869 F.2d 560 (10th Cir. 1989), 86-1355, Zenith Drilling Corp. v. Internorth, Inc.

Docket Nº:86-1355, 86-1436.
Citation:869 F.2d 560
Party Name:ZENITH DRILLING CORPORATION, Plaintiff-Appellee/Cross-Appellant, v. INTERNORTH, INC. and Belnorth Petroleum Corporation, Defendants-Appellants/Cross-Appellees.
Case Date:March 10, 1989
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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Page 560

869 F.2d 560 (10th Cir. 1989)

ZENITH DRILLING CORPORATION, Plaintiff-Appellee/Cross-Appellant,

v.

INTERNORTH, INC. and Belnorth Petroleum Corporation,

Defendants-Appellants/Cross-Appellees.

Nos. 86-1355, 86-1436.

United States Court of Appeals, Tenth Circuit

March 10, 1989

Page 561

Burck Bailey (John Joseph Snider and David L. Kearney, also of Fellers, Snider, Blankenship, Bailey & Tippens, with him on the briefs), Oklahoma City, Okl., for InterNorth, Inc. and BelNorth Petroleum Corp.

Gary W. Davis (Denise Cotter Villani, also of Crowe & Dunlevy, with him on the brief), Oklahoma City, Okl., for Zenith Drilling Corp.

Before LOGAN, BARRETT and MOORE, Circuit Judges.

LOGAN, Circuit Judge.

This diversity action arises out of a contractual relationship between Zenith Drilling Corporation (Zenith), a contractor that leases oil rigs, and InterNorth, Inc. and BelNorth Petroleum Corporation (collectively InterNorth), two oil exploration companies. The district court granted summary judgment for Zenith on its claim for breach of contract and awarded damages of $6,014,131.47, plus post-judgment interest and costs. It granted summary judgment for InterNorth, however, on Zenith's claim for punitive damages. Both appeal.

In 1981, InterNorth entered into separate two-year contracts with Zenith for the exclusive use of Zenith's drilling rigs numbers 5 and 9. A dayrate charge of $7,800 and $8,200 respectively was provided for each day that a rig was in use and a standby charge, equal to the dayrate, would be made for each day a rig was not used. By mid-1982, oil prices had taken a nosedive, which resulted in significantly reduced demand for InterNorth's services. Thus, the rigs InterNorth had leased from Zenith were idle much of the time; yet, large standby charges still accrued.

Page 562

By a "Letter Agreement" (Agreement) dated September 27, 1983, the parties agreed to reduce both the dayrate and standby charges for the two rigs, to extend the lease term to allow InterNorth more time to cover Zenith's costs plus a stated profit margin on the two rigs, to allow other exploration companies to lease the two formerly exclusive rigs, and to credit InterNorth's payments for use of other Zenith rigs against InterNorth's obligations on the two rigs of the original contracts. In addition, the parties agreed that InterNorth would not be liable for standby charges when the rigs were leased to another company.

In October 1984, Zenith invoiced InterNorth for standby charges covering the period from September 1983 through September 1984, and in November 1984 invoiced InterNorth for the month of October. Zenith had, before this time, billed InterNorth for dayrate charges and apparently all invoices were timely paid. InterNorth, however, failed to pay the standby charges, which were calculated in accordance with the Agreement. InterNorth does not contest its liability for the standby charges or that it had not paid the invoices by their due dates.

In February 1985, Zenith notified InterNorth that it had decided to rescind the Agreement, and in March it sued InterNorth under the 1981 contracts. Zenith alleged that it was entitled to do so because InterNorth's failure to pay the standby charges constituted a material breach of the Agreement. Immediately after suit had been threatened, InterNorth paid Zenith for all the invoiced standby charges, plus 1 1/2% interest per month that the payments were overdue. Zenith returned the check uncashed. It later did accept payment, reserving its rights in this suit.

The district court granted Zenith summary judgment on the breach of contract claim. The court found that the Agreement merely conditionally modified the original contracts, displacing them only if InterNorth fully performed under the Agreement. The court then found that InterNorth committed a material breach of the Agreement, and by necessary implication from its holding, a material breach of the 1981 contracts, when it failed to...

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