Laclede Gas Co. v. Amoco Oil Co.

United States Court of Appeals, Eighth Circuit
522 F.2d 33 (1975)

ELI5:

Rule of Law:

A contract is not invalid for lack of mutuality of obligation merely because one party has a right to cancel while the other does not, provided the cancellation right is subject to some restrictions. A promise to purchase all of one's requirements can be implied from the circumstances and practicalities of the contractual arrangement, creating an enforceable requirements contract.

Facts:

On September 21, 1970, Laclede Gas Company and Amoco Oil Company's predecessors entered a written agreement for Amoco to supply propane to residential developments served by Laclede.
The agreement allowed Laclede to request Amoco supply specific developments, with Amoco binding itself by signing a supplemental form letter for each one.
Under the agreement, Amoco was obligated to install and operate storage facilities and provide a continuous supply of propane to meet Laclede's reasonably anticipated needs for each development.
The agreement gave Laclede the right to cancel by providing 30 days' written notice, but this right could only be exercised after one year and only on the anniversary of the first gas delivery.
Amoco had no contractual provision allowing it to terminate the agreement.
The parties operated under the agreement for several years, bringing 17 subdivisions into the arrangement.
On May 14, 1973, following a price dispute, Amoco sent a letter informing Laclede that it was terminating the agreement, claiming it was invalid due to a lack of 'mutuality'.

Procedural Posture:

Laclede Gas Company filed a diversity action against Amoco Oil Company in the U.S. District Court for the Eastern District of Missouri.
Laclede sought a mandatory injunction for specific performance or, in the alternative, damages for breach of contract.
Following a bench trial, the district court held that the contract was invalid due to a lack of mutuality and denied Laclede's request for an injunction.
Laclede, as the appellant, appealed the district court's judgment to the U.S. Court of Appeals for the Eighth Circuit.

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Issue:

Does a long-term supply agreement lack mutuality of obligation, and is therefore unenforceable, when the buyer has a restricted right to terminate the agreement while the seller does not, and the buyer's promise to purchase its requirements is implied rather than explicit?

Opinions:

Majority - Ross, J.

No. The agreement does not lack mutuality of obligation and is an enforceable contract. A bilateral contract is not invalid simply because one party has a right of cancellation that the other lacks. Laclede's right to terminate was not absolute or unrestricted; it was limited by three conditions: it could not be exercised for one year, it required 30 days' written notice, and it could only be effective on the anniversary of the first delivery. Citing authorities like Williston and Corbin, the court found that even slight restrictions on a cancellation right constitute sufficient legal detriment to serve as consideration. Furthermore, the court held that this was a valid requirements contract. While Laclede did not explicitly promise to purchase all its propane from Amoco, this obligation was clearly implied by the practicalities of the arrangement. Laclede was required to install its distribution facilities connected to Amoco's header piping, making it practically and economically infeasible to switch to another supplier for a given development. This implied promise to purchase its requirements from Amoco constituted sufficient consideration to bind Amoco to its promise to supply.

Analysis:

This case clarifies the modern doctrine of mutuality of obligation, moving away from a rigid requirement of identical promises to a more flexible analysis of whether each party's promise is supported by consideration. The court's willingness to find an implied promise to purchase based on the practical realities of the business arrangement reinforces the principle that courts will strive to uphold contracts that the parties intended to be binding. The decision also serves as a strong precedent for granting specific performance in long-term supply contracts for goods, especially where market volatility makes it difficult to calculate monetary damages and find a reliable alternative supplier, highlighting that a legal remedy must be as complete and efficient as an equitable one to be deemed adequate.

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