Zenith Drilling Corp. v. Internorth, Inc.

• Decision Date: 10 March 1989
• Docket Number: Nos. 86-1355,86-1436,s. 86-1355
• Citation: 869 F.2d 560
• Parties: ZENITH DRILLING CORPORATION, Plaintiff-Appellee/Cross-Appellant, v. INTERNORTH, INC. and Belnorth Petroleum Corporation, Defendants-Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 560

869 F.2d 560

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.

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.

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 pay the invoiced standby charges. Thus, Zenith was entitled to rescind the Agreement and obtain damages calculated under the original contracts. The court denied Zenith punitive damages.

The parties agree that Oklahoma law applies in this case. We consider on appeal the district court's construction of the Agreement, whether InterNorth committed a material breach, and Zenith's entitlement to punitive damages.

I

To support a grant of summary judgment in a case such as that before us, in which the standard of proof is preponderance of evidence, we must conclude that the evidence before the court would not permit a reasonable jury to find for the nonmovant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986); Kaiser-Francis Oil Co. v. Producer's Gas Co., 870 F.2d 563, 566 (10th Cir. 1989). A nonmovant's pleadings alone do not create an issue of material fact if the movant has tendered affidavits contrary to those pleadings and the nonmovant has not challenged the affidavits with evidence of its own. Nichols v. United States, 796 F.2d 361, 365 (10th Cir.1986).

InterNorth argues that the Agreement amended the earlier contracts, and thus Zenith cannot rescind the Agreement without voiding the 1981 contracts. Zenith, on the other hand, asserts that the Agreement was an executory accord, and when InterNorth failed to comply with its terms, Zenith could rescind the Agreement and sue under the earlier contracts. The district court concluded that the Agreement was clear and unambiguous and proceeded to interpret it without the aid of a jury. See Devine v. Ladd Petroleum Corp., 805 F.2d 348, 349 & n. 1 (10th Cir.1986) (ambiguity is a question of law); State ex rel. Comm'rs of Land Office v. Butler, 753 P.2d 1334, 1336 (Okla.1987) (ambiguity is question of law and court may interpret unambiguous contract without aid of jury), cert. denied, --- U.S. ----, 109 S.Ct. 557, 102 L.Ed.2d 583 (1988). It held that the Agreement conditionally modified the 1981 contracts, and therefore, InterNorth's "underlying obligations expired only if [it] performed in accordance with the Agreement." I R.Doc. 59 at 3 (emphasis in original).

An executory accord is an agreement for the discharge of an existing claim by a substituted performance, but one in which the extinguishment of the prior obligation is conditioned upon the performance of the accord. See Coffeyville State Bank v. Lembeck, 227 Kan. 857, 610 P.2d 616, 618-19 (1980). Incomplete performance or nonperformance of an accord does not discharge the original contractual obligations. See, e.g., id. 610 P.2d at 619; Walker v. Rocky Mountain Recreation Corp., 29 Utah 2d 274, 508 P.2d 538, 542 (1973); Hinkle v. Basic Chem. Corp., 163 Colo. 408, 431 P.2d 14, 16 (1967); A. Corbin, Corbin on Contracts Sec. 1274 (1962); Restatement (Second) of Contracts Sec. 281 (1981) [hereinafter Restatement ]. We do not understand Oklahoma law to be to the contrary. See Houston Bros. v. Wagner, 28 Okla. 367, 114 P. 1106, 1107-08 (1911). Here, the words used in the Agreement indicate that the parties only intended to release InterNorth from its obligations under the original contracts if it fully complied with the Agreement's terms:

"It is agreed that all of InterNorth's obligations under the referenced contracts will be fulfilled by use of these two rigs by InterNorth and Nortex at a reduced daywork rate and by extending the joint term.

....

Upon completion of the extended term as contemplated above, InterNorth shall have no future obligation or liability to Zenith under the above referenced contracts."

I R.Doc. 24 exh. A paragraphs 2, 5. This language plainly shows that InterNorth was to be released from its original obligations only if it fully performed under the accord, and neither the bald statement in the Agreement that it will serve as an "amendment" to the original contracts, nor the authorities cited by InterNorth dictate a contrary conclusion. We hold that the district court properly treated the Agreement as an executory accord which did not extinguish InterNorth's prior obligations unless its terms were satisfied.

II

The district court determined that InterNorth materially breached the Agreement and, by necessary implication, also determined that InterNorth materially breached the 1981 contracts. It therefore awarded Zenith damages under the earlier contracts. I R.Doc. 59 at 6. InterNorth argues that whether it committed a material breach is a question of fact not susceptible to summary resolution. Zenith, on the other hand, asserts that uncontroverted evidence shows InterNorth intentionally breached a material obligation, thus entitling Zenith to damages calculated under the original contracts.

There is no question that InterNorth breached the Agreement, and therefore the original contracts, when it intentionally failed to pay the invoiced standby charges within the thirty-day grace period; the only question is whether that breach was material. Although the materiality of a contractual breach usually is a question of fact for the jury, cf. Continental Ill. Nat'l Bank & Trust Co. v. Sahadi, 706 F.2d 193, 196 (7th Cir.1983), in other contexts this court has stated that "materiality is a mixed question of law and fact that can be decided as a matter of law if reasonable minds could not differ on the question." Long v. Insurance Co. of N. Am., 670 F.2d 930, 934 (10th Cir.1982); see also Suggs v. State...