David V. Bear, Columbia, for defendant-appellant.

Channing D. Blaeuer, Cynthia A. Suter, Moberly, for plaintiff-respondent.

Before SHANGLER, P. J., and WASSERSTROM and CLARK, JJ.

WASSERSTROM, Judge.

B & B Equipment Company, Inc. filed this suit to obtain a judgment declaring its right to terminate a contract under which defendant John A. Bowen was entitled to purchase 100 shares of the corporate stock. Bowen counterclaimed for a declaration that the contract is valid and subsisting and that he has a continuing right to purchase the 100 shares. The trial court rendered declaratory judgment as prayed by B & B, and Bowen appeals.

B & B is the successor to Braymen Tractor Company which was originally owned by Mr. and Mrs. L. D. Braymen. The Braymens took Robert J. Jaecques and William L. Hughes into the business in 1964, first as employees and then later as partners and finally as equal stockholders in a corporate form of doing business.

In 1968, L. D. Braymen wanted to retire and Jaecques and Hughes desired to find someone to take Braymen's place. At that particular time, Bowen who had had prior experience in the same line of business, was unemployed and available. Accordingly, on December 28, 1968, the parties entered into an oral agreement with Bowen under which Bowen would become an equal participant in the business in place of Braymen. Bowen, however, did not have sufficient funds to pay the value of Braymens' 100 shares of stock, which was agreed to be $15,000. The corporation therefore agreed to buy the stock from the Braymens for $15,000 and in turn to sell that stock to Bowen for the same sum. Bowen was to and did pay $2,500 direct to the Braymens. B & B gave the Braymens its note for $12,500, payable with interest of 6% per annum. Bowen was to be entitled to all dividends on the 100 shares, and he agreed to pay back the dividends to B & B for application on the purchase price of the stock. When those payments for the stock totaled $12,500, plus whatever interest B & B had by then incurred to the Braymens, B & B was to deliver the 100 shares to Bowen. Under the agreement, Bowen was to assume as his primary responsibility all the corporate record keeping and bookkeeping, and he was in addition to devote his full time and attention to the corporate business in whatever capacity became necessary, including selling. The salaries of all three men were to be equal.

Promptly after the making of that agreement, Bowen did assume his new duties and at the beginning performed in a manner satisfactory to Jaecques and Hughes. Dividends were declared from 1969 to 1976 of which Bowen's share came to $7,156 and which were paid to him. He, in turn, repaid an equivalent amount on each occasion to be applied toward the stock purchase. However, starting in about 1972, Bowen began engaging in outside business activities and spent less time on his duties for B & B, with the result that Jaecques and Hughes became more and more dissatisfied with Bowen's performance. This dissatisfaction developed to the point that on April 27, 1976, a meeting was held between the three men in which Jaecques and Hughes informed Bowen that he was discharged. Approximately two or three weeks before that, B & B had paid a dividend for the year 1975, of which Bowen's share was $800, and at the time of the April 27 meeting Bowen had not yet repaid that sum to be credited on the stock purchase.

Following his discharge, Bowen retained counsel and on May 4 his lawyer wrote to the B & B attorney stating that Bowen would release any and all interest in the corporation for the sum of $82,350. On May 24, 1976, the corporation's attorney responded that B & B had elected to rescind the 1968 agreement and tendered to Bowen the sum of $9,656, representing the $2,500 paid by Bowen to the Braymens, together with the $7,156 dividends which Bowen had received from B & B and contributed toward payment of the stock. On June 2, 1976, Bowen's lawyer wrote rejecting the Corporation's tender and countered with a tender by Bowen of $5,344, plus whatever the amount of interest was that B & B had paid the Braymens, in exchange for which Bowen demanded the issuance to him of 100 shares of B & B stock.

The impasse thus created led to the present lawsuit. After hearing evidence without a jury, the trial court made findings of fact which included the following:

"6. That on or about April 27, 1976 Jaecques and Hughes fired defendant as an employee and officer in the business. This action resulted from dissatisfaction with defendant in not devoting his full time and best efforts to the interest of the business. That defendant over a period of time did not properly keep the books of the plaintiff's business and did not devote his full time to his responsibility in the business. That defendant, as of April 27, 1976, had not paid to plaintiff the $800.00 dividend to be applied on defendant's obligation to purchase stock. That such actions and omissions and failure to act and perform on part of the defendant constituted a breach of the terms and conditions of the contract between plaintiff and defendant.

* * * * * *

"9. The court finds defendant did breach the conditions of the contract of December 28, 1968 as set out in paragraph 6 herein and that plaintiff was entitled to rescind the contract upon payment to defendant of the sum of $9,656.00 representing the total of the benefits received by plaintiff from defendant under said contract."

I.

Sufficiency of the Evidence

Bowen's first point on appeal is that the trial court's determination is not supported by the evidence. Despite the phraseology of that point, the main thrust of Bowen's argument thereunder is that even if the evidence did support a finding that Bowen had breached the contract, nevertheless Bowen's default was not so serious as to warrant rescission. That contention really argues in slightly different form, the substance of what is presented in the argument advanced under Bowen's point 2 and that subject will be reserved for discussion under section II of this opinion. The discussion at this point will be confined to an inquiry as to whether Bowen did in fact breach the contract.

The disputed issues of fact in this regard are as follows: (A) whether Bowen's delay in repaying the $800 constituted a breach; (B) whether Bowen took business hours away from duties for the corporation in order to pursue outside business activities of his own; (C) whether Bowen performed his record keeping and bookkeeping in a satisfactory manner; (D) whether Bowen failed to lend sufficient help in sales activities, and (E) whether the other stockholders voiced their dissatisfaction to Bowen prior to the discharge, thus giving him adequate warning and opportunity to remedy the alleged defaults.

A. The $800 Repayment. Without dispute, B & B did pay Bowen a dividend of $800 about the middle of April, 1976, and Bowen had not tendered repayment of that amount toward the stock purchase up to the time of his discharge on April 27, 1976, nor had he repaid the $800 up to May 24, 1976, when B & B declared a rescission. However, by his letter dated June 2, 1976, Bowen did tender the full balance still owed by him on the stock purchase, which, of course, covered the $800 which he had received in April. The question therefore becomes whether Bowen's delay from April to June constituted a breach of agreement.

To be noted in this respect is that the agreement between the parties did not call for repayment within any definite specified time. Bowen testified that in fact there had been a delay of two or three weeks in prior years between the date upon which the dividend was paid and the date when he made repayment of a like amount to be credited against the stock purchase. Under these circumstances, and considering the confused situation caused by Bowen's discharge on April 27, 1976, it cannot be said that Bowen delayed an unreasonable length of time in making his tender. See Cochran v. Grebe, Mo.App., 578 S.W.2d 351 (1979). The portion of the trial court's finding is therefore disapproved which holds that Bowen's delay in this regard constituted a breach of the agreement. That disapproval, however, does not change the result, because there was other conduct constituting breaches of the agreement, discussed below.

B. Outside Business Activities. Jaecques and Hughes both testified that during the last four years before the discharge, Bowen had devoted an increasing amount of time to personal business activities of his own. They testified that he was engaged in the selling of real estate and that the B & B business phones were often times tied up by Bowen conducting his real estate business. They further testified that Bowen was gone from the business premises much of the time, Jaecques estimating that these absences would run as much as 50% of the business hours. They also testified that Bowen spent some of his time at B & B using the company equipment to make ornamental rings. In addition to that, they testified that Bowen went to auctions of used farm equipment where he bought certain pieces of equipment which he then brought back to the B & B shop for reconditioning and that Bowen would then resell that equipment for his own account and profit.

Bowen did not wholly deny, but only tried to minimize, the foregoing testimony. He admitted that he had sold three farms and two houses during the years 1973 and 1974, and that he had made and received phone calls at the B & B offices in connection with his real estate activities. He denied that he had made any real estate sales after 1974, but his denial did not go so far as to say that he had not made attempts at sales in the subsequent period. He acknowledged that he had brought some personally owned equipment with him when he first came to work for B & B in December, 1968, which he thereafter sold for his own account, and he further acknowledged that he had attended auctions and purchased used equipment which he brought to B & B for reconditioning. However, with respect to the latter equipment, he testified that the purchases and resales were for the account of the corporation and B & B received the profit. Bowen also admitted that he sometimes took two to three hours for lunch, and he also admitted that he came back to the B & B office late at night after regular hours in order to do bookkeeping work.

The testimony by the opposing parties on this subject presents some conflict. That conflict was resolved by the finding of the trial court, to which this court must give deference under Rule 73.01-3(b). Accordingly, the finding of breach of contract by Bowen in this regard must be accepted.

C. Sufficiency of Performance of Bookkeeping Duties. Jaecques and Hughes testified that the corporate records were improperly kept in many important respects. According to them, the perpetual inventory was far off from the actual inventory so that items were shown on perpetual inventory which were not actually present and some of the actual inventory was not shown on the records. Certain loans to the corporation were not reflected on the books of account. The bank balances were not reconciled. Bowen was so far behind in bookkeeping that he neglected to take advantage of available cash discounts, although the corporation had the money on hand with which those bills could have been paid. After Mrs. Braymen left the office, Bowen never did close the books at the end of the month and strike a monthly balance sheet as she had done and which was required by the B & B suppliers. For some period of time, Bowen had this month-end work done by his wife, but later (over the protest of Jaecques and Hughes) he hired a professional accountant, Fine, to do that phase of the company accounting, with Fine being paid at B & B expense. After Bowen was discharged, B & B hired Mrs. Braymen to return to do the office work and she found that no balance sheet had been prepared since October of 1975, that there were large inventory discrepancies, that the bank balances had not been reconciled, and she had trouble putting the records into order. Jaecques further testified that at one time when he and Hughes suspected laxness in the keeping of cash records, he made a test by abstracting sums of money from the cash drawer which he held out until the withdrawals accumulated to more than a hundred dollars, after which he returned the abstracted money to the cash drawer. Bowen did not report or comment upon money either being short or over.

Bowen for his part denied any basic improprieties in his performance of bookkeeping. However, he did admit that he had never closed the books or made up a monthly balance sheet, and he further admitted that he hired Fine at company expense to do this work until Fine's death and that thereafter he employed another outside accounting firm at company expense for that purpose.

Here again, the conflict in evidence has been resolved by the trial court and is entitled to deference under Rule 73. The finding in this respect is therefore approved.

D. Sales Assistance. Jaecques testified that Bowen never lent a hand at sales work even when obviously needed, until either he or Hughes would make direct request upon Bowen. Bowen never developed any clientele of his own, and his portion of the total sales would be only approximately 10%. Hughes corroborated that general testimony. Bowen on the other hand insisted that he did his "fair share" of sales work. The evaluation of this conflicting testimony was for the trial court, to which deference is due under Rule 73.

E. Protests and Warnings. Jaecques testified that he had discussed Bowen's shortcomings with him several times. Bowen, on the other hand, said that although there were some disagreements, there was "nothing serious" except with respect to his insistance upon hiring Fine to do part of the bookkeeping work. Bowen also testified that at one time he suggested that each of the three stockholder-employees use a time clock, which can well lead to the inference that Jaecques was protesting to Bowen about the latter's taking too much time away from his duties at B & B. In any event, to the extent that there is a conflict in evidence on this point, the facts must be taken in accordance with the result reached by the trial court. Westinghouse Electric Co. v. Vann Realty Co., 568 S.W.2d 777 (Mo. banc 1978); In re Marriage of Prenavo, 556 S.W.2d 463 (Mo.App.1977); De Paul Hospital v. Southwestern Bell Tel., 539 S.W.2d 542 (Mo.App.1976); Collins v. Bowyer, 524 S.W.2d 190 (Mo.App.1975).

II.

Materiality of Bowen's Breach

Bowen's second point on appeal is that his "breach did not go to the very substance of the contract and further, any breach was waived and the trial court should have estopped assertions otherwise." The legal doctrine upon which Bowen rests this argument is that a rescission of a contract for breach by the other party must relate to a vital provision going to the very substance or root of the agreement, and cannot relate simply to a subordinate or incidental matter. McCullough v. Newton, 348 S.W.2d 138, 142 (Mo.1961). Bowen attempts to bring himself within that principle by arguing: "The contract respondent corporation and appellant entered into on December 28, 1968, was for the purchase of L. D. Braymen's One Hundred (100) shares of stock. * * * The further agreement of employment with the respondent corporation was incidental to the major purpose of the contract, that of purchasing the stock of L. D. Braymen."

The argument just quoted turns the real situation up side down. Rather than the principal purpose of the agreement being the sale and purchase of stock, clearly the major purpose of the transaction between B & B and Bowen was the performance of services by Bowen. The stock itself was to go to Bowen on terms which can be explained only on the basis that Jaecques and Hughes were willing to let him become a one-third owner in expectation of valuable services to be contributed by Bowen. Indeed, by far the major part of the purchase price was to come from the corporation itself in the nature of a bonus which could only be for services rendered.

B & B did not make this deal with Bowen in order to obtain needed capital. Instead the real purpose which stands out on this record as a whole is that Jaecques and Hughes wanted a "third partner" to take the place of the retiring partner Braymen. What they wanted were Bowen's services, not his money; and in fact the only money which Bowen was ever to put up out of his own pocket was the initial $2,500. The only realistic appraisal of this situation is that the services to be performed by Bowen were the "very substance and root of the contract" so that his failure to adequately perform those duties did constitute a material breach warranting rescission.

Bowen suggests that the definition of materiality should be amplified by utilization of the guidelines set forth in Restatement of Contracts, Section 275. Comment a to that section states that in determining whether a breach of contract is a material one, it is impossible to lay down a rule that can be applied with mathematical exactness and that such a determination depends upon considerations of inherent justice. Nevertheless, this section of the Restatement suggests certain guidelines, each of which will now be considered in connection with the facts of the present case:

A. The extent to which the injured party will obtain the substantial benefit which he could have reasonably anticipated. Here, B & B (the injured party) received some performance from Bowen for a period slightly in excess of five years, but those services were defective for reasons already discussed under section I of this opinion. Jaecques and Hughes had agreed that Bowen could acquire a one-third ownership in their corporation on extremely favorable terms, in the expectation that they were obtaining an experienced partner who would devote his full time and attention to the company business. That expectation failed of fulfillment. It cannot reasonably be said that Jaecques and Hughes received the substantial benefit which they had a right to expect.

B. The extent to which the injured party may be adequately compensated in damages for lack of complete performance. Bowen suggests no way in which his breaches of contract may be measured in monetary terms. This situation does not lend itself to compensation in damages.

C. The extent to which the party failing to perform has already partly performed or made preparations for performance. Bowen here had partly performed, but defectively. Despite protests, he failed and neglected to make good the deficiencies. This guideline operates somewhat in Bowen's favor, but not decisively so.

D. The greater or less hardship on the party failing to perform in terminating the contract. The value of the 100 shares of B & B stock appreciated between December 1968 and April 1976. Bowen will receive the benefit of at least a substantial part of that increase by reason of the payment to him of the $7,156 in dividends declared by B & B during that period. To the extent that Bowen does not receive the full benefit of the increase in value of the 100 shares, his wound is self-inflicted by his defaults in performance. In addition, whatever loss is suffered by Bowen is more than counterbalanced by the hardship and unfairness which would be caused to Jaecques and Hughes by an opposite ruling.

E. The willful, negligent or innocent behavior of the party failing to perform. As heretofore discussed, Jaecques made protest and gave fair warning to Bowen concerning the unacceptability of Bowen's performance. Bowen's continuance in his unacceptable performance was at the very least negligent.

F. The greater or less uncertainty that the party failing to perform will perform the remainder of the contract. This particular criterion is of doubtful application in this present situation. If it be applicable, Bowen has had over five years in which to demonstrate his good faith and willingness to carry his share of the burden. Jaecques and Hughes cannot with fairness be required to experiment even longer in some vague hope of improvement.

Bowen also argues that B & B should not be permitted to rescind because that would be a violation of good faith and fair dealing on its part, because it had waived any claim of defect in Bowen's performance, and because it should be estopped to assert any such defect. All this multifaceted argument rests on the assertion that B & B never protested to Bowen concerning the unacceptability of his performance of duty and that the corporation therefore caused him to rely upon a belief that his performance was satisfactory. That argument in all of its aspects falls because of the false factual premise. As heretofore discussed in section I of this opinion, Jaecques did protest to Bowen and gave him warnings. It cannot be fairly said that B & B failed in any duty of fair dealing or that it was waived or is estopped to assert its right of rescission.

III.

Divisibility

Bowen's third point is that the employment under the December 28, 1968 contract is divisible from the stock purchase, so that even though Bowen may have made a material breach of the employment part of the contract, that did not authorize a rescission of the stock purchase part.

The rule as to what constitutes an entire as compared to a severable contract can be stated in only general terms, subject to flexible application. It is said that there is no formula for a test in all cases, and each case must depend largely on its own circumstances. 17A C.J.S. Contracts § 331, p. 302. According to Williston on Contracts, 3d Ed., Section 863, p. 275: "The essential test to determine whether a number of promises constitute one contract or more than one is simple. It can be nothing else than the answer to an inquiry whether the parties assented to all the promises as a single whole, so that there would have been no bargain whatever, if any promise or set of promises were struck out." That statement of the rule by Williston is quoted with approval in Swinney v. Continental Bldg. Co., 340 Mo. 611, 102 S.W.2d 111, 120 (banc 1937). To the same effect: Katz v. Pulaski Savings and Loan Ass'n., 546 S.W.2d 24, 26 (Mo.App.1976); Rexite Casting Co. v. Midwest Mower Corp., 267 S.W.2d 327 (Mo.App. 1954).

Applying the quoted test here, it can hardly be doubted that B & B would have refused to enter into the December 28, 1968 agreement had it not been for the employment feature. As has already been developed under section II of this opinion, the employment of Bowen was the dominant reason and motivating cause for the entire contract. It is inconceivable that Jaecques and Hughes would have agreed to let Bowen have one-third of all the stock for only $2,500 paid in were it not for their expectation that he would earn the additional $12,500 of the purchase price through the value of the services he would supply to the corporation over and above his stated salary.

The present case bears considerable analogy to Lynch v. Higley, 8 Wash.App. 903, 510 P.2d 663, 670 (1973), in which it was held that the breach of an employment contract by an employee-stockholder excused another stockholder from his contract obligation to sell the remainder of his stock to the defaulter.

We hold that the employment portion of the December 1968 contract is not severable from the stock purchase portion.

IV.

Adequacy of the Remedy

Bowen argues that the remedy granted by the trial court is inequitable in that he should have been awarded specific performance of the stock purchase agreement. The short answer to that argument is that Bowen is disentitled to specific performance because of his own prior material breach. Landau v. St. Louis Public Service Company, 364 Mo. 1134, 273 S.W.2d 255 (banc 1954).

Bowen argues also that B & B should not have been granted relief because its conduct was inequitable. This argument is erected upon the contention that B & B had never protested to Bowen that his performance was unsatisfactory and that B & B thereby led him to believe that his performance was acceptable. This underlying factual contention is incorrect in light of the evidence already discussed.

However, although not specifically argued by Bowen, the relief granted by the trial court does seem plainly inadequate and inequitable in another respect; that is, the failure of the decree to give credit to Bowen for the income taxes paid by him which otherwise would have fallen upon B & B. This phase of the matter arises out of the fact that B & B and its stockholders had elected from the beginning to be taxed under Subchapter S of the Internal Revenue Code. Pursuant to this election, B & B was taxed essentially as a partnership, with all the corporate profits being taxed to the individual stockholders in proportion to their stockholding, and with the corporation itself being excused from the payment of income tax. This tax result followed regardless of how much of the corporate profit was actually distributed to each of the stockholders.

The record shows that B & B did have substantial corporate profits upon which the stockholders individually paid taxes, but that not all of those profits were actually distributed as dividends. Thus for example, the record shows that the individual stockholders each paid substantial tax on the corporate earnings in the years 1972 and 1973, although no dividends were paid by B & B in those years. The testimony was that B & B paid out as dividends only such cash earnings as could be spared, and that the balance of the profits was plowed back principally in the form of inventory.

So it is that Bowen has paid taxes on corporate earnings which he has never received and which he now can never receive. In effect he has paid taxes in lieu of and for the benefit of B & B. The only equitable course is to require B & B to reimburse Bowen for that amount of income tax paid by him.

The judgment is affirmed except as to the amount which is to be paid by B & B to Bowen. This case is remanded to the trial court for the purpose of determining the amount of income tax paid by Bowen attributable to the corporate earnings by B & B which were not distributed. That amount is to be added to the $9,656 paid by Bowen toward the 100 shares of capital stock, and the aggregate total of those two sums is to be paid to Bowen by B & B.

All concur.

863 P.2d 1150

ROYE REALTY & DEVELOPING, INC., PLAINTIFF/APPELLANT, v. ARKLA, INC., DEFENDANT/APPELLEE.

Case No. 77693

Supreme Court of Oklahoma

Decided July 13, 1993

Federal Certified Question; David L. Russell, District Judge for the United States District Court for the Western District of Oklahoma, has certified a Question of Law pursuant to the Oklahoma Uniform Certification of Questions of Law Act, 20 O.S. 1991, §§ 1601 -1611 , as follows:

"What is the measure of damages under a take-or-pay gas purchase contract where the seller alleges an anticipatory repudiation by the buyer and buyer alleges that had it elected to `take' gas, seller could not have physically delivered gas over the entire term of the contract?"

QUESTION ANSWERED. OKLAHOMA'S UNIFORM COMMERCIAL CODE (12A O.S. 1981, §§ 1 -102 ET SEQ.), SPECIFICALLY 12A O.S. 1981 § 2-708 (1), PROVIDES THE MEASURE OF DAMAGES WHERE THE BUYER ANTICIPATORILY REPUDIATES A TAKE-OR-PAY GAS PURCHASE CONTRACT.

Eric S. Gray, Thomas P. Goresen, Gregory F. Pilcher, Gray, Goresen, Moriarty & Wright, P.C., Oklahoma City, for plaintiff/appellant.

J. Kevin Hayes, Graydon D. Luthey, Jr., Richard T. McGonigle, William G. Bernhardt, Hall, Estill, Hardwick, Gable, Golden & Nelson, Tulsa, for defendant/appellee

SIMMS, Justice:

Certified Question of Law from the United States District Court for the Western District of Oklahoma.

FACTS

The following relevant facts are from the Order of the federal court certifying this question of law.

Arkansas Louisiana Gas Company, a division of Arkla, Inc. (Arkla) which is the appellee herein, entered into a contract with Gulf Oil Corporation (Gulf) in which Gulf agreed to sell all of the gas it acquired from certain lease and wells to Arkla for a 15 year period. At the time of the contract, Gulf had drilled two wells on properties designated the Epley #1-14 and the Gulf Bagley-Griffin # 1-14.

Six years after the contract was executed, Roye Realty & Developing, Inc. (Roye Realty), appellant, purchased the contract leases, contract wells, and all of Gulf's rights under the gas purchase contract.

The contract further required Roye Realty to hold its gas from the dedicated acreage exclusively for Arkla. Arkla had alternative obligations under the contract with the first being for Arkla to take and pay for a certain minimum quantity of gas calculated by reference to deliverability tests.

The relevant deliverability tests were performed and the test on the Bagley-Griffin well in effect at the time of the alleged repudiation of the contract was performed one month prior to the date of the alleged repudiation. The deliverability test performed on the Epley well in effect at the date of the alleged repudiation was done approximately four months prior to the date of the alleged repudiation.

Roye Realty claims that Arkla has failed and refused to take the quantity of gas it was required to take or pay for under the contract. According to Roye Realty, the damages for such repudiation should be based upon the "pay" alternative under the contract and be calculated according to Arkla's minimum obligation from the date of the alleged repudiation through the end of the contract term.

Conversely, Arkla contends that had Arkla honored its obligation to take and pay for gas for the remainder of the contract, the amount produced, taken and paid for would have been less than the amount required to be paid under the "pay" alternative of the contract and that the measure of damages should be based upon the [863 P.2d 1153] lesser amount. Arkla further argues that its minimum volume obligation should not be fixed as of the date of the alleged repudiation, but should be based upon evidence as to the physical ability of the wells to produce in the future assuming the wells will be produced. Moreover, Arkla contends the well physically could not produce the amount of gas indicated by the last deliverability test over the term of the contract.

In response, Roye Realty claims the volume of gas in the ground or producible over the remainder of the contract term is irrelevant after the buyer's repudiation of both the "take" obligation and the "pay" obligation and in any event Arkla has no evidence that it would have taken any gas during the remaining term of the contract.

Realizing that the courts of this state have not yet answered the precise question of law as to damages in a case such as this one, the United States District Court for the Western District of Oklahoma has now certified the following question of law pursuant to the Uniform Certification of Questions of Law Act, 20 O.S. 1991 § 1601 , et seq.:

"What is the measure of damages under a take-or-pay gas purchase contract where the seller alleges an anticipatory repudiation by the buyer and buyer alleges that had it elected to `take' gas, seller could not have physically, delivered gas over the entire term of the contract? See Golsen v. ONG W., Inc., 756 P.2d 1209, 1213 (Okla. 1988); Manchester Pipeline Corp. v. Peoples Natural Gas, 862 F.2d 1439, 1441 & n. 1, 1443-49 (10th Cir. 1988) ("market-out" provision distinguishes case from typical take-or-pay contract); Universal Resources Corp. v. Panhandle E. Pipe Line Co., 813 F.2d 77, 78-80 & n. 4 (5th Cir.) (purpose of take-or-pay contract is appointment of risks), reh'g denied en banc, 821 F.2d 1097 (1987) (per curiam); International Minerals & Chem. Corp., v. Llano, Inc., 770 F.2d 879, 882 (10th Cir., 1985), cert. denied, 475 U.S. 1015[106 S. Ct. 1196, 89 L. Ed. 2d 310] (1986); Sabine Corp. v. ONG W., Inc., 725 F. Supp. 1157, 1184-85, 1190-91 (W.D.Okla. 1989); Louisiana Gas Sys. v. Tee Oil, Inc., No. 86-2594 (E.D.La. June 30, 1987) (granting motion in limine regarding reserves); 12A Okla. Stat. § 1-102(3) ("The effect of provisions of this Act may be varied by agreement. . . .'); 12A Okla. Stat. § 1-106 (fundamental objective of UCC remedies is to place `the aggrieved party . . . in as good a position as if the other party had fully performed.'); 12A Okla. Stat. § 2-107(1); 12A Okla. Stat. § 2-708(2) (provides for lost profits, costs, and mitigation); 12A Okla. Stat. § 2-719(1)(a) (` [T]he agreement may provide for remedies in addition to . . . those provided in this Article and may . . . alter the measure of damages recoverable under this Article.'); see also Prudential Ins. Co. v. Faulkner, 68 F.2d 676, 679-81 (10th Cir. 1934) (waiver of election of remedies); accord Stewart v. Bowser, 178 Okla. 382, 62 P.2d 1195, 1195(1936) (Court's fifth syllabus) (per curiam), and Washoma Petroleum Co. v. Eason Oil Co., 173 Okla. 430, 49 P.2d 709, 709-10 (1935) (Court's fifth syllabus) (per curiam); see generally 17 Am.Jur.2d (Contracts) § 1407, at pp. 594-96 (3d ed. 1968)."

We are not asked to determine whether Arkla repudiated the contract. Only in issue before us is the measure of damages if Roye Realty establishes at trial that Arkla repudiated the take-or-pay gas purchase contract. We hold that the correct measure of damages in this situation is governed by Oklahoma's Uniform Commercial Code (UCC), specifically 12A O.S. 1981 § 2708 .

I.

THE UNIFORM COMMERCIAL CODE APPLIES TO GAS PURCHASE CONTRACTS AND PROVIDES THE MEASURE OF DAMAGES FOR ANTICIPATORY REPUDIATION OF A TAKE-OR-PAY PROVISION IN SUCH GAS PURCHASE CONTRACTS.

A take-or-pay gas purchase contract relates to the sale of natural gas [863 P.2d 1154] reserves to be severed from realty by the seller. Therefore, under 12A O.S. 1981 § 2-107 ,

In Golsen, working interest owners in a well sued on a take-or-pay gas purchase contract when the purchaser failed to take or pay under the contract. The trial court found that the gas purchaser's performance was excused under the force majeure clause of the contract, and judgment was entered denying recovery of the deficiency payments. In holding that the inability of the gas purchaser to resell the gas at a profit was not a "failure of market" under the force majeure clause, this Court noted a few UCC provisions regarding the seller's damages upon breach of contract. We said:

"The policy of the law in this state is reflected in the sales article of the Uniform Commercial Code. Therein damages for breach of contract are specified around the general principle of the difference between the contract price and market price. In regard to seller's damages see for example 12A O.S. 1981 §§ 2706 (1) and 2-708(1). . .: After resale of the contracted goods the seller may recover the difference between the resale price and the contract price together with incidental damages. 12A O.S. 1981 § 2706 (1)" Golsen, 756 P.2d at 1212.

Although the Court did not specifically hold that §§ 2-706(1) were the measure of damages for repudiation of a take-or-pay gas purchase contract, we did note that these provisions show that the UCC does not support the theory that inability to sell gas at a profit excuses performance under the contract. However, the Court did state that § 2-708(1) reflects the policy of this state towards damages in such situations. Section 2-708(1) reads:

"Subject to subsection (2) and to the provisions of this Article with respect to proof to market price (Section 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this Article (Section 2-710), but less expenses saved in consequences of the buyer's breach." (Emphasis added)

The Comment to § 2-708 notes that the UCC does not require the seller to resell upon repudiation by the buyer, but if the seller elects to resell, damages are measured by § 2-708. Because the provisions of the UCC apply to gas purchase contracts, we hold that the measure of damages for anticipatory repudiation of both the take and the pay obligations in a take-or-pay gas purchase contract is the difference between the market price at the time when the aggrieved party learned of the repudiation and the unpaid contract price. 12A O.S. 1981, §§ 2-706 , 2-708 and 2-723 .

Citing Golsen and 12A O.S. 1981 § 2-107 , the court in Manchester Pipeline Corp. v. Peoples Natural Gas, 862 F.2d 1439 (10th Cir. 1988), determined damages for anticipatory repudiation of a gas purchase contract are governed by the UCC. In Manchester, the parties negotiated a gas purchase contract which contained a take-or-pay clause and a "market-out" provision - a clause which allows the gas purchaser to reduce the price paid for gas taken in order to remain competitive in the gas market. The parties disagreed as to whether a contract was ever executed. [863 P.2d 1155] The court found sufficient evidence to support the jury's finding of the existence of a contract.

However, the court held the jury incorrectly determined the damages for repudiation of the take-or-pay contract by People's Natural Gas (PNG) and remanded the matter for consideration of damages under 12A O.S. 1981, §§ 2-708 and 2-723 (1). Section 2-708, as noted above, measures damages for repudiation according to the difference between the market price at the time and place for tender and the unpaid contract price. Section 2-723(1) gives guidance on determining the market price at the time and place for tender. It provides:

"If an action based on anticipatory repudiation comes to trial before the time for performance with respect to some or all of the goods, any damages based on market price (Section 2-708, or Section 2-713) shall be determined according to the price of such goods, prevailing at the time when the aggrieved party learned of the repudiation."

The Oklahoma Code Comment to § 2-723 reads:

"(1) There are no previous Oklahoma decisions. This changes the rule as previously stated in Williston On Sales, Section 587, which says that when an action for anticipatory breach comes to trial before performance date the measure of damages is the difference between the contract price and the market value at the date fixed in the contract for performance. Thus, the jury must speculate by attempting to predict what the future market value will be. The Commercial Code rule is more certain and far easier to apply. . . ."

Based upon these provisions and the "virtue of certainty" which they provide, the court concluded that "Manchester's damages should be calculated by reference to the difference between the Manchester-PNG contract price and the market price of gas under a similar long term contract at the time Manchester learned of PNG's repudiation." 862 F.2d at 1448. The court further held that the market-out provision would need to be considered as it would affect the determination as to what the market price was at the time Manchester learned of the repudiation.

In an unreported decision, the United States District Court for the Northern District of Oklahoma also concluded that § 2-708(1) provides the measure of damages for repudiation by the buyer of the take-or-pay provision of a gas purchase contract. Dyco Petroleum Corp. v. ANR Pipeline Co., No. 86-C-1097-E (August 29, 1990). In applying the UCC to the matter, the trial court rejected the gas seller's argument that the measure of damages was governed by "the law of the case" and 23 O.S. 1981 § 22 which provides:

"The detriment caused by the breach of an obligation to pay money only is deemed to be the amount due by the terms of the obligation, with interest thereon."

The trial court determined that the gas purchaser's obligation to pay deficiency payments when they fail to take gas was governed by the UCC rather than § 22 because it is an integral part of the contract for sale and not a separate obligation of the gas purchaser "to pay money only." Further finding that the take-or-pay obligation is a provision for alternative performance and not a measure of damages after the breach, the court concluded that using the deficiency payment obligation as the measure of damages was essentially granting specific performance. Such a remedy was, in the court's view, inappropriate. Hence, the court sustained the gas purchaser's partial summary judgment, finding § 2-708(1) provides the proper measure of damages.

Roye Realty acknowledges that the UCC applies herein, and notes certain UCC provisions which, Roye Realty argues, lead to the result that the gas purchase contract provides the measure of damages. First, the UCC provides that sales agreements governed by it "may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article . . ." 12A O.S. 1981 § 2-719 [863 P.2d 1156] (1)(a) (Emphasis added). Additionally, 12A O.S. 1981 § 1-102 (3) provides that the "effect of provisions of this Act may be varied by agreement, except as otherwise provided in this Act. . . ." Furthermore, the remedies provided by the UCC are to be "liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed . . . ." 12A O.S. 1981 § 1-106 (1). Using these provisions and Oklahoma case law as support, Roye Realty asserts the gas purchase contract provides an alternate measure of damages which places Roye Realty in the same position as if Arkla had taken and paid for gas as required by the contract, and hence, § 2-708 does not apply to this contract. Roye Realty's reasoning is as follows.

The contract is one for alternative obligations, the first being to take and pay for a minimum quantity of gas. International Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879, 882 (10th Cir. 1985), cert. denied, 475 U.S. 1015, 106 S. Ct. 1196, 89 L. Ed. 2d 310 (1986); Prenalta Corp. v. Colorado Interstate Gas Co., 944 F.2d 677 (10th Cir. 1991). When Arkla does not perform the first alternative obligation, it then must make deficiency payments with the option to recoup the paid for gas later. Under Oklahoma law, a party making alternative promises in a contract may elect which alternative he will perform as long as he makes such election before default, but if the promiser fails to make such election in time, then the promise may chose which alternative to accept. Washoma Petroleum Co. v. Eason Oil Co., 173 Okl. 430, 49 P.2d 709(1935). See also Prudential Ins. Co. of Am. v. Faulkner, 68 F.2d 676, 679-81 (10th Cir. 1934) ("One who repudiates his obligation under a contract cannot thereafter exercise an election contained in its provisions."); contra 17A Am.Jur.2d (Contracts) § 619 (1991) and 22 Am.Jur.2d (Damages) § 126 (1988).

Since Arkla elected not to perform the first alternative obligation, and refuses to perform it now, Roye Realty concludes that the right to elect which alternative performance Arkla must perform has shifted to Roye Realty. Thus, Roye Realty asserts that despite the specific provisions of the UCC on the measure of damages, it is entitled to damages in the amount of the deficiency payments Arkla was required to make under the second alternative performance.

To support this argument, Roye Realty also points to Prenalta Corp. v. Colorado Interstate Gas Co., supra. In Prenalta, the Tenth Circuit, applying Wyoming law, reversed the summary judgment granted in favor of Colorado Interstate Gas Company, the purchaser under a take-or-pay contract with Prenalta. The trial court determined that Prenalta failed to plead the proper measure of damages for breach of the take-or-pay obligation because Prenalta's remedy lies in Wyo. Stat. § 34.1-2-708(b) (1991) which provides for "lost profits" to be the measure of damages under certain circumstances.

The appellate court agreed that the UCC applied to the contract, but held that the deficiency payment provision expressed the intent of the parties to "fashion a specific remedy for breach by requiring CIG to pay the value of the shortfall." Citing Wyo. Stat. §§ 34.1-1-102(c) and 34.1-2-719(a)(i) (1991), [Wyoming's UCC versions of §§ 1-102(3) and 2-719(1)(a)], the court found the UCC permitted the parties to provide remedies other than those under the UCC in their contracts. Since the deficiency payment was the alternative left for Colorado Interstate Gas Company to perform when it failed to take and pay for gas, the court concluded, citing 5 A. Corbin, Corbin on Contracts § 1085 (1964), infra, that the deficiency payment obligation provided the measure of damages. We cannot adopt this conclusion.

First, the deficiency payment obligation is neither a remedy for breach of the first alternative performance nor a clause which alters or limits the measure of damages. Universal Resources Corp. v. Panhandle E. Pipe Line Co., 813 F.2d 77, 80, fn. 4 (5th Cir.), reh'g denied en banc, 821 F.2d 1097 (1987); Sabine Corp. v. ONG W., Inc., 725 F. Supp. 1157, 1184 (W.D.Okl. 1989); Resources Investment [863 P.2d 1157] Corp. v. Enron Corp., 669 F. Supp. 1038, 1041 (D.Colo. 1987). Therefore, Roye Realty's reliance upon § 2-719 and Prenalta is misplaced.

Moreover, the deficiency payment is not a liquidated damages provision which sets the amount of damages when Arkla breaches its obligation to take and pay for gas. Id. Because there is a second alternative available for Arkla to perform, failure to take and pay for gas merely constitutes a decision not to perform the first alternative obligation and is not a repudiation of the contract. Repudiation of the contract does not occur until Arkla also refuses to make the required deficiency payments. Hence, the deficiency payment obligation is not a provision designed to provide the measure of damages when Arkla fails to take and pay for gas under the contract. Rather, it is a portion of the overall obligation which Roye Realty alleges Arkla anticipatorily repudiated.

Professor Corbin points this out when he observes:

"An alternative contract may be so drawn as to limit the power of the promisor to discharge his contractual duty by performing one of the alternatives to a definite period of time, after the expiration of which only the other alternative is available to him. After the expiration of the specified period, the obligation of the promisor becomes single and the contract is no longer alternative. . . . Such a contract as this is never an alternative contract at the time of breach." 5 A. Corbin, Corbin on Contracts § 1085, at 469-71 (1964). See also Prenalta Corp. v. Colorado Interstate Gas Co., supra.

Thus, once the one year period has elapsed and Arkla has failed to take and pay for gas, the contract is treated as one for a single obligation, to wit, payment of the deficiency amount.

Professor Corbin continues by stating that the promisee must estimate his damages according to the second alternative which now is deemed the only obligation. Id. It is upon this basis that the court in Prenalta held the deficiency payments to be the measure of damages for breach of the take-or-pay provision. However, the treatise further notes that when the second alternative is payment of a sum of money, special treatment is required. See 5 A. Corbin, Corbin on Contracts § 1081, at 461-62 (1964). Professor Corbin concludes that contrary to the general measure of damages for breach of an alternative contract, there is no reason for laying down a rule which requires damages for failure to elect performance between the alternatives to be estimated according to the sum of money. Id. Rather, the more appropriate measure of damages should be in accordance with the less valuable of the two alternatives which is usually the market value of the specific alternative. Ibid. Hence, our conclusion finds support in academia as well as the specific statutory provisions.

As for the effect of 12A O.S. 1981 § 1-102 (3), we note that there is no indication in the take-or-pay provision of the contract that its terms are intended to vary the effect of provisions of the UCC. Moreover, by selling the gas on the open market and utilizing the § 2-708(1) measure of damages to get the difference between the market price and the contract price, Roye Realty will obtain the same price for its gas as if Arkla would have fully performed. Thus, the purpose of § 2-719 will be fulfilled.

Roye Realty further contends that the purpose of take-or-pay provisions and the intent of the parties thereto also indicate that the best measure of damages for repudiation is the deficiency payment amount. Roye Realty asserts that by entering into the contract the parties intended to allocate risks. Since the risk that Arkla took by entering into the contract has now occurred, i.e., market demand and market price have fallen below the amount agreed to by the parties in the contract, Arkla must pay under the contract. As support, Roye Realty points to Universal Resources Corp. v. Panhandle E. Pipe Line Co., supra, wherein the Fifth Circuit Court of Appeals held that the purpose of a take-or-pay contract is to apportion the risks.

The parties in that case entered into a gas purchase contract which contained a take-or-pay provision. Based upon geological studies, the field reserves, well capabilities and Panhandle's projected sales levels, the gas purchaser (Panhandle) determined that the gas producer (URC) would not be able to supply both the contractual quantity for the remaining term of the contract and also the makeup gas in sufficient quantities to permit full recoupment of deficiency payments. Pursuant to § 2.609 of Texas's version of the UCC,

URC brought suit for breach of contract, and the court held that Panhandle's fears that URC would not be able to fully perform the contract did not rise to a level of "reasonable insecurity" to justify refusing to make deficiency payments. The court further refused to allow extrinsic evidence of the parties' intent regarding the effect of the take-or-pay provision because the purpose and intent of the contract was unambiguous. Such purpose, according to the court, was as follows:

"The purpose of the take-or-pay clause is to apportion the risks of natural gas production and sales between the buyer and seller. The seller bears the risk of production. To compensate seller for that risk, buyer agrees to take, or pay for if not taken, a minimum of gas. The buyer bears the risk of market demand. The take-or-pay clause insures that if the demand for gas goes down, seller will still receive the price for the Contract Quantity delivered each year." 813 F.2d at 80. See also Kaiser-Francis Oil Co. v. Producer's Gas Co., 870 F.2d 563, 566 (10th Cir. 1989) (quoting Universal Resources Corp. v. Panhandle E. Pipe Line Co., supra) and Resources Investment Corp. v. Enron Corp., 669 F. Supp. 1038, 1040-1041 (D.Colo. 1987).

Despite this understanding of the contract's purpose, the court held that "[t]he take-or-pay clause is a promise in the Agreement, not a measure of damages after breach . . ." 813 F.2d at 80, fn. 4 (Emphasis added). See also Resources Investment Corp. v. Enron Corp., supra.

Other courts have noted that take-or-pay clauses in gas purchase contracts are designed to apportion the risks of supply and demand. RJB Gas Pipeline C. v. Colorado Interstate Gas Co., 813 P.2d 1, 10-11 (Okl.App. 1989), cert. denied, (Okl. 1990); International Minerals & Chem. Corp. v. Llano, Inc., 770 F.2d 879, 882 (10th Cir. 1985) (applying New Mexico law), cert. denied, 475 U.S. 1015, 106 S. Ct. 1196, 89 L. Ed. 2d 310 (1986); Louisiana Gas Sys., Inc. v. Tee Oil, Inc., No. 86-2594, (E.D.La. June 30, 1987).

Although we agree that take-or-pay contracts were designed to allocate the risks involved in gas production and marketing, we cannot accede to the view that such allocation of risk is determinative of the measure of damages for anticipatory repudiation of the contracts. The deficiency payment obligation is merely a promise from Arkla to compensate Roye Realty for Roye Realty's promise to take the gas off the public market and sell the gas produced from the designated wells exclusively to Arkla. Arkla's refusal to make the deficiency payments is nothing more than reneging on its promise to compensate. The fact that Arkla took a risk that the market might become depressed when Arkla made the promise does not result in damages for repudiation of that promise being measured according to the promise. Rather, [863 P.2d 1159] the legislature has provided a specific statutory measure of damages for anticipatory repudiation of the take-or-pay obligation.

II.

ONCE BUYER REPUDIATES ITS OBLIGATION TO TAKE OR PAY, SELLER'S INABILITY TO PHYSICALLY DELIVER GAS HAS NO BEARING UPON THE MEASURE OF DAMAGES.

Having concluded that the measure of damages for repudiation is provided in the UCC, we must now determine whether the gas producer's alleged inability to tender gas over the entire term of the contract has any bearing on those damages. Arkla claims that even had it elected to take and pay for gas under the contract, Roye Realty could not have physically delivered the required gas over the entire term of the contract because the well's reserves would be depleted. Arkla bases this contention upon the most recent deliverability tests run on the wells prior to the alleged repudiation which indicate a higher deliverability than previous tests had indicated.

Roye Realty points out that Arkla's argument assumes that Arkla will take the minimum amount of gas each remaining year of the contract and that this assumption is erroneous since Arkla has refused to take now. However, neither assertion fully accounts for the nature of the contractual promises. The deficiency payment portion of the contract states that if Buyer does not take and pay for the annual minimum amount of gas which Buyer is obligated to receive, "and the annual minimum was available and tendered by Seller for delivery hereunder in accordance with the provisions of this contract," then Buyer must make the required deficiency payments. (Emphasis added). Under the contract Roye Realty is only required to be willing and able to perform at the time of Arkla's repudiation, and after such repudiation occurs, Roye Realty need not prove its ability to perform under the contract in order to recover damages for the anticipatory repudiation. This is seen in general contract law in Oklahoma which holds:

"The rule is well settled that where either party to a contract gives notice to the other that he will not comply with its terms, the other need not, in an action for damages for the breach, either plead or prove a tender of performance on his part." Colonial Sugar Co. v. Waldrep, 121 Okl. 31, 246 P. 623, 624 (1926).

Moreover, in the Court's fifth syllabus of Stewart v. Bowser, 178 Okl. 382, 62 P.2d 1195 (1936), we held that the "[i]nability of plaintiff to comply with [the] contract subsequent to renouncement thereof by defendant does not deprive plaintiff of right to damages for loss of prospective profits." (Emphasis added). Professor Corbin states it in the following manner:

"In an action for breach by an unconditional repudiation it is still a condition precedent to the plaintiff's right to a judgment for damages that he should have the ability to perform all such conditions. If he could not or would not have performed the substantial equivalent for which the defendant's performance was agreed to be exchanged, he is given no remedy in damages for the defendant's non-performance or repudiation. Of course, the willingness and ability that remains a condition precedent inspire of the defendant's repudiation, is willingness and ability to perform if there had been no repudiation. The defendant's wrongful repudiation justifies the plaintiff in taking him at his word and at once taking steps that may make subsequent performance impossible. The willingness and ability to perform need not continue after the repudiation; it is merely required that they should have existed before the repudiation; and that the plaintiff would have rendered the agreed performance if the defendant had not repudiated." 4 A. Corbin, Corbin on Contracts § 978, at 924-25 (1951) (Emphasis added)

Hence, the contractual provision imposing deficiency payments upon Arkla when Arkla chooses not to take gas during a particular year comports with the contract [863 P.2d 1160] law of this state, as well as the understanding of such provisions by academia.

Moreover, even though the UCC does not contain a specific provision concerning this issue, 12A O.S. 1981 § 2-610 provides three remedies that the "aggrieved party" may resort to when the other party repudiates the contract with respect to a performance not yet due. Those remedies include the right of the aggrieved party to "suspend his own performance . . . ." Id. The Oklahoma Code Comment to § 2-610 states that "in any event, the repudiation excuses his own performances, and permits him to suspend performance." The Comment further notes that § 2-610 is in accord with previous Oklahoma law, citing Waggoner Refining Co. v. Bell Oil & Gas Co., 117 Okla. 55, 244 P. 756 (1926), which held that "[a]ny conduct of the party to a contract * * * that shows that he does not intend to abide by the terms of the contract in a material particular will excuse the [other] party from his obligation to perform." 244 P. at 758 (quoting Williston on Contracts, § 875). Thus, the UCC offers some support for the case law which governs this issue.

In addition, the court in Universal Resources Corp. v. Panhandle E. Pipe Line Co., supra, held that experienced buyers of natural gas, as Arkla in the case at bar, are "deemed to have known of the risk that [they] might not be able to recoup deficiency payments by taking makeup gas." 813 F.2d at 79. The court further stated that the definition of makeup gas contemplates that the buyer may pay for gas that he never receives. On this basis, the court concluded that the gas purchaser was unreasonable in refusing to make deficiency payments merely because the seller could not assure the purchaser that gas reserves were sufficient to cover the future requirements of the contract plus makeup gas for which the deficiency payments would prepay. See also Louisiana Gas Sys., Inc. v. Tee Oil, Inc., No. 86-2594, (E.D. La. June 30, 1987), wherein the court granted a motion in limine to exclude evidence regarding reserves because the gas purchaser "accepted the risk that actual reserves might be less than `seller's delivery capacity' as computed in the contract."

The express language of the take-or-pay contract and Oklahoma law relating to anticipatory breach support a finding that the measure of damages is unaffected by the seller's future inability to deliver gas. If the seller is capable of performance on the date of the breach, the damages recoverable will not be diminished.

QUESTION ANSWERED.

HODGES, C.J., LAVENDER, V.C.J., and HARGRAVE, ALMA WILSON, KAUGER, and WATT, JJ., concur.

OPALA and SUMMERS, JJ., concur in part, dissent in part.

Footnotes:

1 A deliverability test is conducted to determine the "daily deliverability" of a well. The contract defines "daily deliverability" as "the average daily rate at which the well can lawfully deliver gas under the conditions of this contract as determined by a 5-day test, such 5-day tests to be conducted by [Arkla] from time to time as operations may indicate to be necessary." This "daily deliverability" figure is then multiplied by one-half to determine the "average daily volume." All of the "average daily volumes" are cumulated to find the "contract annual volume" which is the minimum amount that Arkla would be required to "take-or-pay" for that year.

2 Section 2-107 provides:

"(1) A contract for the sale of minerals or the like, including oil and gas, or a structure or its materials to be removed from realty is a contract for the sale of goods within this Article if they are severed by the seller, but until severance, a purported present sale thereof which is not effective as a transfer of an interest in land is effective only as a contract to sell."

3 Oklahoma's version of this statute, 12A O.S. 1981 § 2-609 , entitled "Right to Adequate Assurance of Performance," reads, in pertinent part, as follows:

"(1) A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until had receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return."

The cause was argued before GILBERT, C.J., and THOMPSON and MELVIN, JJ.

Branko Stupar, with whom were Faulkner, Shands, Stupar & Tucker on the brief, for appellant.

Courtland K. Townsend, Jr., with whom was John Burgess Walsh, Jr., on the brief, for appellees.

MELVIN, J., delivered the opinion of the Court.

By written contract, dated 14 November 1972, the appellant (plaintiff below), Sam L. Harrell, agreed to buy, and the appellee (one of the defendants below), Sea Colony, Inc., a Delaware corporation, agreed to sell for $74,900.00 a condominium unit to be constructed by Sea Colony, Inc. in Bethany Beach, Delaware. The contract called for a deposit of $11,235.00 and the balance of the purchase price to be paid "at settlement". The $11,235.00 deposit consisted of $5,000.00 cash paid by Harrell and the execution by him, pursuant to the contract, of a promissory note for $6,235.00, payable "at settlement". Other pertinent parts of the contract were the following provisions:

".... In the event of a default by the Purchaser hereunder, Seller shall have the right to retain the cash deposit and enforce the Note...."

* * *

"Settlement shall take place within thirty (30) days of the posting of written notice to the Purchaser of substantial completion of the above unit, and at the offices of an attorney selected by the Seller...."

* * *

"In the event the above unit is not delivered to the Purchaser on or before January 1, 1974, the Purchaser shall have the right to terminate the Agreement and secure refund of deposit."

On 12 January 1974, the parties agreed in writing to extend the limiting date for delivery to 31 December 1974.

On 12 November 1974, Harrell filed a declaration in the Circuit Court for Montgomery County against Sea Colony, Inc. (Sea Colony) and its agent, Carl M. Freeman Associates, Inc. (Freeman), seeking damages for an alleged anticipatory breach of the contract. Harrell claimed that the defendants had "repudiated" the contract and sold the condominium unit to another buyer for more than the contract price. He claimed as damages the $5,000.00 cash deposit as well as the difference between the contract price and the amount for which the unit was sold to the other buyer. Harrell also claimed, in his second amended declaration, punitive damages. After considerable pre-trial maneuverings, the case finally came on for trial before the court sitting without a jury on 6 May 1976.

The evidence before the trial judge consisted of various documentary exhibits and the live testimony of the appellant Harrell and that of Mr. Norman Dreyfuss who was an employee of Freeman. The judge concluded that the appellant had without justification unilaterally cancelled the contract and judgment was entered in favor of both appellees, Sea Colony and Freeman. Because we find the evidence legally insufficient to support the trial court's conclusion that Harrell unilaterally cancelled the contract, we shall vacate the judgment as to Sea Colony. As to Freeman, however, we shall affirm the judgment in its favor.

Regarding Freeman, the most the record shows is that after the contract of sale was executed by Harrell and Sea Colony, Freeman acted only as agent for Sea Colony, its disclosed principal. Freeman was not a party to the contract and its name nowhere appears therein. The general rule regarding an agent's contractual liability to a third party is set forth in A.S. Abell Co. v. Skeen, 265 Md. 53, 288 A.2d 596 (1972):

".... If an agent, acting for his principal, enters into an agreement with a third party, he is personally responsible under that contract if the identity of his principal is not fully disclosed and is in fact unknown to the third party. This concept encompasses two basic factual situations; where the third party knows there is an agency relationship but is unaware of the principal's identity; and where the third party is not even cognizant that an agency relationship exists. [citations omitted]. Generally, if an agent fully discloses the identity of his principal to the third party, then, absent an agreement to the contrary, he is insulated from liability. [citations omitted]. However, this is subject to exception when the purported principal that is disclosed is nonexistent or fictitious; or when the principal is legally incompetent. [citations omitted]." Id. at 56. (Emphasis added.)

Here, there is no indication that in his dealings with Freeman, Harrell was not fully aware that Freeman was no more than an agent for Sea Colony. Nor is there any evidence or claim that Sea Colony, as a corporate entity, is "nonexistent or fictitious" or "legally incompetent".^[1] Under these circumstances, we hold that the judgment in favor of Freeman was properly entered, albeit not for the reason given by the trial court.

We turn now to the principal issue raised in this appeal, and that is the correctness of the trial court's ruling that Harrell had breached the contract. There is no evidence that Sea Colony or its agent Freeman ever gave notice, written or otherwise, to Harrell "of substantial completion" of the condominium unit he had agreed to purchase. On 28 May 1974, Harrell requested of Dreyfuss that he be allowed to assign the contract. He was told that he could not do so.^[2] Harrell testified that he then told Dreyfuss "that I would be interested in getting out of the contract, that the units were selling for substantially more than my contract price, we all knew this, and I asked them if they would be interested in taking my contract back and reselling the unit, they could make any additional profit on it, if they could, and he said that he would look into the matter and he would be in touch with me". Mr. Dreyfuss, testifying for the defendants, corroborated much of Harrell's testimony concerning this conversation and did not contradict any of it. He said:

"Mr. Harrell stated he wanted to cancel the contract, did not want to proceed with settlement, and indicated that he wanted another disposition of his deposit. He did discuss the matter of the assignability, and I informed him again it was not assignable, and that was pretty much the gist of the conversation.

He told me that the reason was his personal financial situation, which was such that he felt he could not proceed with the purchase of this unit."

It was this 28 May conversation that the trial court seems principally to have relied upon to conclude that Harrell had anticipatorily breached the contract. We think the conclusion was clearly erroneous, particularly in view of subsequent events.

Following the 28 May conversation between Harrell and Dreyfuss, Dreyfuss sent Harrell a letter in mid-July enclosing a "cancellation request which must be signed by you in order for us to process your release". (Emphasis added). The letter continued:

"Please detail the reasons for your request, and the factors effecting your decision not to proceed with the settlement of Unit 901-S, Phase II.

Once we receive this information we will be able to proceed with the determination on the disposition of your deposit". (Emphasis added).

Harrell responded with a letter dated 17 July 1974 as follows:

"Dear Mr. Dreyfuss:

Enclosed herewith is the Release relative to the above. You will note that I have predicated this upon the refund of my deposit and execution of the Release by Sea Colony by July 25th. This is necessary due to the proximity of the completion of the building so that unless Sea Colony is going to release me from the Contract and refund my deposit I will need as much time as possible to take the necessary action to protect my interest in this matter.

Thank you for your consideration in this matter."

The "Release" enclosed with Harrell's letter was the "Cancellation Request" form sent to him in mid-July. He stated therein that he "wishe[d] to rescind his Agreement for the following reasons: Personal financial considerations and the refusal of Sea Colony to allow the assignment of this contract. This Release is contingent upon refund of deposit by July 25, 1974." (Emphasis added).

On 18 August 1974, Sea Colony entered into a contract with a third party to sell the condominium unit for $82,000.00, i.e., $7,100.00 more than the original contract price that Harrell had agreed to pay. In the meantime, so far as the record discloses, there had been no communication between Harrell and Sea Colony or its agent. Thereafter, Harrell received the following letter from Freeman, dated 23 August 1974 — five days after Sea Colony had re-sold the unit to a third party:

"Dear Mr. Harrell:

We are accepting your request to cancel your unit number 901-South of Sea Colony Phase II. However, due to your being unwilling to comply with the terms of the contract, we are keeping your deposit as liquidated damages." (Emphasis added).

This letter was followed by another from Freeman, dated 28 August, 1974:

"Dear Mr. Harrell:

Enclosed is an executed release which relieves you of any further obligation towards the purchase of a home is Sea Colony. Enclosed you will find your cancelled Promissory Note in the amount of $6,235.00.

We are sorry that you are unable to proceed with the purchase of one of our homes. If in the future we can be of service, we would be pleased to have the opportunity to serve you."

The "executed release" enclosed with this letter consisted of the same "Cancellation Request" form that Harrell had forwarded to Freeman with his letter of 17 July 1974. The form contained a space for "Agency Approval" and was executed by an "authorized officer of seller". The executing officer, however, had crossed out Harrell's statement on the form that "This Release is contingent upon refund of deposit by July 25, 1974".

In our view, Sea Colony unilaterally attempted to convert Harrell's request for a mutual rescission of the contract to an anticipatory breach or repudiation on his part.

In 6 Corbin, Contracts, § 973, the standard for determining an anticipatory breach of contract is set forth:

"In order to constitute an anticipatory breach of contract, there must be a definite and unequivocal manifestation of intention on the part of the repudiator that he will not render the promised performance when the time fixed for it in the contract arrives. Doubtful and indefinite statements that the performance may or may not take place and statements that, under certain circumstances that in fact do not yet exist, the performance will not take place, will not be held to create an immediate right of action. A mere request for a change in the terms or a request for cancellation of the contract is not in itself enough to constitute a repudiation." (Emphasis added).

Measured against that standard, we think the evidence in this case falls short of warranting a finding that Harrell breached his contract. Sea Colony argues that Harrell's statements to Dreyfuss in their 28 May conversation that he (Harrell) "wanted to cancel the contract" and "did not want to proceed with settlement" because his "personal financial situation ... was such that he felt he could not proceed with the purchase of this unit" amounted to an impermissible unilateral cancellation of the contract and that Sea Colony was therefore justified in retaining Harrell's $5,000 cash deposit and in re-selling the property to a third party. Sea Colony concedes that Harrell's "Cancellation Request" in July "was simply an offer of the appellant to rescind". It contends, however, that the "contract at that time was already breached" by Harrell and therefore Sea Colony "was under no obligation to even consider" the rescission offer.

As evidence of Harrell's alleged anticipatory breach of contract, in addition to Harrell's 28 May conversation with Dreyfuss, Sea Colony points to the fact that Harrell failed to answer requests from Sea Colony to choose which of two attorneys' offices he preferred as the location for settlement. As we have already noted, the contract provided that "Settlement shall take place within thirty (30) days of the posting of written notice to the Purchaser of substantial completion of the ... unit, and at the offices of an attorney selected by the Seller." (Emphasis added). In early April 1974, Harrell received a letter from Freeman indicating that the "Seller" had "selected" two alternative law firms at which settlement would take place — one located in Delaware and one located in Bethesda, Maryland. The letter asked Harrell to "indicate which location would be more desirable for you". The letter concluded with this statement: "Once we have received your preferences, the attorney's office will be contacting you with regard to more specific information". Harrell did not reply to this letter, nor to an identical one he received in early May. His failure to reply can not be regarded as even a partial breach of contract, for there is nothing in the contract imposing upon him a duty to do so — and, as we have already indicated, there is no evidence that at the time he received these letters the triggering event for scheduling a settlement (that event being written notice of substantial completion of the condominium unit) had occurred, or that he ever refused to attend a settlement, or otherwise refused or failed to fulfill any obligation imposed upon him by the contract.

In summary, we hold that the evidence as a whole is legally insufficient to permit a finding that there was "a definite and unequivocal manifestation of intention" on Harrell's part that "he ... [would] not render the promised performance when the time fixed for it in the contract arrive[d]". 6 Corbin, Contracts, supra. See also, Friedman v. Katzner, 139 Md. 195, 114 A. 884 (1921), where the Court of Appeals, in discussing the doctrine of anticipatory breach, made it clear that the alleged repudiator's "refusal to perform must be positive and unconditional" in order that it may be treated as an anticipatory breach.

Because the trial court found that Harrell had breached the contract, it did not reach the precise issue of whether or not Sea Colony was guilty of an anticipatory breach as alleged by Harrell when it (Sea Colony) resold the property to a third party. Although it may be said that the trial court did, at least by implication, determine that issue, it did not do so in the context of a non-breach by Harrell. We think the issue should now be decided in that context by the court below upon remand rather than by us in the first instance. Md. Rule 1085. We think the issue can be determined by the trial court on the present record and see no necessity for further evidence to be taken. We point out, however, that on the evidence before it a finding by the trial court that Sea Colony breached the contract of sale may not be required. On the evidence, another possible finding would be that there was a mutual rescission of the contract effected by the words and conduct of the parties. Under the particular circumstances of this case, these two possible alternative findings (a breach by Sea Colony or mutual rescission) are mutually exclusive. If the latter finding be made, it would seem that Harrell is entitled to the return of his $5,000.00 deposit. If the former finding be made, he may, in addition to the deposit, be entitled to further damages for Sea Colony's breach.

Judgment for appellee Carl M. Freeman Associates, Inc. affirmed.

Judgment for appellee Sea Colony, Inc. vacated.

Case remanded for further proceedings not inconsistent with this opinion.

Costs to be paid by appellee Sea Colony, Inc.

[1] The fact that as a foreign corporation Sea Colony may have failed to comply with Code Art. 23, § 90 (qualifying to do business in this State), does not affect the validity of the contract or Sea Colony's liability thereunder. See, Code Art. 23, § 91.

[2] The contract provided that it "shall not be assigned or transferred without written consent of the Seller".