Sunflower Electric Cooperative, Inc. v. Tomlinson Oil Company, Inc.
638 P.2d 963, 7 Kan. App. 2d 131 (1981)
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Rule of Law:
A party is not excused from contractual liability under the doctrine of impossibility or commercial impracticability if the contingency that made performance impossible was foreseeable to that party, and the circumstances suggest that the party assumed the risk of that contingency's occurrence, particularly when that party has superior knowledge or expertise.
Facts:
- On November 29, 1973, Tomlinson Oil Company, Inc. (Tomlinson), an oil and gas producer, entered into a 15-year contract to sell natural gas to Sunflower Electric Cooperative, Inc. (Sunflower), a utility.
- The agreement specified that the gas would be sourced exclusively from Tomlinson's leases in the Stranger Creek gas field and dedicated those reserves to Sunflower.
- Tomlinson promised to deliver a minimum of 3 million cubic feet (MMCF) of gas per day and to develop the field to guarantee delivery of up to 7 MMCF per day.
- Before signing, Tomlinson had five potentially productive wells with tests indicating high gas flows, but its optimistic reserve estimates were based on its own employees' analysis and comparisons to a nearby successful field.
- Both parties constructed expensive pipelines to facilitate the transfer of gas based on the agreement.
- From the first day of delivery in December 1974, Tomlinson failed to meet the minimum contract quantity.
- Production rapidly declined due to heavy oil fouling equipment and what was later determined to be a near-total lack of commercially viable gas reserves in the field.
- In July 1976, Tomlinson ceased all production and deliveries from the Stranger Creek field entirely.
Procedural Posture:
- Sunflower Electric Cooperative, Inc. sued Tomlinson Oil Company, Inc. in a Kansas state trial court for breach of contract.
- The trial court found that Tomlinson breached the contract but excused its non-performance, relieving it of liability for damages under the doctrine of impossibility of performance.
- The trial court concluded that the non-existence of gas reserves was a basic assumption of the contract, making performance objectively impossible, and that Tomlinson was not at fault for failing to foresee this contingency.
- Sunflower Electric Cooperative, Inc., as the appellant, appealed the trial court's judgment to the Kansas Supreme Court.
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Issue:
Is a seller of natural gas from a specific, dedicated field relieved of liability for breach of contract under the doctrine of impossibility of performance when the field's gas reserves are found to be insufficient to meet the contract's requirements, if the seller had superior knowledge and the insufficiency of reserves was a foreseeable risk?
Opinions:
Majority - Herd, J.
No. A seller is not relieved of liability for breach of contract under the doctrine of impossibility where the contingency making performance impossible was foreseeable and the seller assumed the risk of its occurrence. The court acknowledged that the lack of gas in the field constituted an objective, existing impossibility ('the thing cannot be done'). However, relief is precluded if the promisor assumed the risk. The risk that the Stranger Creek field contained insufficient gas reserves was foreseeable to Tomlinson, an experienced oil and gas producer with superior knowledge and exclusive access to the exploration data. The court found that Tomlinson assumed this risk, as evidenced by three factors: (1) the foreseeability of the risk and Tomlinson's superior knowledge; (2) contract language stating that 'the availability of gas to Buyer is the essence of this Agreement'; and (3) Tomlinson's promise to 'guarantee' deliverability. This was not a case of a known resource being destroyed by an unforeseen event, but rather a contract based on an unproven assumption about the existence of the resource, a business risk that Tomlinson was in the best position to evaluate and bear.
Dissenting - McLaughlin, J.
Yes. The trial court's findings of fact were supported by substantial competent evidence, and its conclusions of law were correct. Therefore, the trial court's decision to excuse Tomlinson's performance under the doctrine of impossibility should have been affirmed.
Analysis:
This case refines the application of the foreseeability and assumption of risk exceptions to the doctrine of commercial impracticability under UCC § 2-615 and the Restatement of Contracts. It establishes that in contracts for undeveloped natural resources from a specific source, the producer-seller is likely to be held to have implicitly assumed the risk of the resource's non-existence or inadequacy. The decision underscores the significance of a party's superior knowledge and expertise in risk allocation, placing a higher burden on the more knowledgeable party to foresee and contractually provide for such contingencies. For future cases, this precedent cautions expert sellers that they cannot rely on the impossibility doctrine to escape liability for what amounts to a failed business gamble unless they explicitly disclaim that risk in the contract.
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