Dakota Gasification Co. v. Natural Gas Pipeline Co. of America
Opinion of the Court
In the early 1980s, a partnership known as Great Plains Gasification Associates built a coal gasification plant in North Dakota to manufacture synthetic natural gas. The partnership consisted of four pipeline companies, ANR Pipeline Company, Natural Gas Pipeline Company of America, Tennessee Gas Pipeline Company, and Transcontinental Gas Pipe Line Corporation (collectively “the Pipelines”), and an additional investor. Each of the Pipelines signed a Gas Purchase Agreement with the partner
The partnership provided $536 million in equity contributions to finance the gasification plant, but its construction was largely financed by a $1.5 billion loan guaranteed by the Department of Energy and secured by a mortgage on the plant. To gain this guarantee, the Pipelines entered into a security agreement known as the Pipeline Affiliates Agreement with the Department of Energy. Entry into the Pipeline Affiliates Agreement was expressly recognized in that agreement as a “condition precedent” for the Secretary’s issuance of the $1.5 billion guarantee supporting the partnership’s financing. Among other things, the Pipeline Affiliates Agreement contained a forum selection clause
During the following years, the price of natural gas in the open market plummeted. In 1985, the partnership defaulted on the loan. The Department of Energy honored its guarantee and sought to foreclose on the mortgage and, more importantly, to enforce the Gas Purchase Agreements by reinstating their conditions with the government in the role formerly held by the partnership. When the Pipelines contested the Department of Energy’s actions, the government filed suit in federal court to compel the Pipelines’ compliance with the Gas Purchase Agreements. The United States District Court for the District of North Dakota granted summary judgment in favor of the Department of Energy, ruling that it legitimately assumed control of the plant and that the Pipeline Affiliates Agreement obligated the Pipelines to continue purchasing 100 percent of the synthetic gas produced by the plant. This court affirmed. See United States v. Great Plains Gasification Assocs., 819 F.2d 831 (8th Cir. 1987); and United States v. Great Plains Gasification Assocs., 813 F.2d 193 (8th Cir. 1987), cert. denied, ANR Gasification Properties Co. v. United States, 484 U.S. 924, 108 S.Ct. 285, 98 L.Ed.2d 245 (1987).
The Department of Energy operated the gasification plant until October 1988, at which time Dakota Gasification Company purchased the assets of the plant as well as the Department of Energy’s rights under the reinstated Gas Purchase Agreements. Each of the Gas Purchase Agreements con
Soon after Dakota assumed control of the plant, disputes arose between the Pipelines and Dakota with respect to the Pipelines’ obligations under the Gas Purchase Agreements. Dakota and the United States
DISCUSSION
This case turns on conflicting provisions from two separate agreements. The question presented is whether the disputes underlying this appeal must be arbitrated or litigated.
We first note that the conflicting documents, the Gas Purchase Agreements and the Pipeline Affiliates Agreement, were simultaneously executed. Indeed, if the Pipelines had refused to sign the Pipeline Affiliates Agreement with the Secretary of Energy, their entering into the Gas Purchase Agreements with the partnership would have been an empty gesture. The government conditioned its guarantee of the gasification plant’s financing on the Pipelines agreeing to the Pipeline Affiliates Agreement with the Secretary of Energy, and without the government’s $1.5 billion guarantee, the project would have lost three-fourths of its funding. In a transaction where the execution of one contract depends upon the execution of other contracts — in this case, executing meaningful Gas Purchase Agreements required the Secretary’s guarantee of the plant’s financing, and to gain this guarantee the Secretary required the Pipelines to agree to the Pipeline Affiliates Agreement — the contracts must be interpreted collectively. Restatement (Second) of Contracts, § 202(2) (1981).
“The courts have long recognized that a contract may consist of more than one instrument.” St. Paul Fire & Marine Ins. Co. v. Tennefos Constr. Co., 396 F.2d 623, 628 (8th Cir. 1968). Thus, as a rule of law, the Gas Purchase Agreements and the Pipeline Affiliates Agreement “should be
First, as we have explained, the Department of Energy played an integral, and perhaps even a decisive, role in making the gasification plant a reality. Without the Secretary’s guarantee of the $1.5 billion loan to the partnership, the plant most likely would not have been built. Before the Department of Energy committed the government to this guarantee, it required the Pipelines to sign the Pipeline Affiliates Agreement, which expressly stated that its execution was “a condition precedent to the issuance of the Guarantee by the Secretary,” and that the parties (i.e., the Pipelines and the Secretary) “consent to the jurisdiction in any United States District Court ... in connection with any suit to enforce the rights of the Secretary hereunder.”
In exchange for guaranteeing the financing which made the construction of the gasification plant possible, the Department of Energy required the Pipelines to simultaneously execute the Pipeline Affiliates Agreement with the Gas Purchase Agreements so as to secure certain rights for the government and its successors-in-interest. These rights included the prerogative to litigate disputes affecting the Secretary of Energy in federal court. We therefore conclude that under the Pipeline Affiliates Agreement, any dispute involving the Secretary of Energy’s rights must be litigated in federal court, if the Secretary or the Pipelines so desire.
Second, Dakota bought the gasification plant and its related assets for $75 million plus a promise to pay the government approximately $1.6 billion out of the future revenues generated by the plant. The Pipeline Affiliates Agreement specifically provided that the government’s benefits from the Pipeline Affiliates Agreement “shall enure to the benefit of ... successors.” Each of the Gas Purchase Agreements contained assignment clauses entitling subsequent purchasers of the plant “to the rights ... of its predecessor in title.” As we explained, under the Pipeline Affiliates Agreement, the Secretary contracted for the prerogative to litigate disputes affecting its rights (which includes the Gas Purchase Agreement obligations of the Pipelines) in designated federal courts. Both the Pipeline Affiliates Agreement and the Gas Purchase Agreements specifically provide that the government’s successor-in-interest will inherit the government’s rights. We therefore hold that the disputes underlying this appeal must be litigated in federal court.
The Pipelines raise numerous arguments that urge a different conclusion. Each of these arguments, however, ignore the conditions under which the Secretary of Ener
. Accordingly, we reverse the district court’s decision and remand for further proceedings consistent with this opinion.
. Article XVIII of each Gas Purchase Agreement provides:
Any dispute between the parties arising out of this Agreement (including failure to agree on matters stated to be determined by mutual agreement) shall be tried by arbitration pursuant to the Rules of the American Arbitration Association in effect at the time of such arbitration.
. As part of the Pipeline Affiliates Agreement, each of the four pipelines agreed:
The parties hereto consent to the jurisdiction in any United States District Court located in the District of Columbia or North Dakota, in connection with any suit to enforce the rights of the Secretary hereunder.
The Pipeline Affiliates Agreement further provided:
The rights and obligations of the parties hereunder shall be governed by and construed and interpreted in accordance with the federal laws of the United States____
. The relevant clause of the Pipeline Affiliates Agreement provided:
In the event of a termination of the Gas Purchase Agreement to which such Pipeline Affiliate is a party as a result of any default by [the partnership] thereunder, such Pipeline Affiliate will ... promptly reinstate such Gas Purchase Agreement with the Secretary or his designee ... taking the place of [the partnership], and will continue to take or pay for gas as provided thereunder on the same terms as were in effect prior to such termination and reinstatement, without penalty, upon such notice to it that the Secretary or his designee is taking over the Project and will be performing the obligations of [the partnership] under such Gas Purchase Agreement.
. Only ANR appealed this court’s decisions to the Supreme Court.
. The Gas Purchase Agreements state:
“Any entity which shall succeed by purchase ... to the properties ... shall be entitled to the rights and shall be subject to the obligations of its predecessor in title____”
. Because of its $1.6 billion interest in the continuing profitability of the gasification plant, the United States successfully moved to intervene and join Dakota.
. In its complaint, Dakota sought a ruling outlining the Pipelines' purchase obligations under the Gas Purchase Agreements.
. Although the parties do not raise any choice of law issues, we note that North Dakota adheres to the position adopted by the Restatement. See N.D. Cent.Code § 9-07-07 (1991).
. We note that under North Dakota law, "A contract may be explained by reference to the circumstances under which it was made and the matter to which it relates.” N.D. Cent.Code § 9-07-12 (1991). See also Sorenson v. Olson, 235 N.W.2d 892, 896 (N.D. 1975) and supra note 8.
Dissenting Opinion
dissenting.
I dissent from the majority’s conclusion that the forum selection clause in the Pipeline Affiliates Agreement supersedes the arbitration clause in the Gas Purchase Agreements and the Transportation Agreements.
The reference in the forum selection clause to “rights ... hereunder” arguably is ambiguous. In my opinion, the correct interpretation of this language is that the Secretary has the right to litigate in the specified federal courts those claims arising from the Pipelines’ breach of any covenant, representation, or warranty contained in the Pipeline Affiliates Agreement. For example, because this agreement contains a covenant that the Pipelines will reinstate the Gas Purchase Agreements, the Secretary can bring an action in federal court to enforce this promise. Once the Gas Purchase Agreements are reinstated, however, the parties must arbitrate any dispute regarding their rights and obligations under these agreements. See Transcontinental
I believe the majority’s interpretation is incorrect for a number of reasons. First, the forum selection clause refers only to the “rights of the Secretary.” The clause makes no reference to the rights of the Pipelines. The Gas Purchase Agreements, however, give the Pipelines numerous rights. Thus, if this clause were applied to the Gas Purchase Agreements, courts either would have to allow the Pipelines to arbitrate their claims under these agreements or would have to read into the forum selection clause a reference to the rights of the Pipelines. The former choice creates a conflict between arbitration and litigation whenever both the Secretary and the Pipelines claim that the other has violated their rights under the Gas Purchase Agreements. The latter choice is an inappropriate judicial rewriting of the contract. • Neither of these problems would exist if, as I suggest, the forum selection clause were applied only to actions claiming a breach of a covenant, representation, or warranty contained in the Pipeline Affiliates Agreement. Under this interpretation, the failure of the forum selection clause to mention the Pipelines does not create a problem because the Pipeline Affiliates Agreement does not give the Pipelines any rights.
Second, in another provision of the Pipeline Affiliates Agreement, each Pipeline represents that there is no litigation pending that threatens its ability “to perform its obligations hereunder or under the Gas Purchase Agreement to which it is a party.” J.A. at 43 (emphasis added). This provision makes it clear that the Pipelines have certain obligations under the Pipeline Affiliates Agreement and certain obligations under the Gas Purchase Agreements. Likewise, the Secretary must have certain rights under each, and use of the term “hereunder” refers only to its rights under the Pipeline Affiliates Agreement.
Third, the clause in the Pipeline Affiliates Agreement that reinstates the Gas Purchase Agreements in no way qualifies this reinstatement. In fact, this clause provides that the Pipelines “will continue to take or pay for gas as provided [ junder [the Gas Purchase Agreements] on the same terms as were in effect prior to such termination and reinstatement____” The arbitration clause clearly was a term in effect prior to reinstatement.
Fourth, it seems highly unlikely that the Pipeline Affiliates Agreement would eliminate the arbitration clauses without even mentioning their existence. If the parties had intended such an outcome, they easily could have done so in a more straightforward manner.
This brings me to the fifth, and perhaps most compelling, reason why the majority’s interpretation of these agreements is wrong — the majority has ignored the federal policy favoring arbitration. The United States Supreme Court has articulated this policy as follows:
*737 The Arbitration Act[, 9 U.S.C. §§ 1-208 (1988),] establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.
. The majority fails to note that the current dispute between the Pipelines and Dakota also includes issues arising under Synthetic Gas Transportation Agreements which each of the Pipelines and the partnership entered prior to foreclosure by the Secretary of Energy.
. Dakota is a successor to the partnership.
. Reinstatement of the Gas Purchase Agreements was by no means the only purpose served by the Pipeline Affiliates Agreement. The agreement contains numerous other substantive provisions including covenants that the Pipelines will use their best efforts to obtain regulatory approval and that they will not claim rights to any patents or technology resulting from their participation in the coal gasification process.
. The majority does not address the continued viability of the arbitration clause in the Transportation Agreements. I do not believe there is any way to interpret the forum selection clause in the Pipeline Affiliates Agreement as superseding these clauses. The Pipeline Affiliates Agreement was entered prior to the Transportation Agreements and makes absolutely no reference to them.
. The Secretary did not even assign its rights under the Pipeline Affiliates Agreement to Dakota. Rather, it assigned only the assets of the gasification facilities and its rights under the Gas Purchase Agreements and Transportation Agreements. This indicates that, until this dispute, the Secretary also did not view the forum selection clause as governing the relationship between the Pipelines and the seller of gas.
Reference
- Full Case Name
- DAKOTA GASIFICATION COMPANY, in its own capacity as successor-in-interest to the Department of Energy and Great Plains Gasification Associates, United States of America, on behalf of The Department of Energy v. NATURAL GAS PIPELINE COMPANY OF AMERICA ANR Pipeline Company, Michigan-Wisconsin Pipe Line Company Transcontinental Gas Pipe Line Corporation Tenneco Gas Pipeline Group, formerly known as Tennessee Gas Pipeline Company, Appellees DAKOTA GASIFICATION COMPANY, in its own capacity as successor-in-interest to the Department of Energy and Great Plains Gasification Associates United States of America, on behalf of The Department of Energy v. NATURAL GAS PIPELINE COMPANY OF AMERICA ANR Pipeline Company, Michigan-Wisconsin Pipe Line Company Transcontinental Gas Pipe Line Corporation Tenneco Gas Pipeline Group, formerly known as Tennessee Gas Pipeline Company
- Cited By
- 5 cases
- Status
- Published