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
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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
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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
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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
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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
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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,
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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
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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.
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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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