B-126879, FEB. 28, 1956

B-126879, FEB. 28, 1956

TO THE HONORABLE SECRETARY OF THE INTERIOR:

REFERENCE IS MADE TO YOUR LETTER OF FEBRUARY 1, 1956, TRANSMITTING YOUR DEPARTMENT'S FILE IN THE MATTER OF THE PURCHASE OF TWO WELLHEAD DEHYDRATORS FROM BLACK, SIVALLS AND BRYSON, INC., BY THE BUREAU OF MINES, PURSUANT TO CONTRACT NO. 14-09-063-192, APPROVED JANUARY 6, 1955, AND REQUESTING OUR OPINION AS TO THE PROPRIETY OF MAKING PAYMENT FOR THESE DEHYDRATORS AT THE PRICE FIXED IN THE AGREEMENT.

THE CONTRACT IN QUESTION WAS AWARDED TO BLACK, SIVALLS AND BRYSON, INC. AS THE LOWEST BIDDER UNDER INVITATION NO. 6305-40, DATED OCTOBER 25, 1954, CALLING FOR QUOTATIONS ON TWO DEHYDRATORS TO BE USED AT TWO GOVERNMENT- OWNED GAS WELLS IN THE RATTLESNAKE FIELD IN NEW MEXICO. IT SHOULD BE NOTED THAT THE REQUIREMENTS ARTICLE OF THE SPECIFICATIONS SET FORTH IN THE INVITATION DID NOT SPECIFY THE VOLUME OF LIQUID TO BE SEPARATED FROM THE GAS BY THE DEHYDRATORS TO BE PURCHASED. HOWEVER, IT APPEARS THAT IN AUGUST 1954, A LETTER HAD BEEN ADDRESSED TO POSSIBLE SUPPLIERS BY THE BUREAU OF MINES IN WHICH IT WAS STATED THAT THE BUREAU PROPOSED TO PURCHASE EQUIPMENT FOR SEPARATING DISTILLATE AND WATER FROM NATURAL GAS AND THAT "FOR DESIGN CALCULATIONS, THE FOLLOWING WELL DATA MAY BE ASSUMED: ... 40 BBLS. WATER-DAY, 25 BARRELS DISTILLATE/DAY.' IT APPEARS FURTHER THAT, PRIOR TO THE AWARD OF THE CONTRACT, REPRESENTATIVES OF BLACK, SIVALLS AND BRYSON, INC. HAD VISITED THE FIELD AND HAD MADE SPECIFIC INQUIRIES REGARDING THE VOLUME OF WATER BEING PRODUCED BY THE TWO WELLS FOR WHICH THE EQUIPMENT WAS INTENDED AND HAD BEEN TOLD BY THE PETROLEUM ENGINEER OF THE BUREAU OF MINES THAT AT THE DESIRED RATE OF GAS PRODUCTION 47.6 BARRELS OF WATER WOULD BE PRODUCED DAILY BY EACH WELL. IT WAS UNDERSTOOD AT THAT TIME BY ALL CONCERNED AND IT IS NOT QUESTIONED NOW THAT THE EQUIPMENT OFFERED BY BLACK, SIVALLS AND BRYSON, INC. WOULD HANDLE UP TO 60 BARRELS OF WATER PER DAY AND THE DEHYDRATORS OFFERED BY THE TWO HIGHER BIDDERS, WHO SPECIFIED THE CAPACITIES OF THEIR EQUIPMENT, WERE PRACTICALLY THE SAME AS THOSE ACCEPTED IN TERMS OF WATER HANDLING CAPACITY.

THE TWO DEHYDRATORS PURCHASED UNDER THE CONTRACT WERE INSTALLED IN DUE COURSE AND ONE OF THEM HAS BEEN IN CONTINUOUS AND SATISFACTORY USE SINCE INSTALLATION. LATE IN JANUARY OR EARLY IN FEBRUARY 1955, THE WELL AT WHICH THE OTHER DEHYDRATOR HAD BEEN INSTALLED DEVELOPED A COMPLETELY UNEXPECTED AND UNPRECEDENTED FLOW OF WATER WHICH THE EQUIPMENT SUPPLIED BY BLACK, SIVALLS AND BRYSON, INC. WAS UNABLE TO HANDLE. BY THE COMPARATIVELY SIMPLE EXPEDIENT OF INSTALLING A FREE WATER KNOCKOUT UNIT, WHICH THE BUREAU OF MINES OWNED AND WAS NOT USING, BETWEEN THE WELL AND THE DEHYDRATION UNIT, THE DEHYDRATOR AT THIS WELL WAS ENABLED TO PERFORM ITS FUNCTION AND IS NOW OPERATING IN A SATISFACTORY MANNER. IT IS UNDERSTOOD THAT THE KNOCKOUT EQUIPMENT HAS A VALUE OF BETWEEN $500 AND $600.

YOUR INQUIRY RAISES THE QUESTION WHETHER THE FAILURE OF THE DEHYDRATOR TO COPE WITH A TOTALLY UNEXPECTED FLOW OF WATER AT ONE OF THE WELLS CONSTITUTES SUCH A BREACH OF THE CONTRACT AS TO DEFEAT THE RIGHT OF THE CONTRACTOR TO PAYMENT AT THE AGREED PRICE FOR THE UNIT INVOLVED, IN VIEW OF THE LANGUAGE OF PARAGRAPH 3 OF THE SPECIFICATION REQUIREMENTS THAT "ALL FREE LIQUIDS WILL BE SEPARATED FROM THE WELLHEAD GAS STREAM * * *.'

IT IS ABUNDANTLY CLEAR FROM THE RECORD, HOWEVER, THAT BOTH PARTIES CONTEMPLATED ONLY THE SEPARATION OF THE WATER ACTUALLY FLOWING AND EXPECTED FROM THE PARTICULAR WELLS FOR WHICH THE EQUIPMENT WAS PURCHASED, AND THAT THE PARTIES INTENDED TO SELL ON THE ONE HAND AND TO PURCHASE ON THE OTHER, THE EXACT EQUIPMENT THAT WAS DELIVERED AND INSTALLED, WITH FULL KNOWLEDGE OF ITS LIMITATIONS IN WATER-SEPARATING CAPACITY. THE MATTER IS SUMMARIZED BY THE FIELD SOLICITOR AT AMARILLO, TEXAS, IN HIS MEMORANDUM DATED AUGUST 5, 1955, AS FOLLOWS:

"* * * IT APPEARS FROM THESE FACTS THAT THE BUREAU KNEW EXACTLY THE CAPACITY OF THE UNIT IT WAS BUYING, AND HAVING ESTIMATED ITS REQUIREMENTS, CONCLUDED THAT THE UNITS WERE ADEQUATE. THE COMPANY ALSO KNEW WHAT WOULD BE REQUIRED OF THE UNITS FROM INFORMATION FURNISHED BY THE BUREAU AND FROM THE SALES OF THIS SAME TYPE OF UNIT TO OTHER OPERATORS IN THE AREA WHERE THEY WERE TO BE USED. EACH PARTY CONTRACTED IN GOOD FAITH AND BUT FOR THE VERY UNUSUAL AND UNFORESEEABLE HAPPENING OF LARGE INCREASES IN WATER PRODUCTION, EACH PARTY WOULD HAVE BEEN FULLY SATISFIED WITH ITS CONTRACT AND THE PERFORMANCE THEREUNDER.'

THE STATEMENTS CONTAINED IN THE FOREGOING QUOTATION ARE STRONGLY CONFIRMED BY THE FINDINGS OF FACT OF THE CONTRACTING OFFICER.

IN THE CIRCUMSTANCES HEREINBEFORE SET FORTH, IT IS OUR OPINION THAT, CONSIDERED FROM THE STANDPOINT OF THE INTENTION OF THE PARTIES WHICH IS THE CARDINAL RULE OF CONTRACT INTERPRETATION, THE AGREEMENT IN QUESTION HAS BEEN SUBSTANTIALLY PERFORMED BY THE CONTRACTOR. SEE W. C. SHEPERD CO. INC., ET AL. V. ROYAL INDEMNITY CO., 192 F.2D (C.C.A. 5TH) 710, 715, AND AETNA LIFE INSURANCE CO. V. PADGETT, 49 GA.APP. 666, 176 S.E. 702, 703. WHILE IT HAS FREQUENTLY BEEN SAID THAT THE FACT THAT UNFORESEEN DIFFICULTIES ARE ENCOUNTERED WILL NOT EXCUSE A PARTY FROM THE PERFORMANCE OF A CONTRACT OTHERWISE VALID, WE BELIEVE THAT THE RECORD HERE SUPPORTS THE VIEW THAT BOTH PURCHASER AND SELLER CONTEMPLATED THAT THE EQUIPMENT INVOLVED WOULD HANDLE THE REMOVAL OF APPROXIMATELY 40 BARRELS OF WATER PER DAY FROM EACH WELL AND THAT WHEN EQUIPMENT WHICH WOULD REMOVE 60 BARRELS OF WATER PER DAY WAS FURNISHED, THERE HAD BEEN SUBSTANTIAL PERFORMANCE OF THE AGREEMENT THE PARTIES INTENDED TO EXECUTE. THE RULE IS SUMMARIZED IN CHICAGO, MILWAUKEE AND ST. PAUL R.R. CO. V. HOYT, 149 U.S. 1, 14, 15 AS FOLLOWS:

"A PARTY MAY, BY ABSOLUTE CONTRACT, BIND HIMSELF TO PERFORM THINGS WHICH SUBSEQUENTLY BECOME IMPOSSIBILITIES, OR TO PAY DAMAGE FOR THEIR NONPERFORMANCE, AND SUCH CONSTRUCTION IS TO BE PUT UPON AN UNQUALIFIED UNDERTAKING WHEN THE EVENT WHICH CAUSES THE IMPOSSIBILITY MIGHT HAVE BEEN FORESEEN AND GUARDED AGAINST, OR WHEN THE IMPOSSIBILITY ARISES FROM THE ACT OR DEFAULT OF THE PROMISOR. BUT WHEN THE EVENT IS OF SUCH A CHARACTER THAT IT CANNOT BE REASONABLY SUPPOSED TO HAVE BEEN IN CONTEMPLATION OF THE CONTRACTING PARTIES, THEY WILL NOT BE HELD BOUND BY GENERAL WORDS, WHICH, THOUGH LARGE ENOUGH TO INCLUDE, WERE NOT USED WITH REFERENCE TO, THE POSSIBILITY OF THE PARTICULAR CONTINGENCY WHICH AFTERWARDS HAPPENS.'

WE CONCLUDE THAT IT WAS THE INTENTION THAT THE WORDS "ALL FREE LIQUIDS" AS USED IN THE SPECIFICATIONS WERE INTENDED TO BE CONSTRUED AS "ALL FREE LIQUIDS NORMALLY ENCOUNTERED OR REASONABLY ANTICIPATED" FROM GAS WELLS IN THE SAME PRODUCING AREA. SINCE THE CONTRACT HAS BEEN FULLY PERFORMED FORMAL AMENDMENT TO EMBODY THE INTENDED LANGUAGE WILL NOT BE REQUIRED, AND YOU ARE ADVISED THAT PAYMENT IN FULL MAY BE MADE TO BLACK, SIVALLS AND BRYSON, INC., AT THE PRICE FIXED IN CONTRACT NO. 14-09-063-192. REFERENCE TO THIS DECISION SHOULD BE NOTED ON THE PAYMENT VOUCHER.