Lenape Resources Corp. v. Tennessee Gas Pipeline Co.

PHILLIPS, Chief Justice,

delivered a concurring and dissenting opinion.

I join in parts II, III, and IV of the Court’s opinion. Because I believe that the Gas Purchase Agreement (“GPA”) at issue here is an output contract which is subject to section *5772.306 of the Uniform Commercial Code, however, I cannot join in a decision to reinstate the trial court’s summary judgment. As I explain below, I would remand the ease to the trial court for further proceedings as to whether the Sellers’ increased tender of gas either occurred in bad faith or was unreasonably disproportionate to prior output.

I

Output contracts are open-quantity contracts in which the quantity is determined by the seller’s output or production of a certain commodity. Because of their lack of a quantity term, output contracts “have historically had two problems: indefiniteness and lack of mutuality.” See Henning & Wallach, The Law of Sales Under The Uniform Commercial Code ¶ 3.08[2] (Rev. ed. 1992). The “common-law hostility to output and requirements contracts,” 1 Hawkland, Uniform Commercial Code Series § 2-306:01 (Art 2) (1995), is evidenced by numerous pre-Code cases refusing to enforce such contracts due to the lack of a specified quantity. See, e.g., Crane v. C. Crane & Co., 105 F. 869, 873 (7th Cir.1901); Harrington Bros. v. City of New York, 51 F.2d 503, 505 (S.D.N.Y.1931); Sealtest S. Dairies Div. v. Evans, 103 Ga.App. 835, 120 S.E.2d 887 (1961); G.H. Baber v. Lay, 305 S.W.2d 912 (Ky.1957). See also Annotation, 14 A.L.R. 1300 (1921).

Section 2.306 of the UCC provides a statutory mechanism for saving output contracts. It solves what the official comments refer to as the “specific problem” of requirement and output contracts by providing that

[a] term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimated to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

Tex.Bus. & Com.Code Ann. § 2.306(a) (Vernon 1994). The Texas Legislature has made the UCC applicable to mineral sales contracts by declaring that gas is a good if it is to be severed from the land. Id. § 2.107(a) (“A contract for the sale of minerals or the like (including oil and gas) ... to be removed from realty is a contract for the sale of goods within this chapter_”)1

The GPA at issue in this case is that type of mineral sales agreement commonly called a “take-or-pay” contract. Distilled to its essence, “[a] take-or-pay contract obligates a pipeline to purchase a specified volume of gas at a specified price and, if it is unable to do so, to pay for that volume.” Mobil Oil Exploration & Producing Southeast, Inc. v. United Distrib. Cos., 498 U.S. 211, 229, 111 S.Ct. 615, 627, 112 L.Ed.2d 636 (1991). In many take-or-pay contracts, the “specified volume” is not a fixed quantity of gas, but is instead a volume of gas equal to a particular measurement specified in the contract. The obligation to purchase may be expressed in terms of a percentage of reserves or, as in this case, a percentage of deliverability.

Whether such a take-or-pay contract for the sale of gas is an output contract is an issue of first impression in Texas. Indeed, there appear to be only two cases addressing this issue, both of which have concluded that *578a take-or-pay contract is an output contract. See United States v. Great Plains Gasification Assoc., 819 F.2d 831, 834 (8th Cir.1987) (applying Illinois law on the contract issues) (concluding that a take-or-pay contract “unambiguously require[s] the pipelines to purchase the project’s entire output”); American Exploration Co. v. Columbia Gas Transmission Corp., 779 F.2d 310, 311 (6th Cir.1985) (applying Ohio law) (stating that in a contract nearly identical to the one at issue here, “[t]he basic structure of the contract is thus that of a fixed-price output contract”).

Sellers contend that the GPA is not an output-contract, making section 2.306 inapplicable. Their first argument is grounded in the contract’s provision that the Buyer may either “take”, that is, cause to be produced and then purchase “nominated” gas, or “pay”, that is, compensate the Sellers for the exclusive dedication of the reserves for the contract period. The presence of the “pay” alternative for performance means, they claim, that the quantity term is not determined solely by the Seller’s output or delivery capacity. Yet the GPA clearly states that the “Buyer agrees to purchase and receive, or pay for if available and not taken ... a quantity of gas well gas equal to eighty-five percent (85%) of Seller’s delivery capacity.” Thus, whether taking or paying, the Buyer is obligated to compensate the Sellers for a quantity of gas measured by the delivery capacity of the Sellers’ wells.2

The “take-or-pay” aspect of the GPA simply reflects that, because of the nearly unique nature of the sale and production of natural gas, gas is not actually produced and does not become the seller’s “output” if the buyer does not take delivery. This is not a valid basis for removing gas purchase contracts from the reach of section 2.306. Since the buyer’s obligation under the contract is dependent upon the seller’s physical capacity to deliver gas at a given point in time, that is, the seller’s potential output, I conclude that the GPA is an output contract.

Sellers next argue that the GPA is not an output contract because only a finite amount of gas exists under the committed acreage, whereas an output contract assumes that the seller can increase production at will. I find nothing in éection 2.306 to indicate that infinite production or purchasing capability is a requisite for an output contract. While the total volume of gas under the dedicated acreage does constitute the outer limit of production that could be subject to the GPA, the acreage of a farm or a forest or various practical limitations on factory capacity constitute similar limits which do not render output contracts impossible. Other courts have applied section 2.306 to various non-manufacturing sales contracts in which, as here, output cannot be easily regulated by simply increasing or decreasing component parts. See, e.g., Orange & Rockland Utils., Inc. v. Amerada Hess Corp., 59 A.D.2d 110, 397 N.Y.S.2d 814 (1977) (utility fuel oil); Shear-Kaiser-Lockheed-Healy v. Dep’t of Water & Power, 73 Cal.App.3d 679, 140 Cal.Rptr. 884 (1977) (aggregate for concrete); Philadelphia Corp. v. Niagara Mohawk Power Corp., 207 A.D.2d 176, 621 N.Y.S.2d 237 (1995) (hydroelectricity). See also, State Dept. of Fisheries v. J-Z Sales Corp., 25 Wash.App. 671, 610 P.2d 390, 393-94 (1980) (discussing potential application of 2.306 to *579contract for surplus salmon eggs and carcasses).

II

The Court reaches its decision without ever resolving whether the GPA is an output contract. Instead, it bases its decision on the conclusion that section 2.306 is a “gap-filler” provision which is inapplicable here, even if the GPA is an output contract, because the parties, by the provisions of the GPA itself, “agreed to quantity obligations that differ from those imposed by section 2.306.” 925 S.W.2d at 570. Although I would decide, rather than merely assume, the threshold issue, I would hold that section 2.306 does apply because the GPA has all the “gaps” that normally exist in an output contract.

At the outset, I reject Sellers’ argument that the quantity “gap” here is filled by the physical attributes of the reservoir, which limit the volume of gas that can be produced under the GPA much as a tract of land physically limits the quantity of a crop that can be produced on it during a year. See Tennell v. Esteve Cotton Co., 546 S.W.2d 346 (Tex.Civ.App.—Amarillo 1976, writ ref'd n.r.e.) (holding that a contract covering all of the cotton produced from a tract of land during a year was not governed by section 2.306 because identification of the “entire production” was sufficiently specific). This argument is not convincing. Even if Tennell was correctly decided, this case differs from a crop production case in that here the parties did not contract for the “entire field of gas,” or anything like it. They contracted for 85% of Sellers’ delivery capacity for twenty years. That could be all of the gas, or only a fraction of it, depending not only on fortune and physics, but also to some extent on the Sellers’ aggressiveness in exploring and developing the underlying leases. The physical attributes of the committed reservoir simply are not such a firm quantity figure for the parties’ take-or-pay obligation as to remove the GPA from the ambit of section 2.306.

For similar reasons, I reject Sellers’ argument and the Court’s conclusion that various quantity provisions in the GPA “fill the gap.” While it may be true that section 2.306 “does not apply when the contract either specifies a numeric quantity or provides a standard for determining a specific quantity,” 3 925 S.W.2d at 570,1 cannot conclude, as the Court does, that the “GPA requires Tennessee to purchase a set quantity of gas defined as eighty-five percent of Lenape’s delivery capacity.” 925 S.W.2d at 570 (emphasis added). There is nothing “set” about the quantity here, as the perhaps several hundredfold increase in production that actually occurred amply demonstrates. Indeed, the rest of the Court’s opinion is replete with statements proving that delivery capacity is anything but a “set quantity.” As the Court points out, the GPA permits the Sellers to increase delivery capacity by drilling new wells and unitizing, provides that Sellers are not obligated to deliver any predetermined quantity or to maintain any predetermined level of delivera-bility, anticipates that the Sellers may increase delivery capacity, and demonstrates by virtue of all its provisions taken together that the parties expected that delivery capacity could increase significantly. 925 S.W.2d at 570-571. Delivery capacity under this GPA then, is anything but a “set quantity.” Rather, as Tennessee argues, it is a “moving *580target” that the parties had the right to retest at least as often as every three months, or even more often under certain circumstances. The delivery capacity provisions of the GPA do nothing to negate the application of section 2.306.

The Court claims that two cases support its conclusion that the quantity specified in the GPA — delivery capacity — is a determinable amount that takes the contract outside the reach of section 2.306. Neither does so. Riegel Fiber Corp. v. Anderson Gin Co., 512 F.2d 784, 790 (5th Cir.1975), held that contracts for the sale of cotton grown on a certain number of acres which provided a projected yield per acre were not unenforceable for lack of definiteness. The court endorsed the view that “simply by multiplying the number of acres stated in the contracts times the estimated yield, one derives a quantity term stated in pounds of cotton.” Id. at 790 n. 14. Similarly, Fort Hill Lumber Co. v. Georgian-Pacific Corp., 261 Or. 431, 493 P.2d 1366, 1368 (1972), held that a contract for all existing hemlock trees to be logged in a certain area over a period of approximately two years contained the requisite definiteness “because the total area to be logged was known ... and it is possible, therefore, to determine the volume of the hemlock in the total area.” In both these cases, the contract provided a standard for determining a specific total quantity (of corn or logs) subject to the contract. Here, there is no such standard. Delivery capacity measures only “the Sellers’ pro rata part of the average amount of gas well gas per day which can be efficiently withdrawn from the wells on the lease(s)” at the time the test is taken. Delivery capacity provides no standard whatsoever for determining a specific total quantity of gas subject to the GPA. Thus, the GPA contains the same quantity “gap” that all output contracts contain, a “gap” that the UCC fills with the dual provisions of good faith and reasonable proportionality contained in section 2.306.

The Sellers argue, however, that there is no quantity gap because the GPA clearly communicates the parties’ intent as to quantity — to wit, that there be no limits on the amount of gas which Sellers could produce. This allowance for infinite output, in conjunction with the requirement that Tennessee purchase 85% of delivery capacity, is specific enough to displace any “gap filling” good faith requirements of section 2.306 which might otherwise apply.

I agree that the GPA clearly sets out the parties’ expectations and intent that quantity not be limited to any amount. Moreover, trial court finding of fact No. 3, unchallenged by any party, states:

When the parties negotiated the GPA in 1978 and 1979, and executed it on January 16, 1979, Buyer needed and wanted to obtain under long term commitment or dedication as much gas as possible, and the parties intended that the GPA not limit, for any reason, the volume of the committed reserves or amount of gas to be delivered therefrom to Buyer by Seller(s) over the 20-year term of the GPA.

Consistent with this finding, the trial court concluded in part:

The GPA as a whole is unambiguous. If, however, the GPA were to be considered ambiguous, the court’s construction stated herein expresses the true intentions of the parties at the time of the execution of the GPA in 1979.
... The GPA does not limit, for any reason, the volume of committed reserves or amount of gas to be delivered therefrom to Buyer by Seller(s) over the 20-year term of the GPA.

I conclude, however, that the “gap” inherent in all output contracts and in this GPA — the lack of a certain quantity term — can not be successfully “filled” by a statement of intent that there be no limit on quantity.

The Code supports this conclusion. Section 1.102 of the Code provides that “the obligations of good faith, reasonableness and care prescribed by this title may not be disclaimed by agreement,” although “the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable.” Thus, parties may not by contract waive the application of section 2.306; but they may, by “not manifestly unreasonable” provisions, set the *581standard of performance by which good faith and reasonableness are measured.

A contract which intentionally sets no limits whatsoever on increases in quantity hardly sets a standard of performance by which good faith or reasonableness is measured. Since the Code prohibits waiver of the obligations of good faith and reasonableness, and the parties have not set their own standard by which compliance with these standards may be measured, I reject Sellers’ argument that the parties by the terms of the GPA have displaced section 2.306.4

The Sellers and numerous amici have urgently suggested that such a holding would ineluctably bring the oil and gas industry in Texas to a grinding halt. Their arguments, while no doubt sincere, are for several reasons not persuasive.

First, I am not convinced that applying section 2.306 would make the GPA and contracts like it less certain than not applying it. Having no limit whatsoever on quantity is hardly a means of ensuring certainty, except perhaps for Sellers, who want to be certain that the sky’s the limit on quantity sold in a rising market for their product.

Nor do I believe that applying section 2.306 would fundamentally alter the risk allocation of the take-or-pay clause in gas purchase contracts. The Seller still has a certain market for all the natural gas it pumps in good faith and in a reasonable proportion to estimated or prior output. This should be, in almost all cases, all the gas that a Seller produces. As I discuss below, what is “reasonable” will depend on the parties’ expectations, which in almost any oil and gas setting must encompass very wide fluctuations in quantity.

Finally, I do not believe that the GPA’s exclusive dedication of the reserves suffices to excuse the application of section 2.306. The Court mischaracterizes Tennessee’s “concession” that any gas produced in violation of section 2.306 may be sold by Lenape to third parties as a veiled attempt to have this Court rewrite the parties’ contract. However, applying section 2.306 to the GPA no more rewrites that contract than applying any section of the UCC to any other freely bargained contract. Tennessee’s “concession,” moreover, is consistent with the contract. Section 4 of the GPA states:

Commitment of Reserves
(a) Seller commits to the performance of this Agreement all gas produced from the committed reserves.
(b) Seller agrees not to sell to any other party or parties, except contractors conducting drilling or reworking operations for Seller, any gas produced from the committed reserves during the term hereof without the written consent of Buyer.
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(Emphasis added.)

Ill

Having concluded that the GPA is an output contract to which section 2.306 applies, I next consider how the good faith and unreasonably disproportionate standards of that provision operate in this case. At the outset, I would consider the nature of the good faith requirement under section 2.306, with specific focus on whether this good faith standard is further defined by the unreasonably disproportionate standard, or whether good faith and unreasonably disproportionate are two separate standards.

The good faith standard applicable to output and requirements contracts under section 2.306 of the Code, as under the common law, permits quantity variations for valid business reasons and disallows quantity variations caused by speculation or contract manipulation to take advantage of a favorable differential between market and contract price. See generally Stacey Silkworth, Quantity Variation in Open Quantity Contracts, 51 *582U.Pitt.L.Rev. 235, 265-67 (1990).5 Thus, the basic test for good faith here is whether and to what extent the Sellers would have increased the quantity of gas proffered had the contract price equaled the market price, i.e., was there a valid business reason for the increased quantity independent of price? As Silkworth points out, “[wjhereas the good faith test considers the conduct of the parties, the reasonableness test speaks to the magnitude of the quantity variation itself.” Id. at 275.

When faced with increases in quantity under an open-quantity contract, most courts and commentators have recognized a distinction between reasonable proportionality and good faith in applying section 2.306. See, e.g., Sheor-Kaiser-Lockheed-Healy, 140 Cal.Rptr. at 890 (demand for aggregate in excess of 20% over contract estimate held unreasonably disproportionate); Philadelphia Corp., 621 N.Y.S.2d at 240 (declaratory judgment that under three output contracts for sale of hydroelectricity which did not contain stated estimates, no quantity unreasonably disproportionate to prior output may be tendered); Orange and Rockland Utilities, Inc., 397 N.Y.S.2d at 818 (demand for more than double the estimated amount of fuel oil held unreasonably disproportionate). See also State Dept. of Fisheries v. J-Z Sales Corp., 610 P.2d at 394 (Wash.App.1980) (opining that, if section 2-306 applied, output of % more than contract estimate would be unreasonably disproportionate); 1 AldeRMAN, A TRANSACTIONAL GUIDE TO THE UNIFORM COMMERCiAL Code, § 1.33-12, at 75 (2d ed. 1983) (“In addition to acting in good faith, the requirements buyer or output seller must also keep his demands within an amount not ‘unreasonably disproportionate’ to any stated estimate or normal output or requirements.”); 1 White & Summers, Uniform Com-meroial Code § 3-8, at 167 (3d ed. 1988) (“An increase might be in good faith, yet unreasonably disproportionate to prior requirements.”); John C. Weistart, Requirements and Output Contracts: Quantity Variations Under the UCC, 1973 Duke L.J. 599, 647 (“Properly read, section 2-306 operates as a codification of both the good faith standard and an equitable limitation on the extent to which quantities can be increased by the quantity-determining party.”).6

The clear statutory language of section 2.306 imposes a standard of reasonable proportionality that is separate from the requirement of good faith. In recognizing reasonable proportionality as a standard distinct from good faith under section 2.306, the court in Orange and Rockland said: “Obviously this language [‘no quantity unreasonably disproportionate’] is not the equivalent of ‘lack of good faith’ [because] it is an elementary rule of construction that effect must be given, if possible, to every word, clause and sentence of a statute.” Orange and Rockland, 397 N.Y.S.2d at 818. The court concluded: “Thus, even where one party acts with complete good faith, the section limits the other party’s risk in accordance with the reasonable expectations of the parties.” Id. at 819.

*583Having recognized that section 2.306 imposes separate requirements of reasonable proportionality and good faith for quantity increases under an output contract, I would address in turn the applicability of each proviso to the GPA.

In addressing reasonable proportionality, the first inquiry must be whether or to what extent it must be dependant on the parties’ expectations. Orange and Rockland concluded that it could not be expressed by a fixed quantity. Instead, for the reasonable proportionality limitation to take effect, “it is not enough that a demand for requirements be disproportionate to the stated estimate; it must be unreasonably so in view of the expectation of the parties.” Orange and Rockland, 397 N.Y.S.2d at 819 (emphasis added). I agree. Applying the unreasonably disproportionate limitation to disallow an increase in fuel oil requirements that was 63% greater than the contract estimate, Orange and Rockland held:

Defendant had no reasonable basis on which to forecast or anticipate an increase of this magnitude. Indeed the contract suggests the parties contemplated that any variations from the estimate would be on the downside.... [T]he quantities of oil utilized ... were not within the reasonable expectations of the parties when the contract was executed, and accordingly we hold that those “requirements” were unreasonably disproportionate to the contract estimates.

Id, at 822 (citation omitted). See also 1 White & Summers, supra, § 3-8 at 167 (stating that “[t]he word ‘unreasonably’ allows for the interplay of almost any factor a court properly considers relevant,” and suggesting that anticipation of large increases in requirements might prevent the party resisting the increase from prevailing under section 2.306). Thus, the parties’ expectations should not be considered only in light of past performance under the contract, as urged by Tennessee, but also in light of the original expectations of the parties as well as the industry context in which their agreement was made.

Tennessee argues that the increase in quantity of gas tendered by Sellers from the new wells is unreasonably disproportionate because it is so great compared to Sellers’ prior output under the GPA. But whether the magnitude of the disproportion here is unreasonable under section 2.306 depends on the expectations of the parties when the contract was executed and whether such an increase in output could have been reasonably forecast or anticipated. Orange and Rock-land, 397 N.Y.S.2d at 822. Objective indicia of the parties’ reasonable expectations at that time may also be considered, including the size and capabilities of the pipe lines and other facilities, the history of the area, the nature of the formation, local industry practices, reserve and deliverability estimates and so forth.

The parties’ expectations should also be considered in light of the general nature of the industry. The possibility of greatly increased output, and the awareness of that possibility, is an essential characteristic of the oil and gas industry, which provides the context in which the GPA must be considered. Texas courts have long recognized that the existence of oil or gas in a particular tract of land and “the amount of [a well’s] output” is highly speculative. Hatt v. Walker, 33 S.W.2d 489, 499 (Tex.Civ.App.—Dallas 1930, writ dism’d w.o.j.), followed in KMI Continental Offshore Prod. Co. v. ACF Petroleum Co., 746 S.W.2d 238, 244-45 (Tex.App.—Houston [1st Dist.] 1987, writ denied).

Moreover, these sophisticated parties obviously were aware of Lenape’s duty as lessee to reasonably develop the leases underlying the GPA, see Sun Exploration and Prod. Co. v. Jackson, 783 S.W.2d 202, 204 (Tex.1989) (discussing Clifton v. Koontz, 160 Tex. 82, 325 S.W.2d 684 (1959)), and Lenape’s duty as an operator to protect the leasehold from drainage, which could give rise to a duty to drill an offset well under certain circumstances. See Amoco Prod. Co. v. Alexander, 622 S.W.2d 563, 568 (Tex.1981). Especially in light of Lenape’s duties under the underlying leases, Tennessee’s reasonable expectations had to encompass the possibility that at any time during the twenty-year term, new and productive wells might be drilled. Likewise, the parties’ reasonable expectations would have encompassed reasonable industry *584practices relating to the production and sale of gas. On remand, the parties would have the opportunity to put forward all such relevant evidence concerning the nature of the industry as it impacts the parties’ reasonable expectations at the time the GPA was entered into.

Given the nature of the oil and gas industry and the relationship of unreasonable proportionality to parties’ expectations, it should be clear that producers will not face a jury trial over the enforceability of a take-or-pay gas purchase contract every time a new well is drilled or a successful strike is celebrated. Only in extraordinary cases will a fact issue be raised as to whether a tendered quantity is unreasonably disproportionate to prior output under section 2.306. Even then, of course, “[i]t is fundamental that an issue, which is normally a question of fact, can be proved so conclusively by the evidence at trial that it becomes a question of law, rather than a question of fact.” Dixon v. Southwestern Bell Tel. Co., 607 S.W.2d 240, 242 (Tex.1980). Whether the complained-of increased quantity of gas tendered in this ease is unreasonably disproportionate under section 2.306 as a matter of law is not raised in this Court.

Finally, I would also remand to the trial court for further proceedings regarding whether Sellers caused the complained-of increase in production to occur in bad faith, i.e., for no valid business reason or for the purpose of manipulating the contract to take advantage of a price disparity in their favor. If the increased output did not occur in good faith, section 2.306 should apply to prevent Sellers from forcing Tennessee to pay for the bad faith increase.

Tennessee contends and I agree that it was prevented from trying the issue of good faith because the trial court ruled on summary judgment that section 2.306 does not apply to the GPA. Since the trial court decided as a matter of law that section 2.306 did not apply, there was no opportunity to present evidence of or arguments about the Sellers’ failure to abide by the provisions of that section.

Sellers counter that section 2.306 does not contain the only good-faith requirement in the UCC. The official comments indicate that section 2.306 applies to requirement and output contracts the general good faith requirement of the Code, codified in section 1.203, and further defined for merchants in section 2.103(a)(2).7 Thus, the same obligation of good faith applies to an output contract whether it is through the general application to all sales contracts of section 1.203, in conjunction with section 2.103(a)(2), or through the good faith requirement of section 2.306, applicable to output contracts. Based on these observations, the Sellers originally contended in this Court that Tennessee was not denied its right to prove bad faith, but rather that Tennessee voluntarily gave up that right by its own act of dismissing all section 1.203 good faith claims in a Motion for Agreed Partial Judgment.8

On rehearing, Sellers correctly point out that Tennessee did not dismiss its bad faith claims under section 1.203 against Lenape. The motion for agreed partial judgment states: “Plaintiff Tennessee Gas Pipeline has agreed to dismiss any of its claims for bad faith or lack of good faith that it may have against [Tesoro and Coastal] ... with the exception of, and it expressly reserves to itself, any claims that it might have under Section 2.306 of the Uniform Commercial Code.” The Agreed Partial Judgment signed by the trial judge likewise reflects *585that Tennessee’s agreement was with Tesoro and Coastal, not Lenape. Tennessee thus went to trial against Lenape with a live good faith claim under section 1.203, and the trial judge found no bad faith as to the formation of the new units and the drilling of the new wells.

However, the central question of whether the increased output complained of by Tennessee occurred for a valid business reason or as a result of speculation and/or contract manipulation by the Sellers has not been fully litigated. The record indicates that the case was tried under the assumption that the court had precluded any argument that the contract was an output contract.9 As a result, the trial judge could not have focused on whether the complained-of increase in quantity tendered under an output contract occurred in bad faith, whether under section 2.306 or section 1.203.10 Therefore, I would remand this action to the trial court for further proceedings on the issue of the Sellers’ good faith with regard to the increased production of gas subject to the GPA.

This is a very unusual, perhaps a unique, case. It involves wildly fluctuating market conditions uncommon even in the volatile gas industry, a type of contract no longer in use, and a large discovery seldom replicated. But merely because a case is not likely to arise again should not prevent the law from being fairly applied to the situation as it actually occurred. In this instance, I believe the law permits Tennessee to attempt to prove that Sellers’ increased tender of gas either occurred in bad faith or was unreasonably disproportionate to prior output. Therefore, I would affirm the court of appeals’ judgment in all respects.

. Almost every other state has adopted an identical provision stating that a contract for the sale of minerals, including oil and gas to be severed from land, is a contract for the sale of goods under the UCC. AlaCode § 7-2-107; Alaska Stat. § 45.02.107; Ariz.Rev.Stat.Ann. § 47-2107; Ark.Code Ann. § 4-2-107; Cal.Com.Code § 2107; Colo.Rev.Stat.Ann. § 4-2-107; Conn.Gen.Stat.Ann. § 42a-2-107; Del.Code Ann. tit. 6, § 2-107; D.C.Code § 28:2-107; Fla.Stat.Ann. § 672.107; Ga.Code Ann. § 11-2-107; Haw.Rev.Stat.Ann. § 490:2-107; Idaho Code § 28-2-107; IllAnN. Stat. ch. 810, para. 5/2-107; Ind.Code Ann. § 26-1-2-107; Iowa Code Ann. § 554.2107; Kan.Stat. Ann. § 84-2-107; Ky.Rev.Stat Ann. § 355.2-107; Me.Rev.Stat.Ann. tit. 11, § 2-107; Mass.GenXaws Ann. ch. 106, § 2-107; Mich.Comp.Laws Ann. § 440.2107; Minn.Stat.Ann. § 336.2-107; Miss. Code Ann. § 75-2-107; Mo.Ann.Stat. § 400.2-107; Mont.Code Ann. § 30-2-107; Neb.Rev.Stat. § 2-107; Nev.Rev.Stat. § 104.2107; N.H.Rev.Stat.Ann. § 382-A:2-107; NJ.Stat.Ann. § 12A:2-107; N.M.Stat.Ann. § 55-2-107; N.Y.U.C.C.Law § 2-107; N.C.Gen Stat. § 25-2-107; N.D.Cent.Code § 41-02-07; Okla.Stat.Ann. tit. 12A, § 2-107; Or. Rev.Stat. § 72.1070; 13 Pa.Cons.Stat.Ann. § 2107; R.I.Gen.Laws Ann. § 6A-1-107; S.C.Code Ann. § 36-2-107; S.D.Codified Laws § 57A-2-107; Tenn.Code Ann. § 47-2-107; Utah Code Ann. 70A-2-107; Va.Code Ann. § 8.2-107; Wash.Rev.Code Ann. § 62A.2-107; W.Va.Code § 46-2-107; Wis. Stat.Ann. § 402.107.

. Moreover, the authorities cited by Sellers and the Court in support of the argument that ‘'paying” is not purchasing are not convincing. See Prenalta Corp. v. Colorado Interstate Gas Co., 944 F.2d 677, 689 (10th Cir.1991); Diamond Shamrock Exploration Co. v. Hodel, 853 F.2d 1159, 1167-68 (5th Cir.1988); Mandell v. Hamman Oil and Refining Co., 822 S.W.2d 153, 164-65 (Tex.App.—Houston [1st Dist.] 1991, writ denied) ("Take or pay is not a payment for production; it is a payment for non-production.”); Killam Oil Co. v. Bruni, 806 S.W.2d 264, 267-68 (Tex.App.—San Antonio 1991, writ denied). The latter three authorities involve only an interpretation of the royalty clause in a contract. Here, however, we must decide whether a particular type of gas purchase agreement is subject to a statute that applies to mineral sales in general. Other courts, including the Prenalta court, have held that gas purchase and sales agreements containing a take-or-pay clause are subject to Article 2 of the UCC. See Prenalta, 944 F.2d at 687-90. (holding, in case involving take-or-pay contracts, that gas purchase contracts are governed by Article 2 of the UCC despite acknowledging that payments made under the contracts pursuant to the “pay” alternative are not payments for the sale of gas); and Universal Resources Corp. v. Panhandle E. Pipe Line Co., 813 F.2d 77, 78-80 (5th Cir.1987) (applying Article 2 of the UCC to a gas purchase contract containing a take-or-pay clause).

. I agree that if a contract "specifies a numeric quantity or provides a standard for determining a specific quantity” for the total amount of the commodity to be sold under that contract, it is manifestly not an output contract subject to section 2.306, but rather an ordinary supply contract providing for the sale of a fixed quantity of goods. See Cooper v. Fortney, 703 S.W.2d 217, 219 (Tex.App.—Houston [14th Dist.] 1985, writ ref'd n.r.e.). The same conclusion would apply to a contract which purported to measure quantity by output but in fact specified a fixed numeric quantity for that output, as in "I will sell you all my output of widgets, which we agree will total 100 widgets per month.” Note, however, that by its very terms, section 2.306 applies to an output contract which specifies an estimate of what output will be.

I strongly disagree, however, with the Court’s suggestion that section 2.306 does not apply to a contract which "provides a standard for determining a specific quantity” for output on an ongoing basis over the life of the contract. If that were true, section 2.306 would never apply. All output contracts will provide for some means of measuring what the specific quantity of output under the contract is on an ongoing basis — how else would the buyer make the payments due for that quantity of output?

. It is not enough to conclude, as the Court does, that the GPA does not disclaim the good faith and reasonableness standards or that, regardless of section 2.306's applicability, any increase in delivery capacity is still subject to the good faith obligation of section 1.203. The issue is whether the dual requirements of good faith and reasonableness under section 2.306 apply, or whether the parties have set their own standard by which compliance with these standards may be measured, thereby displacing section 2.306. Because the GPA's "no limits” standard is no standard at all, I conclude that section 2.306 applies.

. Silkworth’s analysis of numerous pre- and post-Code quantity variation cases leads her to conclude:

The business reason factor and the contract manipulation factor lend context to the pre-Code good faith standard. Many courts and commentators have stated that the primary concern in quantity variation cases is good faith. Courts have been reluctant to define good faith; ... [n]evertheless, ... courts have held that the presence of a valid business reason and/or the absence of contract manipulation constitute good faith in open quantity contracts. On the other hand, absence of a business reason and/or presence of contract manipulation constitute bad faith in open quantity contracts. The U.C.C. has codified this good faith standard.

Silkworth, supra, at 270 (footnotes omitted).

. In cases involving decreases in quantity, most courts applying section 2.306 have held that the quantity-determining party, whether a requirements buyer or output seller, should be held to only a good faith standard. See, e.g., Atlantic Track & Turnout Co. v. Perini Corp., 989 F.2d 541, 544-45 (1st Cir.1993); Empire Gas, 840 F.2d at 1337-38; Angelica Uniform Group, Inc. v. Ponderosa Sys., Inc., 636 F.2d 232, 232 (8th Cir.1980) (per curiam). While some commentators have criticized the disparate treatment of increases and decreases, see Silkworth, supra, at 268-70; Owings, Note, Output Contracts and the Unreasonably Disproportionate Clause of§ 2-306, 59 Mo.L.Rev. 1051, 1059-60 (1994), there is no need to resolve any inconsistency here, nor do I make any comment on the standards applicable to quantity decreases, since this case involves only an increase of quantities tendered by an output seller.

. The official comments state that section 2.306(1) applies to the "specific problem” [of the absence of a quantity term in output and requirements contracts] the general approach of the Act which "requires the reading of commercial background and intent into the language of any agreement and demands good faith in the performance of that agreement.” TfeBus & Com.Code § 2.306 cmt. 1. The Code's general good faith and reasonableness requirement provides that "[ejveiy contract or duty within this title imposes an obligation of good faith in its performance or enforcement.” Tex.Bus. & Com.Code § 1.203. Good faith is further defined for merchants as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade." TexJBus. & Com.Code § 2.103(a)(2).

. The Application for Writ of Error filed jointly by Tesoro, Coastal, Lenape and Gulf states that "on the eve of trial, Tennessee dismissed with prejudice all claims for bad faith under § 1.203, but retained its claim under § 2.306.”

. Tennessee made a partial summary judgment motion seeking a ruling that the GPA was an output contract governed by section 2.306. Tennessee specifically argued that the GPA agreement "meets the definition of an output contract as the contract quantity is indefinite and is measured by the future output (delivery capacity) of the seller.” Lenape, in its brief in response, argued that the GPA was not an output contract because it requires Tennessee to purchase the entire production of gas from specified acreage. Tesoro and Coastal also filed a summary judgment motion, joined by Lenape, which sought a ruling by the court that the GPA was not an output contract subject to 2.306. Their brief contained arguments that the GPA was not an output contract and that, even if it was, it is not governed by section 2.306. Without specifying the grounds of its decision, the trial court denied Tennessee’s motion and granted Tesoro and Coastal’s motion.

During opening statements (before the Hon. Charles W. Barrow, retired Justice of this Court, sitting by designation), counsel for Tennessee, after indicating to the court that various claims had been voluntarily dismissed by the parties, stated:

The only thing left in this case is a previous judge [the Hon. Carlos C. Cadena, retired Chief Justice of the Fourth Court of Appeals, sitting by designation] in a grant of summary judgment had knocked out our right to claim that this was [a]n output contract. The output section of the Uniform Commercial Code imposes a good faith obligation upon the parties. We have preserved that if on appeal sorrie-where up the line that is reversed and sent back for trial on the output question, that whatever bad faith claims or good faith claims we might have under solely the output section of the Uniform Commercial Code is preserved.

(Emphasis added.) Given the summary judgment rulings and this statement to the judge, which went unchallenged by counsel for the Sellers, I believe that the parties and the court proceeded to trial under the assumption that the court had effectively ruled that the GPA was not an output contract.

. The record supports this conclusion. During the opening and closing statements of the trial, none of the parties identified bad faith increase in delivery capacity or output as an issue to be tried or in any way attempted to link (or not) the increase in output with market price changes for gas. Moreover, the only explicit question about “good faith” posed to a witness during the trial was in regard to Lenape’s duty as a lessee to its lessors to pool in good faith. During cross-examination by Tesoro and Coastal, Mr. Devine, senior vice president for Lenape Resources, testified that he was aware that an operator is required to pool in good faith, and that in his opinion the two new units in question were formed in good faith "as far as the oil and gas leases are concerned.” But, of course, any duty owed by Lenape to its lessors is not at issue in this case. Thus, from this review of the record, I conclude that the issue of whether the complained-of increase in output occurred in good faith has not been tried.