Laclede Gas Co. v. Amoco Oil Co.

• Decision Date: 10 July 1975
• Docket Number: No. 74-1957,74-1957
• Parties: 17 UCC Rep.Serv. 447 LACLEDE GAS COMPANY, doing business as Midwest Missouri Gas Company, Plaintiff-Appellant, v. AMOCO OIL COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 33

522 F.2d 33

17 UCC Rep.Serv. 447

LACLEDE GAS COMPANY, doing business as Midwest Missouri Gas Company, Plaintiff-Appellant, v. AMOCO OIL COMPANY, Defendant-Appellee.

No. 74-1957.

United States Court of Appeals Eighth Circuit.

Submitted May 13, 1975.

Decided July 10, 1975.

Morris E. Stokes, and P. B. Hanker, Jr., Laclede Gas Co., St. Louis, Mo., for plaintiff-appellant.

Richmond C. Coburn, St. Louis, Mo., for defendant-appellee.

Before LAY, ROSS and WEBSTER, Circuit Judges.

ROSS, Circuit Judge.

The Laclede Gas Company (Laclede), a Missouri corporation, brought this diversity action alleging breach of contract against the Amoco Oil Company (Amoco), a Delaware corporation. It sought relief in the form of a mandatory injunction prohibiting the continuing breach or, in the alternative, damages. The district court held a bench trial on the issues of whether there was a valid, binding contract between the parties and whether, if there was such a contract, Amoco should be enjoined from breaching it. It then ruled that the "contract is invalid due to lack of mutuality" and denied the prayer for injunctive relief. The court made no decision regarding the requested damages. Laclede Gas Co. v. Amoco Oil Co., 385 F.Supp. 1332, 1336 (E.D.Mo.1974). This appeal followed, and we reverse the district court's judgment.

On September 21, 1970, Midwest Missouri Gas Company (now Laclede), and American Oil Company (now Amoco), the predecessors of the parties to this litigation, entered into a written agreement which was designed to provide central propane gas distribution systems to various residential developments in Jefferson County, Missouri, until such time as natural gas mains were extended into these areas. The agreement contemplated that as individual developments were planned the owners or developers would apply to Laclede for central propane gas systems. If Laclede determined that such a system was appropriate in any given development, it could request Amoco to supply the propane to that specific development. This request was made in the form of a supplemental form letter, as provided in the September 21 agreement; and if Amoco decided to supply the propane, it bound itself to do so by signing this supplemental form.

Once this supplemental form was signed the agreement placed certain duties on both Laclede and Amoco. Basically, Amoco was to "(i)nstall, own, maintain and operate . . . storage and vaporization facilities and any other facilities necessary to provide (it) with the capability of delivering to (Laclede) commercial propane gas suitable . . . for delivery by (Laclede) to its customers' facilities." Amoco's facilities were to be "adequate to provide a continuous supply of commercial propane gas at such times and in such volumes commensurate with (Laclede's) requirements for meeting the demands reasonably to be anticipated in each Development while this Agreement is in force." Amoco was deemed to be "the supplier," while Laclede was "the distributing utility."

For its part Laclede agreed to "(i)nstall, own, maintain and operate all distribution facilities" from a "point of delivery" which was defined to be "the outlet of (Amoco) header piping." Laclede also promised to pay Amoco "the Wood River Area Posted Price for propane plus four cents per gallon for all amounts of commercial propane gas delivered" to it under the agreement.

Since it was contemplated that the individual propane systems would eventually be converted to natural gas, one paragraph of the agreement provided that Laclede should give Amoco 30 days written notice of this event, after which the agreement would no longer be binding for the converted development.

Another paragraph gave Laclede the right to cancel the agreement. However, this right was expressed in the following language:

This Agreement shall remain in effect for one (1) year following the first delivery of gas by (Amoco) to (Laclede) hereunder. Subject to termination as provided in Paragraph 11 hereof (dealing with conversions to natural gas), this Agreement shall automatically continue in effect for additional periods of one (1) year each unless (Laclede) shall, not less than 30 days prior to the expiration of the initial one (1) year period or any subsequent one (1) year period, give (Amoco) written notice of termination.

There was no provision under which Amoco could cancel the agreement.

For a time the parties operated satisfactorily under this agreement, and some 17 residential subdivisions were brought within it by supplemental letters. However, for various reasons, including conversion to natural gas, the number of developments under the agreement had shrunk to eight by the time of trial. These were all mobile home parks.

During the winter of 1972-73 Amoco experienced a shortage of propane and voluntarily placed all of its customers, including Laclede, on an 80% Allocation basis, meaning that Laclede would receive only up to 80% Of its previous requirements. Laclede objected to this and pushed Amoco to give it 100% Of what the developments needed. Some conflict arose over this before the temporary shortage was alleviated.

Then, on April 3, 1973, Amoco notified Laclede that its Wood River Area Posted Price of propane had been increased by three cents per gallon. Laclede objected to this increase also and demanded a full explanation. None was forthcoming. Instead Amoco merely sent a letter dated May 14, 1973, informing Laclede that it was "terminating" the September 21, 1970, agreement effective May 31, 1973. It claimed it had the right to do this because "the Agreement lacks 'mutuality.' " ¹

The district court felt that the entire controversy turned on whether or not Laclede's right to "arbitrarily cancel the Agreement" without Amoco having a similar right rendered the contract void "for lack of mutuality" and it resolved this question in the affirmative. We disagree with this conclusion and hold that settled principles of contract law require a reversal.

I.

A bilateral contract is not rendered invalid and unenforceable merely because one party has the right to cancellation while the other does not. There is no necessity "that for each stipulation in a contract binding the one party there must be a corresponding stipulation binding the other." James B. Berry's Sons Co. v. Monark Gasoline & Oil Co., 32 F.2d 74, 75 (8th Cir. 1929). Accord, Boland v. Shell Oil Co., 71 F.Supp. 649, 651 (E.D.Mo.1947) (Missouri law); Zeppenfeld v. Morgan, 168 S.W.2d 971, 975 (Mo.Ct.App.1943); Banner Creamery Co. v. Judy, 47 S.W.2d 129, 131 (Mo.App.1932).

The important question in the instant case is whether Laclede's right of cancellation rendered all its other promises in the agreement illusory so that there was a complete failure of consideration. This would be the result had Laclede retained the right of immediate cancellation at any time for any reason. 1 S. Williston, Law of Contracts § 104, at 400-401 (3d ed. 1957). However, Professor Williston goes on to note:

Since the courts . . . do not favor arbitrary cancellation clauses, the tendency is to interpret even a slight restriction on the exercise of the right of cancellation as constituting such legal detriment as will satisfy the requirement of sufficient consideration; for example, where the reservation of right to cancel is for cause, or by written notice, or after a definite period of notice, or upon the occurrence of some extrinsic event, or is based on some other objective standard.

Id. § 105, at 418-419 (footnotes omitted). Professor Corbin agrees and states simply that when one party has the power to cancel by notice given for some stated period of time, "the contract should never be held to be rendered invalid thereby for lack of 'mutuality' or for lack of consideration." 1A A. Corbin, Corbin on Contracts § 164 at 83 (1963). The law of Missouri appears to be in conformity with this general contract rule that a cancellation clause will invalidate a contract only if its exercise is unrestricted. Phillips Petroleum Co. v. Rau Const. Co., 130 F.2d 499, 501 (8th Cir.), cert. denied, 317 U.S. 685, 63 S.Ct. 260, 87 L.Ed. 549 (1942), (Missouri law); Boland v. Shell Oil Co., supra, 71 F.Supp. at 651-652; Bevins v. Harris, 380 S.W.2d 345, 352 (Mo.1964); National Refining Co. v. Cox, 227 Mo.App. 778, 57 S.W.2d 778, 781 (1933).

Here Laclede's right to terminate was neither arbitrary nor unrestricted. It was limited by the agreement in at least three ways. First, Laclede could not cancel until one year had passed after the first delivery of propane by Amoco. Second, any cancellation could be effective only on the anniversary date of the first delivery under the agreement. Third, Laclede had to give Amoco 30 days written notice of termination. These restrictions on Laclede's power to cancel clearly bring this case within the rule.

A more difficult issue in this case is whether or not the contract fails for lack of "mutuality of consideration" because Laclede did not expressly bind itself to order all of its propane requirements for the Jefferson County subdivisions from Amoco.

While there is much confusion over the meaning of the terms "mutuality" or "mutuality of obligation" as used by the courts in describing contracts, 1 S. Williston, supra, § 105A, at 420-421; 1A A. Corbin, supra, § 152, at 2-3, our use of this concept here is best described by Professor Williston:

Sometimes the question involved where mutuality is discussed is whether one party to the transaction can by fair implication be regarded as making any promise; but this is simply an inquiry whether there is consideration for the other party's promise.

1 S. Williston, supra, § 105A, at 423. (Footnote omitted.) As stated by the Missouri Supreme Court:

Mutuality of contract means that an obligation rests upon each party to do or permit to be done something in consideration of the act or promise of the other; that is, neither party is bound unless both...