Exxon Corp. v. West Texas Gathering Co.

Texas Supreme Court
1993 WL 233407, 868 S.W.2d 299 (1993)

ELI5:

Rule of Law:

A contract term is ambiguous if it is reasonably susceptible to more than one meaning, making its interpretation a question of fact for the jury to decide based on evidence of the parties' intent.

Facts:

Exxon Corp. and West Texas Gathering Co. (WTG) entered into two 'take-or-pay' contracts for the purchase of natural gas, obligating WTG to pay for minimum annual quantities of gas, whether or not it was actually taken.
The contracts, in force from 1983 to 1988, contained three alternative formulas for determining WTG's liability.
The parties agreed that the controlling formula ('Method 3') applied because WTG's nominations for gas to the Texas Railroad Commission were less than 80 percent of the wells' deliverability.
Method 3 required calculating a hypothetical 'allowable' (a production limit set by the Railroad Commission) based on the assumption that WTG had nominated 80 percent of deliverability.
The contractual language for Method 3 was silent on whether this hypothetical allowable should be calculated using the amount of gas WTG actually took or a hypothetical 80 percent take level.
This distinction was critical, as using actual takes would allow WTG to lower its own take-or-pay liability by intentionally taking less gas, which would in turn lower the calculated allowable.
In June 1986, Mesa Limited Partnership acquired Pioneer Corporation, which was WTG's original guarantor, and Mesa assumed Pioneer's liabilities.

Procedural Posture:

In 1990, Exxon Corp. sued West Texas Gathering Co. (WTG), its parent Cabot Corporation, and alleged guarantor Mesa Limited Partnership in a Texas trial court for breach of contract.
The trial court submitted the case to a jury, which found in favor of Exxon and awarded damages.
The trial court entered a judgment on the jury's verdict.
WTG, Cabot, and Mesa, as appellants, appealed to the Texas court of appeals.
The court of appeals reversed the trial court's judgment and rendered a take-nothing judgment in favor of the appellants, holding the contract was unambiguous and that Exxon's expert testimony on damages was improperly admitted.
Exxon, as appellant, sought review from the Supreme Court of Texas.

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Issue:

Is a 'take-or-pay' contract provision ambiguous, and therefore a question of fact for the jury, when it fails to specify whether a key variable in its damages formula should be based on actual or hypothetical figures?

Opinions:

Majority - Justice Doggett

Yes, the contract provision is ambiguous. A contract is ambiguous when its meaning is uncertain or it is reasonably susceptible to more than one meaning. Here, the provision requiring the calculation of a hypothetical allowable does not specify whether actual or hypothetical gas takes should be used. Exxon’s interpretation—using hypothetical takes—is reasonable because it aligns with the core purpose of a take-or-pay contract, which is to allocate the risk of market fluctuations to the buyer and prevent the buyer from manipulating its own contractual liability. Conversely, WTG's interpretation—using actual takes—is also reasonable because the provision only explicitly calls for one hypothetical variable (nominations), suggesting all other variables should reflect reality. Because both interpretations are reasonable, the provision is ambiguous, and the trial court correctly submitted the question of the parties' intent to the jury.

Analysis:

This case reaffirms the fundamental contract law principle that the determination of whether a contract is ambiguous is a question of law for the court, but the interpretation of an ambiguous provision is a question of fact for the jury. The decision emphasizes that courts will consider the underlying purpose of a commercial agreement, such as the risk-allocation function of a take-or-pay clause, when assessing the reasonableness of a proposed interpretation. Furthermore, the court's ruling on the discovery issue provides a pragmatic framework, allowing experts to refine calculations close to trial so long as the 'substance' of their methodology was previously disclosed and the opposing party is not subject to a 'trial by ambush.'

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