seller promptly of the
existence of such other casinghead gas
contract.
Phillips/GPM never notified Chevron/Gulf/Pure of any contracts

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3 The district court explained the implementation of orders 232
and 232-A on pp.9-13 of its order. In short, the FPC first issued
Order 232 (26 F.R. 1983) which stated that all indefinite price
escalation clauses shall be inoperative in contracts after March 3,
1961, and it added the following proviso to the end of § 154.93 (18
C.F.R. § 154.93):
[A]ny provision for a change of prices of the seller by
reason of indefinite escalation clauses, as defined in
§ 154.91 [], contained in a contract for the sale or
transportation of natural gas subject to jurisdiction of
the Commission tendered for filing on and after April 1,
1961, shall be inoperative and of no effect at law.
On March 31, 1961, Order 232-A amended § 154.93 “to specify the
change of price provisions that may be contained in future producer
rate schedules submitted for filing with this Commission” by
substituting the following for the Order 232 provision above:
[I]n contracts executed on or after April 3, 1961, for
the sale or transportation of natural gas subject to the
jurisdiction of the Commission, any provision for a
change of price other than the following provisions shall
be inoperative and of no effect at law; the permissible
provisions for a change in price are:
4
under which it was purchasing 50% or more of its casinghead gas at
a lower price than that specified under the three contracts.
In its findings of fact, the district court noted that the
FNCs were bargained for in exchange for the life-of-lease term on
the contracts. For example, the GSAU contracts were to be in
effect as long as the Goldsmith San Andres Unit was a going
concern. The McElroy contract provided that it would be in effect
for the life of the lease covering the land described provided that
either party could terminate on ten-year anniversary dates. Gulf
and Pure would not have entered into the contracts without the FNC.
In March 1961, the Federal Power Commission (“FPC”) issued its
Orders Nos. 232 and 232-A (“the regs”) which stated that FNCs would
be of no effect in certain gas contracts.3 In a 1965 letter of

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(1) provisions that change a price on order to reimburse
the seller for all or any part of the changes in
production, severance, or gathering taxes levied upon the
seller;
(2) provisions that change a price to a specific amount
at a definite date; and
(3) provisions that, once in five-year contract periods
during which there is no provision for a change in price
to a specific amount, change a price at a definite date
by a price-redetermination based upon and not higher than
a producer rate or producer rates which are subject to
the jurisdiction of the Commission, are not in issue in
suspension or certificate proceedings, and are in the
area of the price in question.
5
agreement, Phillips and Gulf memorialized an understanding that the
FPC regs would affect a FNC in a different contract filed as a rate
schedule; however, no such understanding was reached or
memorialized regarding a similar contract filed as a percentage
sales contract (like those at issue in this case). The district
court concluded that the FNCs at issue in these three contracts
were not invalidated by the FPC regs, as suggested by GPM.
According to the district court, the industry applied the regs
invalidating FNCs only to those contracts that would be required to
be filed with the FPC as rate schedules. Also according to the
district court, at the time of contracting, Phillips understood the
regs to not apply to the contracts at issue. We note that the
anti-FNC orders upon which GPM relies in this case were repealed
effective July 28, 1994, as a result of the Natural Gas Wellhead
Decontrol Act of 1989, Pub. L. No. 101-60, 103 Stat. 159 (1989).
See 59 Fed. Reg. 40240 (1994).
Chevron first developed its present claim in 1996, when it was

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6
looking into building its own processing plant for the gas coming
out of new CO2 injection projects in the McElroy and Goldsmith San
Andres Units. GPM contends that Chevron began looking for a way to
get leverage that it could use against GPM in discussions to get
the contracts released, since those contracts requiring that the
gas be sold to GPM were an obstacle to Chevron’s new plans.
Chevron contended that it received a proposed replacement contract
from GPM during discussions of the new CO2 project, which proposal
required Chevron to waive all claims under the FNCs, and this
raised a red flag. Upon further investigation, Chevron decided it
did not want to waive its FNC claims of which it was previously
unaware. Chevron sought information from GPM about its other
contracts since GPM had never before notified Chevron nor any of
its predecessors that GPM was getting more than 50% of its
casinghead gas at a higher price than Chevron was receiving. GPM
refused to cooperate in providing information about its other
contracts for casinghead gas. Chevron and GPM entered into a
tolling agreement whereby the parties agreed that any applicable
statute of limitations on FNC claims was tolled as of January 23,
1997.
Chevron tried this lawsuit on one issue: that is, that GPM and
its predecessors had violated the FNCs in the contracts by failing
to offer Chevron an option in May 1992 to sell its gas under the
price terms of the highest-priced contract GPM then had for the
purchase of casinghead gas at its Goldsmith gas processing plant.

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7
Part of Chevron’s claim included the allegation that the McElroy
contract FNC also applied to gas delivered from the Adamc-Devonian
unit. GPM argued primarily that the FNCs were unenforceable as a
result of FPC Orders 232 and 232-A, and that in any event, the
UCC’s four-year statute of limitations barred recovery. Chevron
countered that the statute of limitations is inapplicable because
the breaches were continuous, because GPM failed to comply with its
duty to notify Chevron of the triggering of the FNCs, and because
the discovery rule and/or the doctrine of fraudulent concealment
deferred accrual of the statute of limitations.
The district court agreed with Chevron, and specifically found
as follows:
1. The FNCs are valid and not void under FPC Order Nos. 232,
232-A, nor are they void for indefiniteness;
2. The McElroy FNC is applicable to gas from the Adamc-
Devonian Unit;
3. The FNCs were triggered, giving proper consideration to
quality of gas and conditions of delivery;
4. GPM breached the FNCs by failing to notify Chevron about
the trigger and failing to offer Chevron the option of
electing to receive a higher price for its gas;
5. Chevron suffered quantifiable damages as a result of
GPM’s breach; and
6. Chevron’s claims are not time barred.
III.
Appellant GPM challenges all aspects of the district court’s
judgment and findings, while Chevron challenges only the district

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court’s alleged error in interpreting the FNCs to require the
weighted average pricing methodology for calculating damages.
Except for GPM’s challenge to the district court’s appointment of
a technical advisor, which is reviewed for an abuse of district,
GPM’s issues are legal ones, subject to de novo review.
We have now conducted a thorough review of the record of this
case and the issues presented by both parties. Based thereupon, in
conjunction with our consideration of the parties’ respective
briefs, and with the benefit of oral argument, we conclude that the
district court committed no reversible error. Accordingly, the
judgment entered by the district court in favor of Chevron is
affirmed in all respects.
AFFIRMED.

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