Dakota Gasification Co. v. Natural Gas Pipeline Co. of America

HEANEY, Senior Circuit Judge.

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*733ship to purchase a pro rata share of the plant’s entire output of synthetic gas at a specified price. Each Gas Purchase Agreement contained an identical arbitration clause.1

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 clause2 and stated that if the partnership terminated its Gas Purchase Agreements with the Pipelines, the Gas Purchase Agreements would be reinstated between the Pipelines and the Secretary of Energy, who would assume the role formerly held by the partnership.3 The Gas Purchase and Pipeline Affiliates Agreements were both executed on January 29, 1982.

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).4

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*734tain assignment clauses entitling Dakota to the rights of its predecessor-in-title, the Secretary of Energy.5 Although the Department of Energy did not assign the Pipeline Affiliates Agreement to Dakota, by its own terms, that agreement provided: “This Pipeline Affiliates Agreement shall enure to the benefit of, and be binding upon, successors and permitted assigns.” Dakota paid $75 million in cash for these rights and pledged approximately $1.6 billion in future payments to the government, which were to be paid out of the revenues generated by the plant’s operation over the following eighteen years.

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 States6 filed suit in the United States District Court for the District of North Dakota seeking to resolve the disputes.7 The Pipelines objected to the jurisdiction of the federal court, contending that the disputes were subject to arbitration under the Gas Purchase Agreements. The Pipelines reasoned that if the purchase obligations of the Gas Purchase Agreements were valid and binding as Dakota argued, then the arbitration clauses in the agreements were equally valid and binding and could not be ignored. The district court found this logic “impeccable” and dismissed Dakota’s action. The district court, however, characterized its decision as setting the stage for “utter chaos,” since it realized that its ruling would force Dakota “into four separate arbitration proceedings, in four separate locations, with separate arbitrators, [and] could produce four disparate decisions, each of which would be unappealable and final according to the contract language.” Dakota and the United States appeal. We reverse.

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).8

“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 *735read together as they represent successive steps which were taken to accomplish a single purpose.” Id. This rule of interpretation applies even though the parties executing the contracts differ, as long as “the several contracts were known to all the parties and were delivered at the same time to accomplish an agreed purpose,” id. (quoting Peterson v. Miller Rubber Co. of New York, 24 F.2d 59, 62 (8th Cir.1928)), and even though the contracts did not internally reference each other. Id. at 629. See also 4 Walter Jaeger, Williston on Contracts § 628, at 904 (3d ed. 1961) (“Even where a writing does not refer to another writing, if such other writing was made as part of the same transaction, the two should be interpreted together.”). Indeed, hinging one contract upon the execution of another contract, as was the case here, heightens the need for joint interpretation. See LCI Communications v. Wilson, 700 F.Supp. 1390, 1395 (W.D.Pa.1988).9 Given these rules of interpretation, under the facts of this case, we hold that if the Secretary or its successor-in-interest has a dispute with the Pipelines concerning the Gas Purchase Agreements, the former parties can successfully demand that the dispute be litigated in the designated federal courts. We reach this conclusion for two reasons.

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*736gy agreed to guarantee the financing for the gasification plant. For instance, the Pipelines contend that they seek only to arbitrate disputes under the Gas Purchase Agreements and not under the Pipeline Affiliates Agreement, thereby rendering the forum selection clause from the Pipeline Affiliates Agreement irrelevant. The district court found this logic “impeccable.” We disagree. This conclusion discounts the existence of the Pipeline Affiliates Agreement, however, and forgets that because the government conditioned its guarantee on the Pipelines first signing the Pipeline Affiliates Agreement, the Gas Purchase Agreements and the Pipeline Affiliates Agreement must be interpreted collectively, and not in isolation, particularly since the documents were simultaneously executed. See, e.g., St. Paul Fire & Marine Ins. Co. v. Tennefos Constr. Co., 396 F.2d 623, 628 (8th Cir.1968). This rule of contract interpretation is firmly rooted law, see 4 Walter Jaeger, Williston on Contracts § 628 (3d ed.1961) and 3 Arthur Corbin, Corbin on Contracts § 549 (2d ed. 1960), and convinces us that under the facts of this case, the current disputes over the Gas Purchase Agreements must be litigated in federal court.

. 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.