Arkla Energy Resources v. Roye Realty & Developing, Inc.

Citations: 9 F.3d 855; 22 U.C.C. Rep. Serv. 2d (West) 155Docket: Nos. 91-7131, 7132

Court: Court of Appeals for the Tenth Circuit; November 2, 1993; Federal Appellate Court

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In a diversity action, Arkla Energy Resources (AER), a Delaware corporation, appeals a district court judgment unfavorable to it and the denial of its new trial motion regarding a breach of contract claim against Roye Realty and Developing Corporation (Roye), an Oklahoma corporation. AER and Roye had entered into a settlement agreement in February 1989, wherein AER agreed to pay Roye $2,935,000 for the right to purchase natural gas at a specified rate over a two-year period, with a total of 1.05 billion cubic feet (Bcf). Roye was obligated to deliver gas upon request, but AER did not make any requests until December 1989, after assigning its rights to Blue Jay Gas Company, a subsidiary of Arkla, on October 1, 1989.

Roye ceased performance on September 29, 1989, demanding assurances from AER and Blue Jay. Following assurances from AER, Roye still failed to deliver gas. AER's first requests for gas occurred in December 1989 and January 1990, but Roye could not meet the specified delivery pressures, resulting in no deliveries for January and only partial deliveries in February. Roye subsequently offered increased deliveries in March 1990, which AER rejected. Ultimately, AER received approximately 81% of the gas it was entitled to under the agreement by the end of the two-year term. 

AER initiated legal action in March 1990, alleging breaches by Roye for failed deliveries, while Roye counterclaimed, asserting AER breached the agreement's confidentiality clause by assigning rights to Blue Jay and sought $100,000 in liquidated damages.

The district court determined that Roye breached the agreement by failing to deliver gas in January and February but found that Roye's late offer to deliver up to 15,000 Mcf a day effectively cured the breach, resulting in no damages owed to AER. The court also ruled that Roye justifiably suspended performance and requested adequate assurances from AER and Blue Jay in October 1989. Regarding Roye's counterclaim, the court concluded that AER did not breach the confidentiality provision of the agreement. AER's motions for a new trial and to amend the judgment were denied, as was Roye's motion for attorney fees. AER is appealing the judgment and the denial of its post-judgment motions, asserting that the court erred by not awarding damages for Roye's breach and by permitting Roye to suspend performance. Conversely, Roye cross-appeals, claiming the court erred regarding the confidentiality provision and abused its discretion by refusing to award attorney fees. The appellate court affirms the district court's judgment, though it applies different reasoning regarding AER's inability to recover damages. The appellate court concludes that AER's failure to prove it suffered damages from the delayed gas delivery is key, characterizing the agreement as an installment contract under Oklahoma law, which requires separate acceptance of goods. The court supports the district court's finding that the agreement allowed for gas delivery in installments over a two-year period, rejecting AER's arguments against this classification.

Uncertainty regarding AER's request for gas delivery does not alter the fundamental nature of the contract, which permits delivery in daily lots at AER's discretion. An installment contract can allow deliveries based on the buyer's schedule, as established in Bevel-Fold, Inc. v. Bose Corp. The agreement remains an installment contract even if AER might never request deliveries. The separate deliveries to AER do not constitute distinct contracts; instead, they are part of a single overarching agreement. AER's requests do not represent separate offers to purchase, as the contract mandated delivery and payment terms. 

The district court determined that Roye's failure to deliver the required 3,000 Mcf per day in January and February constituted a breach of the settlement agreement. Although Roye later offered to deliver up to 15,000 Mcf per day, this was not a valid cure for the breach due to the lack of a previous tender or rejection. Instead, it was viewed as a tender of non-conforming installments. Despite this non-conformity not substantially impairing the value, section 2-612 obligates AER to accept the deliveries since the seller indicated a willingness to provide non-conforming goods.

Roye's offer constituted a valid tender of installments under section 2-612, despite the necessity of AER's cooperation for physical delivery. The letter from Roye indicated a clear intent to deliver gas, and performance was possible. AER could only reject nonconforming installments if the nonconformity substantially impaired their value and could not be cured. Since the district court found no substantial impairment and that time was not of the essence, AER was obligated to accept late installments unless they significantly impaired value. AER needed to present objective evidence of substantial impairment regarding the value of the goods. The court concluded that AER failed to prove that the delay would reduce the value of the gas. AER's claim that the higher price of settlement gas would negatively affect its weighted average cost of gas (WACOG) was countered by the court’s finding that the cost of gas was lower than AER asserted. The initial payment was treated as an option rather than part of the gas price. The court determined that the value of late shipments was not substantially impaired, as AER's costs remained the same regardless of when the gas was received. AER did not provide sufficient evidence to demonstrate a loss of demand for gas after February or that it could not sell the late gas. Despite testimony about low summer demand, AER had requested substantial gas amounts during that period. The district court's finding that the value of the installments was not substantially impaired was upheld.

The district court determined there was insufficient evidence to show that AER could not receive gas in later months, and this finding was not clearly erroneous. AER contended that the delay diminished the value of the installments by losing its contractual right to specify delivery dates. However, the court noted this argument merely reiterated that a delay breached the contract without demonstrating how the loss specifically damaged AER or reduced the gas's value. The court established that whether time was of the essence in the contract is crucial; if it were, a delay could substantially impair the installment's value. The district court found that time was not of the essence, based on extrinsic evidence and contract terms, a determination that must be accepted unless clearly erroneous. AER argued that the ability to set specific delivery dates implied that timing was essential, but the court clarified that a specific date does not inherently make performance by that date essential. Under Oklahoma law, time is not of the essence unless expressly stated in the contract. The settlement agreement allowed AER to set delivery dates but did not indicate that failure to meet those dates would justify treating the contract as breached or accepting late deliveries at a reduced value. AER failed to provide evidence that time is generally of the essence in gas purchase contracts. Therefore, the district court correctly concluded that the delay did not substantially impair the contract's overall value, obligating AER to accept late installments without entitlement to damages for non-delivery. However, AER may still seek damages for the delay under certain conditions outlined in Section 2-612.

The district court affirmed the denial of damages for AER due to delays in gas delivery from Roye. It reasoned that awarding damages for hypothetical lost profits would unjustly compensate AER for losses that did not occur, as AER rejected the late delivery and thus did not incur the claimed losses. The only actual loss was payment for gas not received, attributable to AER's own actions. Furthermore, AER failed to prove or quantify any potential damages related to accepting the late gas. 

Regarding the assignment to Blue Jay, AER temporarily assigned the right to receive gas delivery to Blue Jay, but Roye demanded assurances of performance and subsequently suspended its delivery. The district court supported Roye's decision based on UCC sections 2-609 and 2-210(5), which allowed Roye to seek assurances due to the assignment, regardless of whether there were reasonable grounds for insecurity. AER's argument focused on the lack of grounds for Roye's demand rather than the adequacy of assurances provided, which led to the court affirming that AER was not entitled to damages for non-delivery.

In Roye's cross-appeal, it claimed AER breached a confidentiality provision by disclosing the agreement to third parties, seeking $100,000 in liquidated damages and attorney fees. The court maintained that AER did not breach this provision unless proven otherwise, adhering to standards that require clear error for overturning the district court's conclusion.

Roye claims that the disclosure of the agreement resulted from its assignment to Blue Jay and the involvement of agents or employees from AER and other Arida entities. AEM employees acted as agents for AER and Blue Jay, with Hugh Maddox serving as an agent for both in the assignment to Blue Jay. Joseph “Tony” Bouso, another AEM employee, was responsible for administering the settlement agreement for both AER and Blue Jay. The district court acknowledged the formal separation between AEM, AER, and Blue Jay but emphasized that Blue Jay lacked employees, as Bouso managed the agreement for both organizations. The court determined that finding for Roye would prioritize form over substance. Despite Roye's claims of disclosure to Blue Jay and potentially others, the court focused on Bouso’s relationships, not considering AEM's role. It placed the burden on Roye to provide a sufficient record for appeal, ruling that any uncertainties favored AER. The court concluded there was no breach of confidentiality by Bouso, as he did not disclose any information to others, and Blue Jay had no employees for him to share details with. Regarding attorney fees, Roye's post-judgment application was denied by the court, which found no party had prevailed under Oklahoma law, citing an Oregon case that stated fees should not be awarded if neither party prevailed. The determination of the prevailing party falls within the trial judge's discretion, even though an award to a prevailing party is mandatory under Oklahoma law.

The award of attorney fees under section 936 is subject to the trial court's discretion, with the potential for reversal only if there is an abuse of discretion. A prevailing party must have succeeded on the merits and only one party can be deemed the prevailing party—defined as the one with the most favorable outcome or affirmative judgment. If both parties defend against substantial claims without receiving an affirmative judgment, the court may conclude that neither has prevailed. In this case, the district court ruled in favor of both Roye and AER on their respective claims, with neither side obtaining an affirmative judgment, and found that Roye had breached the contract. Thus, the court did not abuse its discretion in determining that neither party was a prevailing party under section 936.

Roye further contends that AER is estopped from claiming Roye is not the prevailing party due to AER's failure to object to the taxation of costs in a previous bill filed by Roye. However, collateral estoppel does not apply to motions for attorney fees as they are part of the same action, and the determination of the prevailing party under Rule 54(d) does not equate to the definition under section 936.

Lastly, regarding Rule 68, which stipulates that if the judgment is less favorable than an offer made, the offeree must bear costs incurred post-offer, the district court's denial of attorney fees under this rule is subject to affirmance unless an abuse of discretion is shown. Prior to trial, Roye made an offer concerning a specific gas quantity, which AER challenged for its ambiguity, impacting the evaluation of the offer's value.

The district court determined that Roye's offer was ambiguous and, as a result, Rule 68 did not mandate the awarding of attorney fees to Roye. The court stated that an ambiguous offer cannot be the basis for invoking Rule 68, referencing Radecki v. Amoco Oil Co. The district court found that Roye failed to clarify the value of its offer adequately, which was essential because the offeree must understand what is being offered to make an informed decision about accepting or rejecting it. Consequently, the district court acted within its discretion by denying attorney fees under Rule 68. The court affirmed its judgment in favor of Roye on AER’s claims, denied AER’s motion for a new trial, ruled in favor of AER on Roye’s counterclaim, and declined to award attorney fees under both Oklahoma and federal law. Additionally, it was noted that AER is a division of Arkla, Inc., and Blue Jay is a wholly-owned subsidiary of Arkla, with Mr. Bouso involved in nominations for both entities. Section 936 stipulates that in civil actions related to contracts for the sale of goods, the prevailing party is entitled to reasonable attorney fees, which the court will determine.