Texas Gas Transmission Corporation v. Shell Oil Company – Oral Argument – April 21, 1960

Media for Texas Gas Transmission Corporation v. Shell Oil Company

Audio Transcription for Oral Argument – April 20, 1960 in Texas Gas Transmission Corporation v. Shell Oil Company

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Earl Warren:

— Texas Gas Transmission Corporation et al., Petitioners, versus Shell Oil Company, and Number 170, Federal Power Commission, Petitioner, versus Shell Oil Company.

Mr. — Mr. Correa.

Mathias F. Correa:

Mr. Chief Justice, may it please the Court.

I represent both petitioners in 167, Texas Gas Transmission Co., which is the pipeline involved in this matter, and the Louisville Gas and Electric Company, which is also a petitioner and which is vitally interested in — in this matter as a customer of Texas Gas and as the supplier of 158,000 consumers of gas in the Louisville area.

Now, as Mr. Gatchell very promptly pointed out yesterday, the economics of the natural gas industry demand long-term commitments between pipeline companies on the one hand, producers of gas on the other for the supply of gas primarily so that the pipeline companies may finance the construction, otherwise, in this case the purchase from the Government of the pipelines.

Now, because these contracts are long-term, and by long-term, I mean 20 to 25 years, the Atlantic contract here involved, for example, is 25-year term, because they are long-term, they usually contain, almost invariably, one might say, some form of predetermined redetermination of price, redetermination in order to take care of economic change over the long-term which regrettably has been mostly in a upward direction.

Predetermined redetermine of price so the parties are bound to it either to an absolute price increase or to a standard from the times when they enter into the contracts.

Now, if the Court please, this — the long-term character of these contracts accounts as well for the presence in them of what is called loosely in the trade as most “favored-nation” clauses.

This term could be misleading because it does not, in the natural gas industry, mean necessarily as it might in, for example, of the patent licensing field or some other field that the pipeline company will pay the producer in whose contract that term appears, the highest price that it is paying or does pay to any other producer.

Rather, the term is more properly or the clause is more properly called as the Commission called it here a price escalation provision which provides for the increase in price upon the occurrence of a specified event.

And the specified event is the subject of bargaining in contract between the parties.

Now, there are two such clauses which have been referred to in this record.

The first is the clause that appears in the Atlantic contract.

And that — there, the event which triggers, as they put it, the escalation into the Shell contract rather it’s the — it’s the clause that appears in the Shell contract, I misspoke myself.

And there, the event which triggers the escalation in price is entry into a new contract for the purchase of gas.

Now, I am aware that Mr. Justice Whittaker quite correctly pointed out yesterday that the word “new” does not appear in the clause.

And that is right.

But if we turn to the record where the full clause in question appears at pages 66 to 67 is clause 3.

At the bottom of 66, we will see immediately what — why we call it “new” contract for the purchase of gas at a higher price because our clause begins, bottom of 66, if, at anytime after December 31, 1951, buyer shall enter, that’s the pipeline, into a contract providing for the purchase of it by gas produced in a certain place etcetera at a higher price, then the price under this contract is increased accordingly.

And you will note the further provision, in the last sentence of this clause which says that in determining whether the price payable under such other, I would say, new contract but post 1951 contract in my — would satisfy the argument just as well, this such other post 1951 contract, due consideration shall be given to the provisions of the contract — of this contract as compared with the other as to quality, delivery pressures, gathering and compressing arrangements, quantity and other pertinent factors.

Mr. Correa, is this a usual form of escalator contract, escalator clause?

Mathias F. Correa:

I believe it is, if Your Honor please.

In — in the —

Mathias F. Correa:

There are several forms actually.

And as the record here reflects and also as is reflected in the — in the petitions for rehearing — for certiorari and particularly our reply petition, there are quite a few different forms in use in — in the trade.

And I may say, if Your Honor please, that where the party is meant, the escalation to be triggered by a payment simply of a higher price under an existing contract, they said so.

And this is the point which the Commission made in denying rehearing.

In the proceeding before the Commission, the Commission said why Shell when they mean that, say it and cited and quoted two or three Shell escalation clauses of that kind.

This is a more unlimited escalator clause than the usual one.

I’ve seen it.

Mathias F. Correa:

I — I’m not prepared to say that that is so, if Your Honor please, nor — nor do I believe the record discloses that one way or the other.

Now, if the Court please.

Now, let me against that brief background turn to this question of expertise upon which Mr. Justice Harlan commented yesterday.

Now, we submit, let me put it that way, that the error of the court below were consistent not simply in failing to give weight to the Commission’s expertise because the court below went further and made its own finding as to the usual objective, and I’m using their words, “in the trade”, their words again, “of these clauses”.

Most “favored-nation” clauses had gone on rating all types of most “favored-nation” clauses.

In these, the Court found that this usual objective in the trade was to assure the seller a top price for its gas.

Now, on the basis of this finding, the Court went on to conclude that the redetermination of price by the parties to the Atlantic contract under that contract would constitute entry into a contract for the purchase of gas, and now I quote significant words because the Court qualified their finding this way, “At least, at least for the purposes of the favored-nation clause”.

And the Court emphasizes by finding that this would be so whether the price redetermination was determined by agreement of the parties as to controlling facts upon which price depended, which is what happened here under the Atlantic contract, all by arbitration to which the parties had bound themselves when they originally entered the contract.

Now, the Court, we submit, does not only ignored the Commission’s expertise but indeed assumed to itself expertise in a field in which the Commission’s statutory duties, responsibilities and functions served by all rights make them better qualified.

Now, this highlights, if the Court please, the answer to Mr. Justice Harlan’s query, which, in substance, I may not have the words exactly right, I — I remember as being, if the contract is clear on its face is to be construed according to its plain language, why is there a necessity for resort to expertise?

And the answer precisely is that the Commission at least had the expertise which enabled it to know that there wasn’t any usual objective of escalation clauses “in the trade” which required that construction in this manner, at least for purposes of most “favored-nation” clause.

Now, if the Court please, we feel that the learned court below also erred in basing its decision upon a finding of fact made by the Court independently of the Commission as to the intention of the parties to the Shell contract in the negotiation of that contract.

Now, as I replied brief points out at pages 5 to 6, the Court’s finding was in fact based on testimony which was in any event, incompetent under the parole evidence rules because it was the testimony of the unilateral understanding of one party as to what the clause meant not communicated to the other.

But more important than that point is it that if the court below felt that the Shell contract needed parole evidence for its construction, the Court should, under the unbroken line of authorities, have set the case back to the Commission with the direction to take evidence and make findings on that subject.

Now, we don’t suggest that the contract needs parole evidence.

Charles E. Whittaker:

Do you — do you understand that the Court of Appeals thought it did or that they gave heed to parole evidence or that they merely construed the terms of the contract?

Mathias F. Correa:

Well, if Your Honor please, I understand — and — and if Your Honor would turn to page 163 of the record, you can see right there exactly what they did.

And I reply to the part of the last paragraph ending on the page following the Folio 178 notation, and — and just before that, “Because of the difficulty in establishing price for so long a period, the clause in question was agreed upon.

It appears that at the time of contracting Shell, Louisiana was purchasing from Atlantic but not familiar with the specific term.”

These facts stand strongly.

Now, those facts are based on testimony on the record.

And as I say, it’s incompetent testimony at best.

Would you say this was a case if the — if suit had been brought —

Mathias F. Correa:

That’s finding.

— brought for a declaratory judgment initiated in the first instance in Court, would you say this was a case where the Court ought to send the matter to the Commission for — under the primary jurisdiction doctrine?

Mathias F. Correa:

I — I believe it would fall under the primary jurisdiction doctrine, although I don’t believe we need to wrestle with the problems of those authorities in — in this connection but I do believe it falls under those authorities, yes, under your — the Western Pacific case, for example, as the authority that comes from —

Isn’t that raise the question?

You cited a lot of those cases in your brief promptly because —

Mathias F. Correa:

Well, we cite them in support of the proposition of — of limited —

And (Voice Overlap) —

Mathias F. Correa:

— judicial review which I do believe they — they hand a support.

Felix Frankfurter:

Well, doesn’t — doesn’t Justice Harlan’s question rather suggest the decisive test about this part of — of problems of the case, namely, for declaration for declaratory judgment, it has to be dismissed or at least held unless the ruling is held from the Federal Power Commission, that’s one thing, if the District Court could, on its own, construe the contract without further ado, that present another problem —

Mathias F. Correa:

Well, I — I think it’s —

Felix Frankfurter:

— or reach a different conclusion?

Mathias F. Correa:

Right, Mr. Justice Frankfurter.

May I say that if we take the word of the Third Circuit point, this is a case which requires reference to the usual objectors of these clauses in the trade.

Felix Frankfurter:

May well be like in the (Inaudible) case that when — when — if there is a reference to the agency, the Federal Power Commission here, as to meaning, and it goes back and doesn’t have to say that they would be controlled by it but if it’s — if it’s a problem, puts a question as to which, in any event, there should be a preliminary, even if not a final ruling by the Federal Power Commission, one starts with a different premise of the Court.

Mathias F. Correa:

That is correct, sir.

And may I — may I clear what — what I’m saying which is almost a form of negative expertise, if you will, that’s a poor description, I’m afraid, but the — the Commission is in a position to know whether there is a — understanding or practice in the trade which controls interpretations of these clauses or whether there isn’t.

And if the Commission finds there isn’t, well, then — then the clauses are — are construed according to their plain language but may be a need to go the Commission to find that out in the first instance because that’s where their expertise precisely comes into play.

Felix Frankfurter:

Take — take the cases that I think to get least mystery by this Court’s decisions are concerned, at least to me the construction of tariffs in relation of courts to the ICC.

Now, is this a case that would — would be like the Great Northern where Justice Brandeis, through the Court, held no, this isn’t.

It doesn’t require any kind of knowledge.

This is just — any judge can decide this at least presumably, at all event, the Court problem and without any light to be shed rather than whether it’s an ambiguous thing as to which will send it on to the Commission and they may say, “Well, this is not a technical thing at all.

It has no technical meaning in the trade and we send it back without any — I mean it maybe ambiguous to that extent.

Mathias F. Correa:

That’s — that’s my point exactly, if Your Honor please.

And I think if this is a case rather like the Memphis case where you are dealing with a contract and the rate schedule or contract operating as a rate schedule.

Felix Frankfurter:

Well, now, in answer to another question of Justice Harlan, whether this is a typical escalation contract or terms, you — you said you thought it was, didn’t you?

Mathias F. Correa:

No, sir.

I said that —

Felix Frankfurter:

(Voice Overlap) —

Mathias F. Correa:

— it certainly is one used by the — by the Commission and that I — I thought that the — precisely the petition for writ of certiorari did show, and I’m not sure it’s otherwise in the record, that the — this type of limitation is limitation to a future contract now appears in 580 other rate schedules.

Now, I take that the Court can judicially —

Felix Frankfurter:

The same kind of thing.

Well, if —

Mathias F. Correa:

Now, it is to that extent, typical.

Felix Frankfurter:

— If this were a unique one, then there couldn’t be any trade meaning for it —

Mathias F. Correa:

I thought that is — I think that’s best so —

Felix Frankfurter:

— or any — or any commission construction.

On the other hand, if this is a — if this is a type —

Mathias F. Correa:

Well, 500 —

Felix Frankfurter:

— if this represents a class, then you might draw some other (Inaudible)

Mathias F. Correa:

Well, the — the answer is 580 because that’s based on the records of the Commission which I take it out at least in theory before this Court.

Now, if the Court please, may I turn to this question of price under the Atlantic contract and what the parties did in February 1954.

The court below in regarding that failed to differentiate, we submit, into the difference or differentiate between entry into a new contract that is opposed 1951 contract and a redetermination of price under a preexisting i.e.pre 1951 contract pursuant to a predetermined standard contained in such preexisting contract.

Now, I shall here concedes implicitly to be sure but unmistakably that the letter would not trigger the escalation clause of the Shell contract but it argues strenuously that that the price provisions of the Atlantic contract were not a true price redetermination clause.

In fact, Shell goes so far to say — as — to say that the Commission did not so hold despite the clear holding of the Commission and Shell’s own specific exception to that holding.

Nevertheless, the contract, in fact, did contain a specific standard which was prevailing prices in Southwestern Louisiana.

Now, most importantly than the contract provision, the parties themselves, and this is shown by undisputed testimony in the record, the parties themselves regarded the contract as containing a standard which was binding on them.

This came out in the testimony of the Atlantic man who negotiated the agreement of — of February 1954 and who said that in reaching that letter agreement, the parties both understood that all they were doing was trying to agree on a fact, which was controlling as the price, the fact being prevailing prices in Southwestern Louisiana, and he said, “Once we agreed on prevailing price, that was it.”

That’s what the contract said.

Now, further than that, the contemporaneous written record shows that during the period between August 1953 and February 1954, the parties were exchanging elaborate computations and tabulations of prices in Southwestern Louisiana aimed at being evidentiary of the controlling fact which control — which was the standard of the contract.

And Your Honors can find those at 38 to 45 of the record.

Now, as Judge Learned Hand pointed out (Inaudible) v. Clark which we’ve cited in our reply brief at page 8, a standard — a contract is not invalid because it contains or even depends upon the application of a standard which is difficult to apply provided there is, as there was here, Judge Learned Hand says a standard which is quote “independent of the will, wish or want of the parties”.

Now, actually, prevailing prices in a particular area is not an unusual standard in the natural gas industry and has been recognized and validated as a valid standard of price redetermination by at least one court, the Tenth Circuit.

Further, and this is very important, this standard was backed up by an arbitration provision so that if the parties couldn’t agree on the fact on the application of this standard, it was nevertheless to be fixed by arbitration.Now, if the Court please, let me come to one last point.

Mr. Justice Whittaker asked yesterday, was the letter of February 1954 a contract or perhaps, was it a contract for the purchase of gas?

Because those are significantly different.

Even if it was a contract, was it a contract for the purchase of gas, and we submit it was not because a contract for the purchase of gas and Shell’s own escalation clause shows, as I pointed out a moment ago, must contained provisions as to quantity quite as important term in this contract’s price, quality, delivery arrangements and a host of other as the clause says pertinent fact.

These are none of these aren’t contained in that letter of February 1954 nor does it purport to contain them or incorporate them by reference rather it says we have agreed on price for the next five years pursuant to the provisions of condition 3 or Article III —

Supposing that —

Mathias F. Correa:

— of our conduct.

–Texas — supposing that Texas Gas Transmission had wanted to increase its supply from — from Shell and had entered into a new instrument —

Mathias F. Correa:

From Shell or Atlantic, sir?

I beg your pardon.

Atlantic.

Atlantic, and then entered into a new instrument, would that have come under this — this escalator clause?

Mathias F. Correa:

If we impose 1951?

Yes.

Mathias F. Correa:

Certainly.

It would have.

It doesn’t have to be a different party.

It just have to be a different producer.

Mathias F. Correa:

It just has to be a new contract.

A new contract.

Mathias F. Correa:

That’s — that’s the (Inaudible)

Now, if the Court please.

Finally, may I say this last point is important because it highlights what the court below, paying with great respect to the Atlantic court, only lip service, call the realities of the situation because the realities of this situation whether the parties to the Atlantic contract had and understood they had a binding contract for the purchase and sale of gas over a 25-year period in specified quantities of a specified quality with specified arrangements for delivery etcetera and that neither party to that contract by failing or refusing to agree on the application of the price standard it contain, “evade” or “frustrates” the obligations of the contract.

And in closing, may I submit that I suggest Shell understood it that way too and that accounts for the abundance of evidence in the record to which I shall have not time to rebuff that Shell didn’t take this claim very seriously.

I would like to reserve the rest of my time for rebuttal.

Earl Warren:

Mr. Stone.

Oliver L. Stone:

Mr. Chief Justice, may it please the Court.

With respect to the judicial review issue, we believe this case resolves itself into the question of whether or not the Federal Power Commission was better qualified than the Court of Appeals to read the everyday language appearing in a privately negotiated contract.

The considerations of which the petitioners now urge in support of the Commission’s order were not the considerations, were not the factors upon which the Commission itself based that order.

What was the issue in this case and how did it arrives and how did the Commission treat it?

The issue in this case was what contract price had the parties fixed for themselves as of the critical date, June 7, 1954.

That was the question.

That was the issue.

The issue in this case in no way involved the lawfulness of that price.

Justness and reasonableness of the price was not involved as it would have been had this been a rate proceeding under either Section 4 (e) or Section 5 (a) of the Gas Act.

The Federal Power Commission, unlike in the Memphis case, had no part in the formulation of the contract which it construed.

This was not a case in which the producer was seeking a certificate of public convenience and necessity.

Hence, the question of whether or not this price was in the public convenience of necessity was not at issue.

As a matter of fact, the Commission had issued a certificate to Shell in 1946, which was the year before this proceeding — this hearing was held before the Commission.

The question which the Commission set for itself in our view was in no way intermixed with any question that was peculiarly administrative.

Any question as to which the Commission had a unique expertise or know-how to bring into play that were not possessed by courts.

The Shell clause, we claimed, Your Honors, is clear.

The words are implied in their ordinary sense.

There are no technical words used.

There are no words of art.

Oliver L. Stone:

Furthermore, in the resolution of this issue, the Federal Power Commission did not draw upon its undrstanding of any industry usage or any industry practice.

There was no evidence in this record to that effect.

Since, as we contend, the words in this privately negotiated contract were used in their normal ordinary non-technical sense, we submit that the issue before the Commission was one purely of law.

That’s all the issue called for.

That’s all it received.

And furthermore —

Felix Frankfurter:

What do you mean when you say that issue of law?

Oliver L. Stone:

I mean, Your Honor, and I was just going to cite that under the decision in the Merchants’ Elevator and other cases following that, when words used in a tariff or used in their ordinary sense, as Justice Brandeis said in that case.

He said their construction presents solely a question of law.

Now, it’s true that the Court then went on to say that there are cases in these railroad tariffs where words may be used in a peculiar sense.

And when that isn’t issued or when words are so used, then it is proper for the Court to refer that matter to the administrative agency under the primary jurisdiction doctrine.

I would concede that perhaps literally, what words mean might be a question of fact.

But I am content, we are, in this case, to rest our position upon what this Court has said that when the construction involves only words used in their ordinary sense, then the question presented is one solely of law for the Court just as the construction of any other written document.

Now, that case dealt with the railroad tariff.

So the more so, we say, should that doctrine apply in this case where you had a privately negotiated contract entered into even prior to the time that the Commission began exercising jurisdiction over producers.

Felix Frankfurter:

But how can you — how can you be sure can a man with limited experience in this field, like myself, be sure that by reading words, the English meaning of which he understand that entrusted upon those — those seemingly ordinary English words, there isn’t a lot of back history in the trade?

Oliver L. Stone:

Your Honor, in this case, had there been back history in the trade, I feel rather confident, there would have been something either in the record to show it or that the Commission somewhere in its order would have mentioned that.

I say that because if the Commission were in effect taking official notice of a given industry practice, then I, the other party —

Felix Frankfurter:

Or Commission construction, Mr. Stone.

Oliver L. Stone:

Or Commission construction, yes, Your Honor.

I should have the opportunity to show that the Commission that that practice is not so.

And I think Section 7 of the Administrative Procedure Act would afford me that right.

Earl Warren:

Didn’t the court — didn’t the court below rely on the practice in the trade?

Oliver L. Stone:

Your Honor, I think my answer to that question is I do not think so.

Earl Warren:

What did it say?

Oliver L. Stone:

I think the court below did say that the usual objective, the usual objective of these clauses is to give the seller a top price.

It also referred to the circumstances and the situation of the parties surrounding the execution of the contract.

It showed that the pipeline wanted a long-term contract and the Court did say, Your Honor, that these facts would tend to indicate that the intention of the parties to the Shell contract was that Shell’s price would increase every time the pipeline paid a higher price except possibly, the Court said, in the event one of these fixed step up clauses.

Our position in that regard —

Earl Warren:

Didn’t —

Oliver L. Stone:

— Your Honor —

Earl Warren:

— didn’t it say a little more?

Oliver L. Stone:

Sir?

Earl Warren:

Didn’t it say a little more than that?

Didn’t it say that —

Oliver L. Stone:

It went on later —

Earl Warren:

— than the practice in the trade?

Oliver L. Stone:

Well, it — it said, Your Honor, in the trade, this — these clauses, the usual objective of these clauses is to give the seller a top price.

That’s on page 163 of the record.

Earl Warren:

Yes, now, what did it base that on?

What —

Oliver L. Stone:

They based that —

Earl Warren:

— what (Voice Overlap) —

Oliver L. Stone:

— Your Honor —

Earl Warren:

— in the record —

Oliver L. Stone:

— I think the Court —

Earl Warren:

(Voice Overlap) —

Oliver L. Stone:

— of — well, there was testimony by the Shell witness who negotiated this contract showing what — at least what he wanted.

Now, Your Honor, I think the Court here was applying the usual rules of construction of the written word.

The Court here was not going outside of the written word.

The Court of — neither the Court of Appeals nor the Federal Power Commission nor the examiner found that the words in the Shell contract were ambiguous.

And that, I believe, is the crux of the problem that the counsel was just speaking about.

You —

Earl Warren:

But does — do the words, do the words show what is the practice in the trade?

Oliver L. Stone:

No, Your Honor, but it is an established rule of construction even where words are not ambiguous that the Court can place itself in the position of the parties and it can look at the surrounding circumstances and it can look at the object and the purpose of it.

That’s all the Court of Appeals was doing.

Earl Warren:

Well, I thought the Court of Appeals when — so far as the matter — I thought they assume to say what the practice in the trade was.

Oliver L. Stone:

No, Your Honor.

I think what the Court of Appeals —

Earl Warren:

I’ll —

Oliver L. Stone:

— was saying there —

Earl Warren:

— I’ll read it again but I — I —

Oliver L. Stone:

Certainly.

Earl Warren:

— maybe it’s (Voice Overlap) —

Oliver L. Stone:

And I wish Your Honor would read it with — with that in mind that a court even in any case, evidence is admissible and the Court is entitled to consider any evidence in the record, showing the surrounding circumstances and the object which the parties meant to attain.

Now, Professor Williston, I think, mentions that and — and points out the — the distinction that he — he says it’s quite often overlook, and I think it’s rather important in this case.

Earl Warren:

But you don’t have — you don’t have to do that for me.

I — I’m —

Oliver L. Stone:

All right, sir.

Earl Warren:

— familiar with that rule.

I was just —

Oliver L. Stone:

Thank you, sir.

Earl Warren:

— I was just talking about the language of the Court insofar as the practice of the trade was concerned and whether or not you rely it on that and if you did, what — what evidence there was in — in the record that you rely upon for that finding by the Court of Appeals?

Oliver L. Stone:

There is no evidence in this record showing the usual objective of these clauses as a general proposition.

There is evidence in this record showing the objective which Shell attempted to attain by this clause.

Now, Your Honor, we — there is evidence that this Court can take judicial knowledge of, that is before the congressional committees where they point out the — they don’t point out what the usual objective of these clauses is but they point out what the usual clauses are.

Now, I further submit, Your Honor, that there is nothing inherently wrong or wrong in any way.

What a court mentioning in passing what it considers to be the usual objective of a price escalation clause.

I submit it can have no other purpose than to give the seller a higher price.

Charles E. Whittaker:

May I ask —

Felix Frankfurter:

Mr. Stone, may I — may I make this comment on your quite natural and proper claim, if I may so, with reference of how courts go about construing an ordinary commercial contract.

I believe they do the best they can and get testimony and so on.

Oliver L. Stone:

Yes, Your Honor.

Felix Frankfurter:

And let me recall the way Lord Mansfield did it.

He had dinner with merchants in London to find out what the understanding of the business community was.

But there is a difference — isn’t there a difference when you deal with an industry for which Congress has set up a regulatory scheme and has set up a regulatory body as it were to provide a regime in the first instance for problem that arise within that industry.

Oliver L. Stone:

Your Honor —

Felix Frankfurter:

The Court can’t do anything in an ordinary commercial contract that the case comes before any of the judges, Judge Winfield or Judge Murphy or whoever it is in the Southern District.

All he can do is to do the best that he can and hear witnesses.

Oliver L. Stone:

That’s correct.

Felix Frankfurter:

There is no other way of — of enlightening him except through books and witnesses and his own good judgment.

Oliver L. Stone:

Right.

Felix Frankfurter:

When you come — to the Federal Power Commission, the ICC and all the rest of them, then you’ve got an intervening body whose job it is to inform itself about those things.

Oliver L. Stone:

Correct, Your Honor.

Might I say about three things in connection with that.

First of all, this case went first to the Federal Power Commission.

This is not a case of primary jurisdiction where the suit was first filed in court and then the question arose as to jurisdiction.

This question was here before the Commission.

It construed by trying to interpret the language of these words on the face of the words.

It’s been through the Commission but more important, speaking of this being —

Felix Frankfurter:

May I — may I interrupt you?

Has the Commission construed these words?

Oliver L. Stone:

Oh, certainly.

Charles E. Whittaker:

Or did they do anymore?

Isn’t that all they did?

Oliver L. Stone:

That’s all they did.

Charles E. Whittaker:

Now, then, if they did it, couldn’t there be a review of their judgment on that question of law by the Court of Appeals?

Oliver L. Stone:

I think absolutely, Your Honor.

Charles E. Whittaker:

And is the Court of Appeals rubber-stamped?

Oliver L. Stone:

I think not, Your Honor, because I think it presents purely a question of law.

The Court of Appeals could review it as a question of law.

And when so doing, the Court of Appeals certainly would apply the usual rules of construction —

Felix Frankfurter:

I know of more — I know —

Oliver L. Stone:

Now, but I — I’d like to finish answering your question, Your Honor.

Speaking about the policy here, the policy of the Natural Gas Act is that parties still have the right to make private contracts.

Now, Your Honor, tariffs were on file with the — with the Interstate Commerce Commission for years and years.

When, in 1922, this case — this Court decided Merchants’ Elevator and it said “Even though this is a tariff, yet, since the words are used only in their normal ordinary sense, we, the Court, can read them just as well as anyone else.”

And in 1937, they said the same thing in the Brown & Sons Lumber company case which actually, Your Honor, was a judicial review case.

Now, Merchants’ Elevator in 1922 was a case of primary jurisdiction.

But the Brown & Sons Lumber case, and these cases are cited and discussed in our brief.

Oliver L. Stone:

It was actually a — a judicial review case.

Felix Frankfurter:

But I — I know lower courts are very sensitive about not wanting to be rubber stamps but as Judge Learned Hand with characteristic of candor said to a large extent that that’s what they want to call it, that’s what they want to call it in the distribution of power between the agencies and courts is a limit to the extent that they can review.

Oliver L. Stone:

That’s absolute —

Felix Frankfurter:

They must respect a determination if it’s within the power of the Commission to make the determination and not set even their own superior with them against that.

Oliver L. Stone:

Your Honor, that is true in some cases.

And maybe, I can partly answer your question by saying what we do not contend for in this case.

We do not contend that every time a federal administrative agency resolves a question which might be classified as one of law, that its conclusion is fully judicially reviewable.

We do not contend that.

And I think that this Court’s decision in the Western Pacific case probably indicates that you can.

Our position is this.

When a matter goes first to the Federal Power Commission or any other administrative agency, and when that matter involves a question of law and when the federal agency views it as such and decides it as it thought a court would have decided it and bases its conclusion upon court decisions and does not bring into play and not does the issue permit the bringing into play of specialized issues, then we believe the agency’s finding is fully and completely reviewable by the Court.

Felix Frankfurter:

If you — if you’re right that this is — has no specialized meaning, but I like to add one more word of our interchange, I think to talk about the construction of a contact being a question of law is, itself, a very unfortunate way of putting a simple fact that it’s for courts and not for jurists construed (Voice Overlap) —

Oliver L. Stone:

There isn’t any question about that, Your Honor.

Felix Frankfurter:

That’s all there is to it —

Oliver L. Stone:

Traditionally —

Felix Frankfurter:

To call it — to call it a question of law is just giving a nice big evasive term to — to a very different process.

Oliver L. Stone:

Unquestionably, that — that’s true, Your Honor.

For years, it’s been a question for the Court and not to the jury —

Felix Frankfurter:

That’s all there is to it.

Oliver L. Stone:

Yes.

But the fact remains no matter what you call it.

This was a question that the Court of Appeals could determine.

I — I’m not set on calling it law of fact or anything else but —

Felix Frankfurter:

Would you say — would you say that the — that the construction of the Commission for (Inaudible) wasn’t allowable one?

Oliver L. Stone:

I think it’s not, Your Honor.

Felix Frankfurter:

Not.

Oliver L. Stone:

In fact, one of our —

Felix Frankfurter:

(Voice Overlap) —

Oliver L. Stone:

— points in here is not reasonable.

Felix Frankfurter:

Well, if — you are in quiet in the clear if that’s what — if you’re right about that.

Oliver L. Stone:

I hope I’m consistent.

Felix Frankfurter:

Well, you better inconsistent here, I guess.

(Inaudible)

Oliver L. Stone:

[Laughs]

With reference to the Memphis case that this Court decided 1958, Your Honors, I shall not presume to persuade this Court what it meant when it so recently decided that case.

If what this Court held in the Memphis case controls this case, then just so be it.

There’s nothing I can do about that.

All I can give is my understanding of it.

Now, I’d give it very briefly.

In the Memphis case, as I read it and as I read the briefs, it seems to me that there, the Federal Power Commission construed language which in effect it had written itself.

This Court then said that was a matter within the special competence of the Commission.

But even then, this Court went on to say that we have scrutinized the record and we find the Commission’s conclusion to be aptly supported both factually and legally.

That’s all I can say about Memphis.

The examiner reached a different conclusion from the Commission.

Oliver L. Stone:

He did, yes, Your Honor.

The examiner held that the Atlantic pipeline agreement of February 1954 did activate the Shell clause.

In fact, he said that the words are just so clear.

To miss their meaning is just to disregard the — the words of the English language.

He held for Shell in effect.

The Federal Power Commission reversed his holding.

And they thought the word was so clear, it was the other way.

Oliver L. Stone:

That is correct, Your Honor.

And the Court of Appeals —

Oliver L. Stone:

But now, you see —

— comes along.

(Voice Overlap) —

Oliver L. Stone:

I — I want to come to that —

— clear in the other way.

Oliver L. Stone:

But — but this is a good time.

It is the question of their saying the words were so clear.

Oliver L. Stone:

They — as I see the Commission’s order, they read into this Shell clause the word “new” and that was bad enough.

But then, when they got to looking at this other contract, the contract between Atlantic and the pipeline that was made in 1954, then they said that was not a new contract.

It was merely action taken pursuant to a preexisting contract.

Hence, it did not activate the Shell clause.

Well, I — I’ll show in a moment, I hope.

But it seems to me these three tribunals, the examiner and the Commission and the Court, all reaching different results or some — or at least two of them reaching the same result, somewhat different reasons it seems to me one has to recognize this is a debatable question.

Oliver L. Stone:

There isn’t any question about it.

Certainly it’s debatable.

Well, if it’s a debatable question then, what — where do you think the — where do you think the —

Oliver L. Stone:

You’re speaking now in the judicial review issue of the substantive —

Yes.

Oliver L. Stone:

— issue, Your Honor.

I’m talking about the substantive issue as it relates to the question as to whether the Commission here was — the Court was entitled to override the Commission.

Oliver L. Stone:

Oh, let’s assume for the moment it is a debatable issue, Your Honor.

It’s not the resolution of every debatable issue that gives finality to the administrative finding.If that were the case, to me, judicial review wouldn’t mean very much.

Now, I grant you that where the Commission under Section 19 (b) of the Gas Act, where the Commission makes a finding of fact that is supported by substantial evidence, that may be conclusive.

But if we are correct in our major premise that this was a question, a judicial question, let us put it that way instead of a question of law, that — it’s a judicial question.

The — the examiner who was a lawyer construed it one way.

The Federal Power Commission looked at it.

It construed it in another way.

The Court of Appeals read it and it construed it another way.

But it was a question of law and the way the administrative agency conclude — construed it was reviewable by the Court.

And it — as I started out, it comes down to a question of who is better qualified to read these things.

Oh, yes.

Oliver L. Stone:

I certainly admit that to reasonable men or reasonable minds might read it different way..

I — I can’t read it that way.

Do you claim that the Commission made any errors of law other than reaching a wrong conclusion or did it reach — reach the wrong conclusion or reach a conclusion it did by virtue of applying errors — applying principles that you claimed were inadmissible principles?

Oliver L. Stone:

They misconceive the law, Your Honor.

I think, first of all, they misread the Shell contract.

But primarily, they said this other contract in effect was not a new contract as they put it but was merely action taken pursuant to an old contract.

Oliver L. Stone:

Now, on the substantive issue here, it doesn’t make any difference under the Shell clause as we read it.

How the other contract comes about whether it results from an old contract or a new contract or anything else, the clause provides that if, after this given date, the buyer shall enter into a contract providing for the purchase by if — of gas within a given field at a — and if the price thereunder is higher, She is entitled to it.

I believe, Your Honors, that Atlantic and the pipeline could have had a firm contract over here for 20 years, let’s say, and had a fixed price for 20 years.

And in 1954, Atlantic may have written to the pipeline for reasons of their own.

They said, “Well, this fixed price isn’t right.

Let’s sit down and see if we can negotiate a new price.”

And they got together and they negotiated a new price.

That, to me, would be entry into a contract providing for the purchase of gas at a higher price.

And we submit that is what the Shell clause means.

And if it’s not so construed, one of its principal purposes is defeated.

Felix Frankfurter:

Let’s see if I understand your argument, Mr. Stone.

It is this, that the Power Commission necessarily had to construe the contract no matter what — what — into what pigeonhole of — of authority as the Commission in court on the place of it.

It necessarily had to construe the contract, is that right?

Oliver L. Stone:

That’s correct, Your Honor.

Felix Frankfurter:

It did give a construction.

Oliver L. Stone:

It did.

Felix Frankfurter:

But you say the construction that it gave was not to a technical specialized use of English words but ordinary use of English words.

Oliver L. Stone:

Precisely.

Felix Frankfurter:

If it’s been technical or if they had established that the practice in the trade was that it mean — meant thus and so, then it would be withdrawn from judicial scrutiny and revision.

Oliver L. Stone:

I think in that case, we might have a different situation, Your Honor.

Felix Frankfurter:

But you say here that this is not an — an adjudication binding on the Court because one was made by the Commission but merely that it — in order to do its job, it has to construe the contract but that did not foreclose the Court of Appeals from getting its construction any more than the construction of a district court who foreclosed the Court of Appeals from saying that was a wrong construction, is that —

Oliver L. Stone:

Precisely.

Felix Frankfurter:

— is that the sum of your argument?

Oliver L. Stone:

Precisely.

If I might pass now —

Could I ask —

Oliver L. Stone:

Excuse me.

— you one more question?

Mr. Correa said there were some 500 of these contracts that had clauses comparable to this.

If I understood him correctly, does the Commission construe any of these contracts before?

Oliver L. Stone:

I do not know of any order or decision by the Commission construing a clause like this.

There are two cases that went to the Tenth Circuit dealing with escalation clauses but they dealt with something else.

Your Honor, I — I hesitate to say they have never done it.

They may well have.

As far as I know, they have not construed this clause.

Now, there may be some clauses in the general arena of this that they’ve dealt with, but sorry, I — I just don’t know.

Well, from the standpoint of the regulatory body, you — my point of my question is uniformity has some — has some factor in this business.

Oliver L. Stone:

Uniformity is unquestionably a factor.

But, Your Honor, as to uniformity, when it’s a question of law, and here, again, I refer and — and think our case is within the principle of the Merchants’ Elevator case, uniformity, when your concerned with — with questions of law is a matter that can be fixed by this Court because that question can come here.

So there may be any (Inaudible).

I know there are thousands upon thousands of contracts with the Federal Power Commission.

But actually on, as I view it, it’s just as important to have the — the courts review the Commission’s conclusion and it might be more so when there are all of these clauses than if there were not any.

Well, maybe one or two.

Charles E. Whittaker:

Well, at all events, Congress has provided for judicial review of Commission orders.

Oliver L. Stone:

Yes, Your Honor.

Charles E. Whittaker:

Now, if there’s anything that the Court of Appeals can review, it’s the correctness of determinations not involving facts but those subject to decision only as once of law or by the Court.

Isn’t that right?

Oliver L. Stone:

Certainly.

It seems that way to me, Your Honor.

Charles E. Whittaker:

Now, in this case, can you tell us with assurance, did the Commission contend that there was some special significance to be given to these words in the trade or did it just interpret these contracts on their plain ordinary meaning of the words?

Oliver L. Stone:

Your Honor, I am positive in my mind.

And if I’m in error, the petitioners can correct me.

The Commission gave no weight, no consideration whatsoever to the peculiarities of the words used in the Shell contract.

It is true there were other contracts in evidence by Shell.

And the Commission said, “Well, the way those contracts will work — you see in these other contracts, they had “favored-nation” clauses that would apply whenever the pipeline paid any higher price.

So the Commission said, “Shell, if it wanted its clause here to cover every higher price, could have used that language,” but that overlooks one of the fundamental significant points that we have always made.

We do not contend that our clause is all inclusive and that it covers every increase.

We content it only covers higher prices resulting from entry in to a contract by the pipeline.

We admit it’s a limited clause.

So saying that here are some clauses that are all inclusive, to me, does not mean that every other clause is all exclusive but one.

Oliver L. Stone:

Now, to get back to your question, Your Honor, I am firmly convinced the Commission did not base it’s conclusion upon peculiar words because you can look at — actually what the Commission itself did in the Commission’s original —

Charles E. Whittaker:

Isn’t that the — isn’t that the only way we have to determine what it give consideration to, that is from what it said?

Oliver L. Stone:

That’s the only way I could do it, Your Honor.

As a matter of fact, in this case, the staff counsel before they examine even contended that the Commission didn’t have jurisdiction to resolve this interpretation question because it was one of law for the courts.

But let us look at how the Commission treated.

If Your Honors would like to see it, on page 132 of the record appears — that’s a part of the Commission’s original order.

In about one-third of the way down, the Commission says “the question before us.”

This is in the record, I — I — not the brief, the record, page 132.

They say, “The question before us is whether the letter agreement constitutes a new contract for the purchase of gas or whether it merely represents action taken pursuant to the preexisting 1943 agreement.”

Then they say, “We believe the latter is the correct view.”

Then skipping down about six or seven lines, the Commission says “The cases show, the cases show that a contract will not fail for want of certainty where a future price is to be fixed by arbitrators.”

Then the Commission goes on to discuss the question not of the Shell clause.

They apparently assumed.

As far as I can read the Commission’s order, they assume or interpolate the word “new” into the Shell clause.

And then they say this other agreement in 1954 between the pipeline and the Atlantic was not new because it was action taken under a preexisting contract.

And the reason for that they say is that the old Atlantic contract first made back in 1943 continued through out because it contained an arbitration clause.

And they said the arbitration clause made everything all right.

Now, Your Honors, under the Shell clause, I repeat, first of all, the facts remains, these parties did not arbitrate.

They entered after extensive negotiations that extended over five and a half — a period of five and a half months.

As the witness testified, they haggled back and forth and they finally reached an agreement on price.

One side said this is as high as we are going and the other side said, “Well, we will see if we can get that agreed too.”

And then they entered into their agreement.

We believe, Your Honors, that the Federal Power Commission’s construction of the Shell clause and the legal conclusion that it reaches with respect to this contract made between Atlantic and the pipeline would largely defeat one of the principle purposes of the Shell clause.

This Shell contract contains a rather comprehensive pricing arrangement.

The contract has one of the so-called fixed step-up clauses under which the price will go up in definite amounts at definite dates.

It also has one of the so-called price redetermination clauses but that doesn’t come into effect until after the first 10 years.

Then it has this “favored-nation” clause.

Now, that “favored-nation” clause appears at page 66 of the record.

And it says that if, after the given date, the buyer shall enter into a contract.

Now, Your Honors, the petitioners give a lot of emphasis not — to the next phrase providing for the purchase by it of gas produced within a given fee.

Oliver L. Stone:

What that language means, we believe, what the draftsman did, that language is merely descriptive of the commodity that the other contract had to govern.

A man preparing this clause said, “Well, you have to run into another contract.”

It would have to be a contract dealing with something.

It couldn’t be crude oil or something else.

It had to be a contract providing for the purchase of what?

Of gas.

Had they there intended to describe the type of contract?

I submit they would have said, “Had they entered into a new gas supply contract?”

but they didn’t do that.

Now, we go on down a little further.

Hugo L. Black:

What do you think it — what do you —

Oliver L. Stone:

Sir?

Hugo L. Black:

— what do you think those words mean “enter into a contract”?

Oliver L. Stone:

Enter into a contract?

Hugo L. Black:

Yes.

Oliver L. Stone:

I — I think they mean, Your Honors, whenever after the result of a negotiated agreement, the pipeline comes up with a higher price to another producer within the 50-mile radius.

Hugo L. Black:

Well, you think they have —

Oliver L. Stone:

Now, you can have entry into —

Hugo L. Black:

— you think they have entered into a contract after these have occurred.

(Inaudible)

Oliver L. Stone:

Oh, there is no question about that.

I think, yes, Mr. Justice Black.

They must do that.

Hugo L. Black:

Well, that would be — I don’t understand the whole — the argument about the word “new”.

Why wouldn’t be a new contract?

Oliver L. Stone:

Well, it would be new in the sense —

Hugo L. Black:

(Voice Overlap) —

Oliver L. Stone:

— of time.

It would be new in the sense of time in that it would be subsequent but it would not be new or it need not be new in the sense that the Federal Power Commission construed it.

Now, the Federal Power Commission said, “Everything would have — let me go back a moment.

Oliver L. Stone:

As I understand the Federal Power Commission’s order, if the old Atlantic contract had not contained an arbitration clause but had contained merely an agreement to agree clause and then these parties had agreed and carried out the agreement to agree, I think under the Commission’s reasoning, they would have said, “That meets our new contract because there wasn’t an enforceable binding relationship between the parties and you supplied it when you made the agreement.”

Now, I fully agreed that it has to be new but in the sense of time subsequent to a given day.

It does not have to be new in the sense of covering a new supply of gas.

Hugo L. Black:

You mean if — if it was a modification, it would not be a new contract or would be?

Which?

Oliver L. Stone:

Well, it might be a new contract.

I think it — I think it would satisfy this clause.

Your Honors, let’s — let me see if I can answer that by an example.

Suppose — and I — and I give one I — I mentioned a moment ago.

Suppose in the Atlantic contract, that’s the other contract, these parties had a fixed contract for 25 years at a fixed price, no escalation clause, no agreement to agree clause, nothing like that in it, just a straight fixed price.

And in 1954, the seller went to Atlantic and said, “Look, I think this price is too low.

Let’s see if we can do something about it.

Let’s see if we can agree upon a new price for it.”

So they negotiated and they haggled back and fourth and they finally agreed upon a new price, and they entered into a letter agreement.

Now, that, Your Honor, I submit, would be entry into a contract dealing with natural gas within the prescribed area at a higher price, and I think that would have activated our clause.

Let me try to give another example that might demonstrate what I’m — I’m trying to say, and I think in part may answer what petitioner said with reference to this other contract covering these various elements of quality and quantity.

Now, let us suppose that in 1954, when the pipeline and Atlantic made this letter of agreement, suppose after they have agreed upon that new price of 12.5 cents, instead of merely writing a letter and saying — and signing the letter, supposed they had said, “Well, this whole agreement is — is dirty or torn up.”

But for reasons of their own they said, “Let’s just reproduce the old contract word for word for word except this new price we’ve agreed upon.”

Now, that would have contained each and every one of those elements.

And if you will then concede that that meets the Shell clause, and unless you are going to permit form to govern over substance, that’s precisely what they did in 1954 when the pipeline and the Atlantic, after these extensive negotiations, just entered into a letter confirming their contract.

We submit, Your Honors, that when the petitioner say there are only two types of these escalation clauses, if — if I understand their position correctly, they say the Shell clause is a so-called “new” or “future type” of clause, and it can only be activated when the pipeline goes out and enters into a new contract covering a new supply of gas.

As I understand that, they say every one of these clauses is either one extreme, that is it applies to every higher price or it’s the other extreme where it applies only when the pipeline goes out and buys a new supply of gas.

That, Your Honors, would leave no middle ground, no in-between ground.

Suppose parties want to make another agreement like the Shell clause, here, Shell was not interested in its price increasing when the price increased to the pipeline under these fixed step-up clauses in a preexisting contract.

Shell and the pipeline had made their own bargain in that regard.

But certainly, parties are to be able to make other contracts.

We submit the Commission’s conclusion and the petitioners’ position here would leave no middle ground on that.

One other thing in connection with those clauses, I would like to point out that this record shows that at the time of the Shell contract in 1951, the pipeline was also the purchaser under the neighboring Atlantic contract.

Now, as the purchaser under that contract, that pipeline certainly knew of this clause in the Atlantic contract which was an agreement to agree clause.

And certainly, it was not a price redetermination clause as the petitioners indicated.

Oliver L. Stone:

The party said they would agree upon price.

All price would be fixed by arbitration.

But at any rate, the pipeline certainly knew of that clause at the time it, the pipeline, prepared the Shell clause.

Under those circumstances, isn’t it reasonable to assume that if the pipeline did not want its price to increase when the Atlantic price went up under that agreement to agree clause, it would have said so.

Another fact that we think of extreme significance in this case is this.

It’s stated in the briefs of the Government and of the pipeline that it’s very strongly to the benefit of the pipeline to limit these “favored-nation” clauses as much as they possibly can.

And I can’t again say that.

Maybe it is.

It’s also shown in this record that the pipeline prepared this clause.

It is further shown in this record at the time the pipeline prepared this clause, it was the purchaser under the Atlantic agreement.

Now, if it had been the intention of the parties at that time in 1951 to limit this Shell clause, and if the limitation of the Shell clause in that regard was so all important to that pipeline, and since that pipeline prepared that clause, isn’t it reasonable to assume that it would have done what some other pipelines have done and made it clear that the Shell price would not increase except when the pipeline bought new gas under a new supply contract.

Now, Your Honors, we have shown in our brief a typical contract at page 33, near the bottom of page 33 of the Shell brief and some hearings on the Harris Bill which was to amend the Natural Gas Act in 1955.

There is shown there a “favored-nation” clause.

And I would just like to read two or three lines from that.

Your Honors can — can follow it because it shown as 3A down at the bottom of that page.

“Buyer agrees that if during the term of this contract, it purchases from producers new gas from new sources of supply,” and then it goes on, “in a given area that it will give the same price to the seller”.

Under the circumstances of this case, we respectfully submit, Your Honor, had that been the intention of the parties when the pipeline prepared the clause, it certainly would have used language along that line, perhaps not that specific language.

Earl Warren:

But if it wanted to accomplish the opposite, why wouldn’t they just say buyer agrees that if during the term of this — of this contract, it purchases from producers in this area any gas at — at a price exceeding that provided for in this contract that the — that the buyers would have a benefit of it?

Oliver L. Stone:

Well, Mr. Chief Justice —

Earl Warren:

What — what

(Voice Overlap) —

Oliver L. Stone:

I think that’s substantially what our clause says when you say if it purchases in this area.

Now, suppose you put that in that clause, and I come along to construe it and I read into it, makes a new purchase in this area, the very word you used, Mr. Chief Justice —

Earl Warren:

No, I didn’t use that word.

Oliver L. Stone:

Well, I — sir?

Earl Warren:

I — I said if they — if they purchase at a higher price from any — anyone during the life of that contract in that area, then — then the purchaser is entitled to the — to the benefit at a higher price.

Oliver L. Stone:

Yes.

Well, even then, someone could say — when you use the words “if they purchase at a higher price” would mean, if they go out and make a contract under which they purchase, I would agree that that would not be the interpretation to me.

Your Honor, let me say this.

Hindsight would certainly dictate, if you told me today, “Go out here and prepare a clause now,” that you will be positive will cover that situation.

Oliver L. Stone:

I am not now saying that someone could not have written it differently so that you would eliminate all doubt.

I —

Earl Warren:

But you were — you were just saying if they meant to do the other, they would have — they would have done what — what this —

Oliver L. Stone:

Right.

Earl Warren:

— prescribed.

I say why isn’t just as reasonable to say if they intended what — what you say that they would have put it in — in this clear language —

Oliver L. Stone:

Well —

Earl Warren:

— that that present result?

Oliver L. Stone:

For two reasons, I believe, Your Honor.

First of all, they prepared the clause.

And secondly —

Earl Warren:

Well, this — this is not two people who — who —

Oliver L. Stone:

Our grant is not an insurance —

Earl Warren:

(Voice Overlap) —

Oliver L. Stone:

— policy.

All right.

Earl Warren:

— person and another one

(Voice Overlap) —

Oliver L. Stone:

But the fact remains, Your Honor, that still I’m writing the clause but the more important thing is this.

I believe it’s only reasonable if it’s so highly important to me as the pipeline now says it is that I get only one of these highly restrictive clauses, then I believe that when I drafted the clause, I would have made that position clear.

And what I’m trying to say is — is if the parties had so intended, and since that is so important to the pipeline, it’s only reasonable that a man is going to do something to benefit himself when he thinks it’s so all important, at least I believe that.

And I believe the pipeline would have done that.

Earl Warren:

Rather important to the Shell too, wasn’t it?

Oliver L. Stone:

It’s rather important to us.

We concede it, Your Honor, and here was a difficulty in the clause.

It was not our agreement that our price go up in every situation.

We had negotiated out on our own fixed step-up clause.

So our bargain with the pipeline was that there would be some limitation in this clause.

We fully concede that, Your Honor.

But we say the fact that the parties intended some limitation does not mean that you have to construe it as though it’s fully limited and applies only when the pipeline goes out and buys a new supply of gas for this reason.

Oliver L. Stone:

It seems to me only reasonable that when you put these escalation clauses in these contracts, the parties, of course, thinking about price, and the testimony — the Shell testimony, I believe, are fair and reasonable reading of it, leads me to believe that Shell was seeking some equality of price when the pipeline went out and made a negotiated agreement.

Now, Your Honor —

Earl Warren:

May I ask — may I ask this?

What — what limitations do you concede this clause carries — carries with it other than one — geographical one?

Oliver L. Stone:

Oh, yes.

It would certainly not apply in the case where the pipeline already had a contract but had one of these fixed step-up clauses in it and the price automatically went up under that pre-fixed clause.

Am I making that clear?

Earl Warren:

I think I know what you mean, yes.

Oliver L. Stone:

I can — I can give you a demonstration —

Earl Warren:

No, I just — I —

Oliver L. Stone:

— if you like.

Earl Warren:

— I get you.

Oliver L. Stone:

The second thing.

Earl Warren:

Yes.

Oliver L. Stone:

In any case where the pipelines price under an existing contract would be increased without the parties having to come to a new meeting of minds, I do not believe our clause would apply.

For instance, if they had something that was just presented a mathematical problem, if you had to add up three things and divide it by three, I would not contend here or elsewhere that that constituted entry into a contract providing for gas with a higher price because they already had their contract.

Now, those two situations and the general one, I’ve tried to mention —

Earl Warren:

Yes, I see.

Oliver L. Stone:

— Mr. Chief Justice.

But what I was just about to say was Shell would be just as intractably deprived of this equality of price in the general area by virtue of this 1954 agreement which was a negotiated agreement under an existing contract as we would be deprived of equality of price if the pipeline went out and bought a new supply of gas from an entirely new purchaser.

Isn’t that sort of overlooking one of the primary purposes of this clause?

Your Honor —

Hugo L. Black:

Who did you say drew this contract?

Oliver L. Stone:

The record shows, Your Honor, that the pipeline, the purchaser —

Hugo L. Black:

Well, I mean, who?

Who for the pipeline, a lawyer?

Oliver L. Stone:

Oh, well, the record doesn’t show, Your Honor.

I’m sorry I don’t know who drew it.

Hugo L. Black:

You don’t know whether the lawyer or not?

Maybe it wasn’t?

Oliver L. Stone:

If you want me to guess, I can.

I [Laughter] — but the record doesn’t show, and I’m sorry I don’t know the answer, Your Honor.

Tom C. Clark:

Do you — do you use it now in saying the language?

Oliver L. Stone:

Sorry?

Hugo L. Black:

Does She’ll uses the language that they have a special (Voice Overlap)

Oliver L. Stone:

Well, you see, normally, the pipeline has prepared these contracts.

I know — Mr. Justice, I know of no other Shell contract that has this specific language in it.

There maybe one or two but I’m familiar with quite a number.

I know of none that has that specific language in it.

Tom C. Clark:

That — that probably indicates they wanted to do something different, doesn’t it?

Oliver L. Stone:

Oh, there isn’t any question.

They wanted to place a limitation upon.

Hugo L. Black:

But they wanted to do something different, I suppose, from what they did in their contracts, I gather, from the fact that this is the only one they have approved.

Oliver L. Stone:

Well, now, I’m talking —

Hugo L. Black:

I don’t where that (Voice Overlap) —

Oliver L. Stone:

— about Shell.

Now, the pipeline may have many others.

As a matter of fact, I know they got at least one other like this but they may have any number of other contract like this.

Your Honors, the point about this matter, as I see it, certainly, there is in the industry but general understanding that you have “favored-nation” clauses and various types of other price escalation clauses.

But there is no set, fixed industry understanding that every “favored-nation” clause is either an all inclusive clause or an all exclusive clause but the one.

As far as I know, there is no such understanding.

I think everyone of these clauses depends upon its own wording.

That’s what our clause depends upon.

That’s all we are contending for.

We only want what it gives us and nothing more.

And we believe that’s the way the — the Commission looked at it, and that’s also the way the Court of Appeals looked at it.

Your Honors, there are other points covered in our brief.

The petitioners make a point of the fact that Shell was delayed somewhat in bringing to the attention of the pipeline our claim for it.

There are only two things important in that connection.

The clause calls for the pipeline to give Shell notice and that notices was never given.

Oliver L. Stone:

Secondly —

Tom C. Clark:

How — how long was (Inaudible)

Oliver L. Stone:

We filed out about the Atlantic contract in March, Your Honor.

We did not write to the pipeline until October of that year which was about seven months.

Now, the record will show, however, that we — Shell accidentally learned of the entry into the other contract.

We didn’t know about it.

We accidentally learned of it.

And then we had to scout around and get a copy of the other contract between the pipeline and Atlantic.

And then it was seven months — between seven months, between the time we learned until we wrote them.

Now, thereafter, there was another delay after the Federal Power Commission wrote back to us and said, “Explain why you’re claiming 12.5 cents.”

But as we explained in our brief, You Honor, negotiations were going during a quite a period of that time.

And also, you might recall the Harris Bill was up before Congress.

And we were hoping maybe we wouldn’t have filed anything but that didn’t turn out.

Therefore, Your Honors, we respectfully submit that the judgment of the Court of Appeals should be affirmed.

Mathias F. Correa:

If Your Honors please — if Your Honors please.

Two points very briefly.

Number one, despite all the argument that has been, it now emerges that there is no substantial dispute between the petitioner and the respondent as to the clause of the Shell contract.

Both agree that he calls for a post 1951 contract.

Both agree that it calls for a contract for the purchase of gas.

Both agree that it calls for a contract containing — containing terms as to quantity, quality, etc.

So the real question here is as to what was done under the Atlantic contract as to which (Inaudible) has been addressed except by myself?

And I note that the one thing that the counsel did say is he said, “Well, they haggled back and forth and agreed on a price and this is what the witness testified to.”

And that is precisely not what he testified to with great respect.

He testified that “We haggled back and forth and agreed on what prevailing prices were,” the — i.e.the standard of the contract.

And once we had agreed on that, that was it.

And further, the contract as the Commission points up, the Commission dealt with this and the Commission said, “Well, whether the — the standard in the contract was definite enough or not, we need not consider because it was backed up by an arbitration clause,” which meant that the standard — the applicability of the standard was assured in any event whether the parties agreed on its applicability or didn’t.

Now, we submit the authority’s allegiant for such a contract as our binding contract on both parties and binding not from the time when they applied their standard as called for by the contract that binding ab initio from the — to the original entry into the contract.

Could you state in two sentences what your position would be on this very difficult question, namely, what do you conceive to be the limits of the Court’s powers in reviewing the limit — the area within which a court, as you constricted, in reviewing a determination of the Commission on an interpretation of a contract?

Mathias F. Correa:

If it is a reasonable interpretation, the Court, as I understand the rules of judicial review in — in this situation, is bound to affirm it.

It does not have to be the reasonable interpretation in the sense that the Court would say, “If we were considering the matter de novo, this is the interpretation we would put up.”

And the question of whether there are particular matters in a particular contract that calls for expertise in a substantial sense is irrelevant on your point of view?

Mathias F. Correa:

No, sir.

I — I believe that that goes to the question of reasonableness which —

You mean that if the Court’s —

Mathias F. Correa:

— might exposes.

— brooding — a brooding expertise —

Mathias F. Correa:

Well —

— it comes (Voice Overlap) —

Mathias F. Correa:

— it’s — it — no, it’s a question of perfectly practical matter.

The Commissioner who’s been sitting — or this Commission which has been dealing with these contracts for 20 years can’t take all of its expertise when it has a particular one before it like a man would shed his coat, their expertise necessarily as part of their equipment.

They’ve seen these contracts over the years.

They’ve been dealing with them.

Hugo L. Black:

Well, what?

20 years?

Mathias F. Correa:

Yes, if Your Honor please.

Actually, it’s smaller.

I believe it’s 38, it goes back.

Now, if the Court please, I have one — only one other point, which I think my other client, at least for purposes of this argument, Louisville Gas and Electric Company would like me to make.

There has been much said about how the limitation of these clauses benefits pipeline companies.

Well, that’s true, but my client — my other client would like me also to point out the benefits to the consuming public.

Thank you.

Earl Warren:

Very well.