Doswell Ltd. Partnership v. Virginia Electric & Power Co.

Present: Carrico, C.J., Compton, Stephenson, Lacy, Keenan and
Koontz, JJ., and Cochran, Retired Justice


DOSWELL LIMITED PARTNERSHIP
                          OPINION BY JUSTICE A. CHRISTIAN COMPTON
v. Record No. 951027                     March 1, 1996

VIRGINIA ELECTRIC AND POWER COMPANY


         FROM THE CIRCUIT COURT OF THE CITY OF RICHMOND
                    Randall G. Johnson, Judge


     In this breach of contract action, the dispositive issue is

whether the trial court erred in ruling that the disputed portion

of a written agreement is clear and unambiguous, thus precluding

consideration of extrinsic evidence supporting one party's

interpretation of the document.
     In March 1993, appellant Doswell Limited Partnership

(Doswell) filed this action against Virginia Electric and Power

Company (Virginia Power) for breach of contract.   In a second

amended motion for judgment, Doswell sought damages for Virginia

Power's alleged breach in the principal amount of $10,317,250.23.

     The following basic facts are shown by the record, including

the pleadings, and furnish part of the background for this

controversy.   Doswell, a Virginia limited partnership with its

principal office in Los Angeles, California and affiliated with

the Mitsubishi Corporation, is an independent power producer that

owns and operates two natural gas-fired electrical generating

units located near the community of Doswell in Hanover County.

Virginia Power is a public utility that provides electrical

service to its customers.

     In 1986, Virginia Power issued a solicitation to purchase
electricity from independent power producers through contracts

that would base payments on the costs that Virginia Power would

avoid by not building a new power plant and producing the power

itself.   In 1987, it entered into two written agreements with

Intercontinental Energy Corporation to purchase electricity from

the two generating units that Intercontinental was then planning

to build near the Doswell community.    The two agreements, one for

each facility, were virtually identical.    For clarity, we shall

refer to the two agreements as one.
     On June 21, 1989, with the knowledge and consent of Virginia

Power, Intercontinental assigned the agreement to Doswell, the

units' present owner and operator.     In August 1989, Virginia

Power offered Doswell the "option" to modify the agreement and to

create a new category of payment, called the "Fixed Fuel

Transportation Charge," sometimes referred to in this opinion as

the "FFTC."

     Subsequently, teams of negotiators representing the

respective parties engaged in extensive discussions about the

language to be included in the modified agreement.    These

negotiations included consideration of drafts and redrafts of

contract language submitted by the participants dealing with the

manner in which the FFTC would be determined.

     Generally, the parties agreed that Virginia Power would

measure its payments to Doswell by the costs Virginia Power

estimated it would incur to construct and operate one of its own




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planned generating stations in Chesterfield County, known as

Chesterfield 7.    Those projected costs included the costs of

transporting natural gas to Chesterfield 7.    The costs of

Chesterfield 7 would serve, in effect, as the "surrogate" or

"benchmark" to measure the costs Virginia Power would avoid by

purchasing power from a plant to be built and owned by Doswell.

        The negotiations culminated in the execution by the parties

of the contract in question, an 83-page document, on January 3,

1990.    It is labelled, "First Amendment and Restatement of the

Power Purchase and Operating Agreement By and Between Doswell

Limited Partnership as Successor in Interest to Intercontinental

Energy Corporation and The Virginia Electric and Power Company."

This controversy focuses on Section 10.3 of the agreement.
        In the second amended motion for judgment, Doswell alleges

that Section 10.3 of the agreement requires Virginia Power to pay

a Fixed Fuel Transportation Charge based on 100 per cent of the

fixed costs associated with transporting natural gas through a

pipeline system delivering gas to Chesterfield 7.    Doswell

further alleges that Virginia Power breached the contract by

basing its payment on only 44 per cent of its actual fixed costs

of one segment of the pipeline and on only 50 per cent of its

actual fixed costs of another segment.

        Doswell filed a pretrial motion seeking a declaration that

it would be permitted to present parol evidence relevant to the

construction of Section 10.3.    Upon consideration of argument of




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counsel, the court ruled "that Section 10.3 is not ambiguous" and

that parol evidence would not be admitted at trial.

     Later, the parties, by counsel, filed a stipulation that

placed an unusual twist on the procedure at trial.    In the

stipulation, Virginia Power promised to waive any objection

during trial to parol evidence presented by Doswell about the

negotiations surrounding the agreement and another document

executed by the parties in June 1990.   Virginia Power reserved

the right, however, to argue at the conclusion of the evidence

that "the contract documents are complete and unambiguous," and

to argue that the court "should not attribute any weight to such

parol evidence in making its findings and rulings."
     Subsequently, during four days of trial, the court, sitting

without a jury, heard from 17 witnesses and considered more than

100 exhibits.   Extensive parol evidence was presented by both

parties.

     At the conclusion, the court ruled from the bench in favor

of Virginia Power, holding Doswell had not "carried its burden of

proof that there was a breach of contract in this case."   During

the course of its oral opinion, the court adhered to its earlier

ruling that "because the contract is clear and unambiguous" parol

evidence "should not be considered."    We awarded Doswell this

appeal from a March 1995 order entering judgment for Virginia

Power.

     The agreement in question was negotiated and executed




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against the following additional background.   At the outset, it

should be understood that when the agreement in question was

executed in January 1990, the Doswell facility and Virginia

Power's Chesterfield facility were in the planning stages and had

not been built.

     Both the Doswell facility and Virginia Power's Chesterfield

7 facility were to be fueled by natural gas supplied from a

storage site in Pennsylvania and delivered through an

interconnecting pipeline system that includes the Consolidated

Natural Gas (CNG) pipeline running through northern Virginia.

This pipeline feeds into a pipeline, not built at the time of the

negotiations, operated by Virginia Natural Gas (VNG) running

through central Virginia and into the Tidewater area.
     In order to transport gas to Chesterfield 7, construction of

an additional pipeline, a spur, approximately 16 miles in length

was necessary.    This spur is comprised of two sections:   The City

of Richmond (CR) pipeline, running from Mechanicsville to the

James River, and the Commonwealth Gas Services (CGS) pipeline,

running approximately 2,000 feet under the James River and

connecting to Virginia Power's Chesterfield facility.   This

controversy relates to the cost allocation of the two sections of

the spur.

     As the reader will soon learn, the foregoing delivery system

is referred to in the agreement as the "CNG/VNG/CR/CGS" pipeline

system.   For clarity, we shall often call it the "northern




                                - 5 -
pipeline."

     Chesterfield 7 is located near another gas-fueled Virginia

Power generating plant known as Chesterfield 8.   Fuel to

Chesterfield 8 was to be delivered through another pipeline

system, which we shall often call the "southern pipeline."

Chesterfield 7 and Chesterfield 8 connect to the two pipelines

through a common header.   Thus, each is capable of receiving gas

from either system.
     According to the provisions of the agreement that was

assigned in 1989, Doswell, as we have said, was required to

provide, broadly stated, electricity.   There were two aspects to

this obligation.   First, the capacity to produce electricity

whenever Virginia Power required it, called "dependable

capacity."   Second, the duty to physically deliver electricity

"whenever called upon."    Under the assigned contract, Doswell was

to be paid a fixed capacity charge for this dependable capacity,

assuming the proposed plant "was, in fact, available and capable

of producing power."   In addition, Doswell was to receive an

"energy charge," a base amount for each kilowatt hour of

electricity sold, for the electricity that was actually generated

and delivered.

     During the negotiations beginning in the summer of 1989, to

fulfill the purpose of the agreement for Virginia Power to

purchase Doswell's generating capacity and electricity employing

the avoided cost concept, the parties agreed upon a third




                                - 6 -
category of payment.   The capacity charge and energy delivery

charge would remain, but the new FFTC charge was introduced.

     The discussions included consideration of the "capacity" of

both the pipelines and the parties' facilities.   The maximum

daily capacity of Chesterfield 7 was projected to be

approximately 42,500 dekatherms.   The use of dekatherms (Dth) is

a technique employed in the industry to measure the volume of

natural gas; historically, it was measured in cubic feet.

Virginia Power planned to reserve approximately 42,500 Dth of

"firm transportation" on the northern pipeline.   This means that

Virginia Power had the right to "push gas" down the pipeline

without interruption and without giving priority to other users

along the pipeline.    In contrast, "interruptible transportation"

means the ability of a user "to move gas down the pipeline . . .

subject to the availability of that pipeline capacity with other

users on the pipeline" that may have priority of use.   The

companies that own the pipelines charge the user for the reserved

capacity.   Generally, the discussions proceeded on the basis that

Virginia Power's two Chesterfield units would receive fuel from

both the northern and southern pipelines, with lateral pipelines

(spurs) to be constructed to "hook up" those two routes with

Chesterfield 7 and Chesterfield 8, and incidentally with a third,

nearby Virginia Power unit at Darbytown.
     During the negotiations, the parties understood that the

spur (CR/CGS) would be constructed with more capacity than needed




                                - 7 -
for Chesterfield 7.    The CR section (planned to be built by the

City of Richmond but ultimately built and operated by Virginia

Power) has 96,000 Dth capacity.    Virginia Power reserved 86,000

Dth of firm capacity on the CGS section.   The parties also

understood that the gas service to Chesterfield 7 would be on a

firm basis, and that Chesterfield 8 and Darbytown would receive

interruptible service from the northern pipeline and the spur.

     Shortly after execution of the agreement in January 1990,

Doswell sought construction financing from Credit Suisse.     In

connection with the financing, Virginia Power, Doswell, and

Credit Suisse executed on June 4, 1990 a document labelled

"Virginia Electric and Power Company Consent to Assignment of

Agreements" (the Consent).   This document evidenced Virginia

Power's consent to Doswell's assignment of the January 1990

agreement to Credit Suisse as security for Doswell's repayment of

a construction loan.
     During negotiations preceding execution of the Consent, the

parties focused on the provisions of the January 1990 agreement,

including the Fixed Fuel Transportation Charge.   In paragraph

(13)(g) of the executed Consent, there is language dealing with

the determination of the FFTC.

     Subsequently, Virginia Power computed the charges due

Doswell according to its interpretation of the agreement.     The

allocation of costs for the CR/CGS spur pipeline, as we have

said, is the basis of this controversy.    Because the maximum




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capacity of Chesterfield 7 is 42,500 Dth and the total capacity

available to it as owner of the CR section is 96,000 Dth,

Virginia Power attributed only 44 per cent (42,500 divided by

96,000) of its fixed costs on the CR section to Chesterfield 7.

Likewise, because Virginia Power has contracted for 86,000 Dth of

firm capacity on the CGS section, with the maximum capacity of

Chesterfield 7 being 42,500 Dth, Virginia Power attributed only

49.4 percent, rounded to 50 per cent, (42,500 divided by 86,000)

of its fixed costs on the CGS section to Chesterfield 7.
     Doswell disagreed with Virginia Power's computation,

insisting on 100 per cent of the actual fixed costs on both the

CR and CGS sections.   This action ensued.

     On appeal, Doswell contends that the trial court erred in

ruling that Section 10.3 is unambiguous and constituted the

complete agreement between the parties, and "in failing to

consider parol or extrinsic evidence showing the entirety of the

agreement."   Also, Doswell contends that the trial court erred in

"ignoring" testimony it presented of trade custom and usage in

the gas pipeline industry with respect to the meaning of certain

phrases defining the FFTC.   Additionally, Doswell contends the

trial court erred in relying on the Consent, which it says was

extrinsic evidence offered by Virginia Power.   Finally, Doswell

contends the trial court erred in concluding it "had not carried

its burden of proof to establish that it was entitled to recover

100% of the fixed costs associated with transporting gas through




                               - 9 -
the Spur delivery system to its sole `firm' user, Chesterfield 7,

and that Doswell was only entitled to 44% of the fixed costs of

one portion of the Spur and 50% of another as a matter of law."

     Urging affirmance, Virginia Power argues the agreement and

the Consent comprise an integrated contract that the trial court

properly read together.   Alternatively, it argues that the

agreement is unambiguous, even without consideration of the

Consent.   Finally, it argues that the trial court was not

required "to accord controlling weight" to Doswell's evidence of

trade usage.
     Because of the view we take of the ambiguity issue, it is

unnecessary for us to determine whether the agreement and the

Consent constitute an integrated document.   The principle debated

is that when parties have entered into two documents relating to

a business transaction, the writings will be construed together

to determine the parties' intent.   Daugherty v. Diment, 238 Va.

520, 524, 385 S.E.2d 572, 574 (1989); J.M. Turner & Co. v.
Delaney, 211 Va. 168, 171, 176 S.E.2d 422, 425 (1970).   See Dime

Deposit & Discount Bank v. Wescott, 113 Va. 567, 573, 75 S.E.

179, 182 (1912).   The reason we do not address this issue is that

we hold the agreement is clear and unambiguous without reference

to the Consent.

     "Parol evidence of prior or contemporaneous oral

negotiations are generally inadmissible to alter, contradict, or

explain the terms of a written instrument provided the document




                              - 10 -
is complete, unambiguous, and unconditional."     Renner Plumbing,

Heating & Air Conditioning, Inc. v. Renner, 225 Va. 508, 515, 303

S.E.2d 894, 898 (1983).    "An ambiguity exists when language

admits of being understood in more than one way or refers to two

or more things at the same time."     Id.; Berry v. Klinger, 225 Va.

201, 207, 300 S.E.2d 792, 796 (1983).

        The question whether an agreement is ambiguous is not one of

fact but one of law, and the function of the court is to construe

the contract made by the parties, not to make a contract for

them.     Wilson v. Holyfield, 227 Va. 184, 187, 313 S.E.2d 396, 398

(1984).    Contracts are not rendered ambiguous merely because the

parties or their attorneys disagree upon the meaning of the

language employed to express the agreement.     Id.   Even though an

agreement may have been drawn unartfully, the court must construe

the language as written if its parts can be read together without

conflict.     Berry, 225 Va. at 208, 300 S.E.2d at 796.

        And, parol evidence may not be used to first create an

ambiguity and then to remove it.     Cohan v. Thurston, 223 Va. 523,

525, 292 S.E.2d 45, 46 (1982).    Finally, an agreement is not

rendered ambiguous merely because it deals with a technical

subject that may be considered complex to the uninformed lay

person who is not familiar with the topic.

        Guided by these settled principles, we turn to the center of

this controversy, Section 10.3(a) of the agreement, included

within Article X of the document labelled "Compensation, Payment,




                                - 11 -
and Billings." Section 10.3(a) provides as follows:
          "10.3 (a) Operator [Doswell] shall be compensated
     by Virginia Power for the fixed transportation charges
     associated with transporting gas to Chesterfield 7
     through the use of the Fixed Fuel Transportation
     Charge. The Fixed Fuel Transportation Charge
     ($/kW/Month) shall be determined on a Monthly basis
     using the following equation:

    Fixed Fuel   CNG/VNG/CR/CGS Transportation Fixed Charges
    Transportation -                214,000 [kW]
    Charge

     The CNG/VNG/CR/CGS Transportation Fixed Charges shall
     be determined on a Monthly basis and shall be equal to
     all costs associated with natural gas transportation
     and storage that do not vary with the volume of gas
     consumed at Chesterfield 7 for the Month in question.
     Fixed costs for natural gas transportation and storage
     shall include demand charges for natural gas pipeline
     transportation, pipeline operation and maintenance, and
     demand and capacity charges for natural gas storage
     services. The CNG/VNG/CR/CGS Transportation Fixed
     Charges shall be based on all the fixed costs
     associated with transporting gas through the
     CNG/VNG/CR/CGS delivery system. In determining the
     CNG/VNG/CR/CGS Transportation Fixed Charges, any
     discount prices received by Virginia Power for
     transporting gas through such delivery system through
     settlement of litigation and not applicable to Operator
     shall be adjusted to offset the effect of such
     discount. Any retroactive adjustments based on changes
     in the tariffs shall be included in the current Month's
     CNG/VNG/CR/CGS Transportation Fixed Charges. An
     example calculation for determining the Fixed Fuel
     Transportation Charge is shown in Exhibit B."

     Plainly, Section 10.3(a) limits the fixed costs to be used

in computing the FFTC payment to those costs associated with

transporting natural gas to Chesterfield 7.   The first sentence

of 10.3(a) clearly states that Doswell "shall be compensated by

Virginia Power for the fixed transportation charges associated

with transporting gas to Chesterfield 7 through the use of the



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Fixed Fuel Transportation Charge."     The third sentence of 10.3(a)

provides that the charges to be used to compute monthly the FFTC

payment "shall be equal to all costs associated with natural gas

transportation and storage that do not vary with the volume of

gas consumed at Chesterfield 7 for the Month in question."

     The calculation example for determining the FFTC included in

Exhibit B, referenced in the last sentence of 10.3(a), confirms

that the FFTC payment is limited to Chesterfield 7's costs, and

does not include 100 per cent of Virginia Power's fixed costs on

the CR and CGS pipelines.   The example contains estimates of the

CNG and VNG portions of the payment.    These estimates are limited

by certain assumptions in the example to the fixed costs

associated with transporting that volume of gas equal to the

maximum daily capacity of Chesterfield 7, assumed to be 43,000

Dth in the example.   Nowhere does the agreement provide that the

CR and CGS portions of the FFTC payment should be computed

differently.
     As the calculation example makes clear, the denominator in

the equation, 214,000 kW, represents Chesterfield 7's capacity in

terms of producing electricity, not accepting fuel.    As

demonstrated in the example, the equation, by employing the

denominator, tabulates the monthly payment on a per kilowatt

basis.

     Doswell implicitly argues, however, that even if the

agreement, standing alone, is unambiguous, the judgment must be




                              - 13 -
reversed because the trial court considered the Consent, which

Doswell says is extrinsic evidence.     We do not agree that the

judgment should be reversed.

     Apparently, the trial court, in making its pretrial ruling,

considered the Consent.   In the letter to counsel announcing the

ruling, the court said, "After again reviewing Section 10.3 of

the Amended Agreements, the Consent to Assignment of Agreements,

and your arguments, I am of the opinion that Section 10.3 is not

ambiguous."
     At the trial held ten months later, however, and when final

judgment was pronounced, the record shows that the trial court

did not give controlling consideration to the Consent.    During

its oral opinion, the court, in first discussing the agreement,

plainly stated that Section 10.3 "is clear and unambiguous" and

that parol evidence should not be considered.    Later during its

comments, the court said, "If that [the agreement] were not clear

enough in and of itself, it's made even more clear, if that's

possible, in the Consent."   Thus, even assuming the Consent

qualifies as prohibited extrinsic evidence, the record shows that

the trial court based its judgment primarily on the agreement,

including Section 10.3.   But even if the court erroneously

considered the Consent, we will affirm the judgment because the

court reached the correct conclusion arguably for the wrong

reason.   Robbins v. Grimes, 211 Va. 97, 100, 175 S.E.2d 246, 248

(1970).   Accord Richmond, Fredericksburg & Potomac R.R. v.




                               - 14 -
Metropolitan Washington Airports Auth., 251 Va. ___, ___,

___S.E.2d ___, ___ (1996), decided today.

     Finally, we reject Doswell's contention that the trial court

erroneously "ignored" testimony it presented of trade custom and

usage with respect to the meaning of certain contract terms

defining the FFTC.   Evidence that contract phrases or terms have

acquired, by custom in the locality, or by usage of the trade, a

peculiar meaning not attached to them in their ordinary use is

admissible even though the phrases or terms themselves are

unambiguous.    Richlands Flint Glass Co. v. Hiltebeitel, 92 Va.

91, 94-95, 22 S.E. 806, 807 (1895).      See Code § 8.2-202(a) (terms

in commercial sales agreements may be explained or supplemented

by course of dealing or usage of trade evidence).

     But Doswell has not referred us to any specific part of the

record to support its claim that such evidence was "ignored" by

the trial court, and we have found no support for Doswell's

conclusion.    Moreover, the trial court was not required to accept

such evidence that was contradicted by other evidence in the

record and that related to usage in a separate business, that is,

the formula the Federal Energy Regulatory Commission uses to fix

rates operators of interstate natural gas pipelines may charge

their customers.

     Consequently, we hold there is no reversible error in the

judgment below and it will be
                                                            Affirmed.




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