CHAPTER 23

Measuring Seller's Damages for Breach of

Long-Term Gas Purchase Contracts

Gregory M. Travalio(1)

Professor of Law

Ohio State University College of Law

Columbus, Ohio

Synopsis

§ 23.01. Introduction.

§ 23.02. Application of the Uniform Commercial Code to Gas Purchase Contracts.

§ 23.03. Seller's Remedies Under the Code.

[1]--Section 2-706: The Right of Resale.

[2]--Section 2-708: The Contract/Market Difference v. Lost Profits.

[3]--Determination of Market Damages.

[4]--Action for the Price.

[5]--Specific Performance or Periodic Payments.

§ 23.04. Conclusion.

§ 23.01. Introduction.

The purpose of this Chapter is to examine some of the problems confronting courts faced with a buyer'sbreach of a long-term contract for the purchase of natural gas. As we will see, most of the problemsdiscussed are not unique to long-term gas purchase contracts. However, because of the nature of the marketand the unique provisions of many gas purchase contracts, some of the difficulties are particularlyintractable in this context.

The issue of seller's damages arises, of course, whenever there is a breach by a buyer of a long-term gaspurchase contract. It is especially timely, however, in view of the Chapter 11 Bankruptcy of Columbia GasTransmission Corp., and the impact of the Federal Energy Regulatory Commission's (FERC) Order 636.(2)

It can also arise in other contexts such as litigation over the amount of royalties payable by a producer to theowner of the mineral rights and the valuation of producing property.

This Chapter begins with a short discussion of the application of the Uniform Commercial Code (UCC or

Code) to gas purchase contracts. It then discusses the available remedy provisions of the Code, focusing ingreater detail on a few significant problems faced by courts in applying these provisions to long-term gassupply contracts. Finally, it briefly explores alternatives to traditional damage recoveries.

§ 23.02. Application of the Uniform Commercial Code to Gas Purchase Contracts.

Section 2-107(1) of the Code states: "A contract for the sale of minerals or the like (including oil andgas)...to be removed from realty is a contract for the sale of goods within this Chapter if they are to besevered by the seller . . .."(3)

The original draft of this Section did not include the parenthetical "(including oil and gas)." In 1972,however, the Section was amended to include the parenthetical and the cases since then have uniformlyapplied the Code to contracts for the sale of oil.(4)

§ 23.03. Seller's Remedies Under the Code.

The seller's remedies under the UCC are catalogued in Section 2-703.(5) While these remedies are applicablein a number of potential breach scenarios,(6) this Chapter is primarily concerned with the repudiation by abuyer before full performance of its contractual obligations to purchase natural gas. Assuming that therepudiation constitutes a breach of the whole contract,(7) the seller can cancel the contract and is entitled tothe remedies enumerated in Section 2-703.(8)

There are four damage remedies in Section 2-703, although they reside in only three sections of the Code.(9)

Each of them is potentially applicable in the context of a repudiation of a long-term gas supply con-tract;each presents its own particular problems. It should be kept in mind throughout that the intent of the Code'sremedial provisions is to put the seller in the same position as if the contract had been performed.(10) Theremainder of the Chapter will consider each of these measures in detail.

[1]--Section 2-706: The Right of Resale.

The Code provides both an aggrieved seller and an aggrieved buyer a right to measure damages by asubstitute transaction, a right that was unavailable at common law.(11) An aggrieved buyer may purchasesubstitute goods and recover the difference between the contract price and the price of substitute goods solong as the purchase was made in a commercially reasonable manner.(12) The seller's analog is found inSection 2-706, which permits a seller to resell the goods that were the subject of a contract repudiated by thebuyer and to recover the difference between the contract price and the resale price.(13) If the resale is madein good faith and in a commercially reasonable manner, the aggrieved seller can recover the differencebetween the resale price and the contract price.

As a general matter, this Section has posed few problems in application.(14) Courts need to remember that,to the extent the seller saves expenses on the resale contract, perhaps because transportation expenses areless, these savings should be deducted from the recovery. In addition, Section 2-706 provides for recovery ofboth the reasonable search costs of finding a new buyer and the cost of retaining the goods for a reasonabletime until delivery is made under a resale contract.(15)

At least one thorny problem may occur, however, particularly in the context of a long-term supply contract.Assume, for example, that a buyer has repudiated a contract to purchase natural gas in the second year of acontract that obligated the buyer to purchase natural gas for the productive life of the property. The contractcalls for the purchase of 75% of the deliverable capacity of the property at a price of $5.00 per MMBTU.(16)

On the buyer's repudiation, the seller then makes another contract with a different buyer to sell 100% of theproperty's deliverability over a two year period at $2.50 per MMBTU. Can the seller recover Section 2-706damages measured by the difference between the contract price and the resale price for two years of thebreached contract?

Although it would not be possible in this hypothetical, if the seller can show that it could have performedboth contracts had the buyer not breached, it could be a lost volume seller.(17) If the seller is able to provelost volume seller status, recovery under Section 2-706 will be undercompensatory and inappropriate. If theseller is not a lost volume seller, the question remains whether the second contract, which could not havebeen entered into but for the breach of the first, should be used to measure damages.

Section 2-706(2)(18) requires only that the resale must be reasonably identified as referring to the brokencontract. It is not necessary, however, that the goods be identified to the contract or even be in existence atthe time of the breach to constitute a resale for purposes of 2-706. Thus, even though the gas wouldprobably not be identified at the time of breach, 2-706 would not preclude the later contract from being asubstitute. In fact, because natural gas is a fungible good, it is probably unnecessary that it ever be identifiedto the contract to constitute the subject of a resale contract.(19)

Is the resale reasonably referable to the broken contract under these circumstances? The answer can only be:it depends. To take advantage of Section 2-706, the seller will have to show that the resale contractconstituted a reasonable disposition of the goods and that the contract terms are sufficiently comparable thatit can serve as a substitute for the breached contract. In the hypothetical case, it may be difficult for theseller to recover Section 2-706 damages. The significant difference in the length of the two contracts and thequantity the buyer agreed to purchase may have greatly affected the price of each. There may be other termsin the resale contract that also impact on the resale price, which cannot be easily valued in dollar terms,making it inappropriate as a substitute contract. In such a case, the difference between the market price andcontract price for a contract similar to the breached contract may be a more accurate measure(20) and wouldbe available to the buyer.

[2]--Section 2-708: The Contract/Market Difference v. Lost

Profits.

Section 2-708(1)(21) provides the basic measure of damages in the event of repudiation by a buyer: thedifference between the contract price and the market price at the time and place of tender. This is the classicmeasure of damages for repudiation by a buyer(22) and is intended to put the seller in the same economicposition as performance. If A contracts to sell B his car for $500, and B repudiates, A presumably candispose of the car on the market for the prevailing market price. If the market price is less than the contractprice, e.g., $400, the seller can collect the difference of $100 from the buyer and be in the same economicposition that he would have occupied had the buyer performed. While there are some serious practicaldifficulties in applying this provision, which we will deal with in the next section,(23) the theory behind it issimple.(24)

Pre-Code cases recognized that contract/market damages may not be sufficient to place an aggrieved sellerin the same position as performance.(25) Early revisions to the Uniform Sales Act contained a provisionpermitting the seller to recover a greater amount than the contract/market differential where circumstancesrequired.(26) This provision ultimately became Section 2-708(2) of the Uniform Commercial Code. Itprovides:

If the measure of damages provided in subsection (1) is inadequate to put the seller in as good a position asperformance would have done then the measure of damages is the profit (including reasonable overhead)which the seller would have made from full performance by the buyer, together with any incidental damagesprovided in this Chapter (Section 2-710), due allowance for costs reasonably incurred and due credit forproceeds of resale.(27)

While Section 2-708(2) has been applied in a number of different contexts,(28) the underlying theory isessentially the same: the breached contract has not created an opportunity to otherwise dispose of the goodson the market; rather, the seller has lost a sale that cannot be recaptured. A simple example from ProfessorNordstrom's treatise on sales illustrates the principle:

Suppose an automobile dealer entered into a contract with a buyer for the sale of an automobile for $3000.The dealer had other models like the one sold and could obtain still others from the manufacturer within afew days. The buyer either repudiated the contract or wrongfully rejected the conforming tender. One weeklater the dealer sold the same automobile to a third party for $3,000.(29)

Neither the resale remedy of Section 2-706 nor the market/contract differential (assuming the retail marketprice is $3,000) will net the seller a recovery. Nonetheless, the seller has lost a sale and the profit from thatsale. If the seller's supply is greater than the demand for the item, it could have satisfied all subsequentbuyers, even if the buyer had performed the breached contract. Thus, it should receive its lost profit on thesale.

Section 2-708(2) has engendered a storm of scholarly commentary and a vigorous academic debate. Muchof the controversy centers on micro-economic theory and is critical of both the propriety of granting lostprofits in at least some cases in which they have been assumed to be appropriate and the method ofcalculation applied by courts.(30) Even those arguing for a restrictive application of Section 2-708(2) acceptits premises in some circumstances, however, and courts have generally assumed that the theory behind therecovery of lost profits is valid. There have been very few cases involving natural gas contracts in whichcourts have been called on to determine damages under Section 2-708.(31) Thus, most of the analysis in thissection is based on general principles derived from case law in other areas.

The decision whether to apply the market/contract measure of Section 2-708(1) or Section 2-708(2) hasbeen litigated in a significant number of cases outside the area of natural gas. The touchstone is whether thebreach of the contract made a sale possible by the seller that would not otherwise have been possible. If so,Section 2-708(1) is the proper measure of damages; if not, lost profits should be recoverable under Section2-708(2). For example, in Bill's Coal Co., Inc. v. Public Utilities of Springfield,(32) the buyer breached along-term coal supply contract by refusing to take delivery of some shipments under the contract. The sellersued for lost profits under Section 2-708(2). The court held, however, that it had been demonstrated at trialthat the seller did not have the production capacity during the contract period both to fulfill the contract withthe buyer and to sell coal to third parties. In fact, at times the seller, a coal producer, had to buy coal on themarket to fill the buyer's requirements. Thus, the court found that the breach by the buyer had made possiblethe sale of coal to third parties and, therefore, the contract/market differential was the appropriate measure.

Courts have also generally allowed the recovery of lost profits by "middlemen," or "jobbers," who neveracquire the goods that are the subject of the contract.(33) In these cases, where the buyer breaches, and theseller's (jobber's) decision not to acquire the goods is commercially reasonable, courts have permitted arecovery of lost profits.(34) In Tri-State Petroleum Corp. v. Saber Energy, Inc.,(35) the parties entered into acontract for the seller to deliver 110,000 barrels of gasoline per month to the buyer for six months. Twomonths later the buyer repudiated the contract. The court held that the seller was entitled to lost profits for

the gas that it never purchased for resale to the buyer because of the buyer's repudiation.

Application of these concepts to gas supply contracts is sometimes simple; at other times they mightproduce significant difficulty. For example, if a buyer contracts with the seller for the exclusive dedicationof the seller's production to the buyer for the useful life of the well, Section 2-708(1) is clearly theappropriate measure on repudiation by the buyer. This is a typical seller-producer/buyer-pipelinerelationship. Because of the buyer's breach, the seller can now sell to other customers, a choice that hadbeen precluded by the exclusive nature of the contract.

At the other extreme, if the seller and buyer have a contract under which the seller is to provide the buyerwith a fixed amount of gas over a short period of time and the buyer repudiates, lost profits may beappropriate despite the later sale of the gas to another buyer. If the seller could have supplied the subsequentbuyer had the first buyer not breached, and if the seller has sufficient reserves to supply gas to its customersinto the foreseeable future, the seller has lost a sale and should recover its lost profit. In the Order No. 636era, this may be a seller- marketer/buyer-LDC relationship, or a seller-producer/buyer-LDC relationshipwhere there is no dedication, simply an aggregation of supply by the seller.

The difficulty, even in the above example, is that, to be a truly lost volume seller, there must be sufficientquantity available to the seller to meet all of its future demand. Otherwise, the seller will not have actuallylost a sale because of the breach, although the sale made possible by the breach may not occur until wellinto the future. To illustrate this problem with a simple (and simplistic) example, suppose that a seller has100 widgets and cannot acquire any more after these are exhausted. After it has sold three widgets, a buyerwho had agreed to buy the fourth widget repudiates and widget 4 is sold to another. The seller continues tosell widgets until its supply is exhausted. The sale of the final (100th) widget is only possible because of thebreach by the original buyer of widget 4. Had that buyer not breached, widget 100 would have been sold onebuyer sooner than it was. Thus, the sale of widget 100 to the final buyer was only possible because of thebreach by the original buyer of widget 4 and the seller has not lost a sale. Here, award of the full lost profitis overcompensatory.

On the other hand, the seller will not necessarily be made whole by an award of the market/contractdifference. Assuming that the contract price and market price were the same at the time and place of tender,the seller would not be entitled to any damages.(36) Yet, it is undeniable that the seller has suffered a loss.The profit from the breach of the original contract for widget 4 is not recovered until the sale of widget 100.In the meantime, the seller has lost the use of the profit on the breached contract for widget 4. Depending onthe available supply, and the demand for, the goods, the period between the breached contract and the salemade possible by the breach may be very long or very short.

There are, of course, further possible complications. Widget 100 may be sold at a different price than thecontract price for widget 4, and may have cost the seller a different amount to buy or produce than widget 4.In addition, at the time of trial, it may not be possible to determine when the supply will be exhausted andthe lost sale "made up" or, perhaps, whether it has already been made up.(37)

The implications of this are especially troublesome when considered in the context of a repudiation of along-term gas contract, where the seller is a producer of natural gas and is permitted under the contract toservice customers other than the buyer. Obviously, no reserve of gas is unlimited. At some point theproducer will have exhausted its supply. Therefore, a buyer's breach will never truly create a "lost sale." Atsome point the producer will be unable to extract further gas economically and the final sale or sales prior toexhaustion would not have been possible but for the buyer's breach.

In a situation where a producer has large reserves, however, the lost profit on the repudiated contract maynot be "made up" for a long period of time. If we assume that the seller could have continued to provide gas

to other customers, even if the buyer had not breached, it will lose the "profit" on the contract until thepoint where it makes the final sale or sales, or otherwise makes a sale that would not have been possible butfor the breached contract. This could conceivably be many years after the breach. On the other hand, the"lost profit" will eventually be made up -- it is not lost forever. Thus, awarding the producer-seller the fulllost profit on the sale that the contract should have been performed is probably overcompensatory.

In theory, in such a case, the true measure of recovery should be the difference between (1) the price atwhich the final sale or sales made possible by the breach are made and (2)(a) the contract price of thebreached contract plus (b) the use value of the profit lost as a result of the breach measured from the timeperformance should have occurred under the breached contract until the time the substitute sales are made.Stated another way, the seller's true loss is not the full profit on the breached contract, but rather the usevalue of that profit between the time of the breached contract and the time of the substitute sale (plus anydifference between the price of the breached contract and the price of the substitute contract).

The difficulties inherent in this measure should be apparent. If the trial occurs prior to the time reserves areexhausted, it will be difficult to tell when the final sale (or other substitute sale) is likely to be made. It willalso be nearly impossible to determine at what price it will be made and what interest rate should be appliedto determine use value.

In such a case, I think it appropriate for the court to simply follow Section 2-708(2) and award the lostprofit, despite the fact that it might be somewhat overcompensatory. There are a number of reasons for thisconclusion. First, if the seller has sufficient quantity to supply customers long into the future, there will notbe a significant difference between awarding a lost profit measure and awarding the measure providedabove. At some point, the present value of the lost profit will equal the interest that could have been earnedon the profit had it been invested at the time of performance. In addition, because of litigation expenses andother costs related to the dispute, potential for some overcompensation should not be too worrisome. Finally,the costs involved in estimating the variables in the above formula will often be tremendous.

All of this is by way of illustrating how difficult the choice between Sections 2-708(1) and 2-708(2) mightbe in a particular case. The polar cases are fairly easy; where the breach makes a sale immediately possiblethat would not have been possible but for the breach, the contract market differential is clearly appropriate.On the other hand, where the seller's supply is, for practical purposes, inexhaustible, lost profits should bethe appropriate measure. The cases in between are the ones in which courts are going to struggle.

In these cases, if a court is so inclined, it can account for these factors by manipulating the profit it allowsthe seller under Section 2-708(2). It could, for example, place the burden on the buyer to establish that theseller's lost profits will be recouped in a sufficient period and that a deduction be made from the profitfigure. Where appropriate, a deduction from the full profit could be made as a "proceed of resale under 2-708(2)."(39) It could also allow for lost profits in all cases where a calculation made in the manner suggestedabove would be too speculative.(40)

There are no cases that are very helpful in resolving this problem,(41) and it has largely been overlooked bythe commentators.(42) This discussion, however, should be sufficient to alert lawyers to the treacherousshoals that may lie ahead.

[3]--Determination of Market Damages.

Even when it is clear that the appropriate formula for computing damages is found in Section 2-708(1),serious problems remain in computing market damages for repudiation of long-term supply contracts. Theprimary focus of this subsection is the difficulty of determining a market price when a contract, with manyyears of its term remaining, is repudiated by the buyer.

Section 2-708(1) measures the market price at the time and place performance is to be tendered.(43) In atransaction involving one delivery, or an installment contract covering a relatively short period, determiningthe market price is often easy since the time for performance will have passed before trial. In a long-termgas supply contract, covering perhaps 20 years, determining the market price at the time of tender (delivery)can be very difficult. For example, suppose that the buyer repudiates in the third year of a twenty yearcontract. The seller sues the buyer and the court is called on to determine the market price at the time andplace of tender of each installment for the remainder of the contract in order to calculate the market/contractdifferential. Given what has occurred with natural gas prices over the past 20 years,(44) this would be ahighly speculative endeavor. There is no reliable way to determine what the market price will be 10, 15, or20 years out. It depends on such things as the evolution of federal energy policy, the development oftechnology, the development of alternative energy sources, the effect of environmental regulations,developments in world affairs, and many other unpredictable variables.

One response might be to disallow any damages based on the market/contract difference on the ground thatdetermining the market price over a long period of time is too speculative. A significant number of caseshave denied the recovery of lost profits over an extended period because of the great uncertainty inprojecting profits over an extended period.(45) In fact, it has been suggested that generally the outside periodfor which many courts will grant lost profits is 10 years.(46) Because of the volatility of gas prices over longperiods, determining the contract/market differential would often involve similar uncertainties.(47) Courtscould respond by simply denying recovery for periods for which the court feels determination of the marketprice is too speculative.(48)

The Code, however, provides an apparent answer in Section 2-723. Section 2-723(1) provides:

If an action based on anticipatory repudiation comes to trial before the time for performance with respect tosome or all of the goods, any damages based on market price (Section 2-708 or Section 2-713) shall bedetermined according to the price of such goods prevailing at the time when the aggrieved party learned ofthe repudiation.(49)

A cursory reading of this Section might suggest that the appropriate market price is the spot market price atthe time the seller learned of the buyer's repudiation. This is precisely how one noted commentator has readthe provision.(50) This would, of course, generally result in large damages since the very reason that thebuyer is repudiating is that the price in the long-term contract has become disadvantageous relative to thepresent spot market.(51) It would also be likely to bear little relationship to the actual damages suffered as aresult of the breach, since the present spot market price in an historically volatile market may bear littlerelationship to the average spot market price over the remaining length of the contract.(52)

A closer reading of Section 2-723 and the accompanying comments do not mandate this interpretation. Therelevant language of Section 2-723 requires that damages be computed on the basis of "the market price . . .of such goods prevailing at the time the aggrieved party learned of the repudiation." The language "themarket price of such goods" does not necessarily mean the spot market price. The other alternative is themarket price for a similar forward contract prevailing at the time of the repudiation. There is nothing in thelanguage of the Section or its legislative history that precludes this interpretation;(53) the market price for aforward contract is also a "market price of such goods."

Further, the Official Comment to the Section makes it clear that the Section is to be applied flexibly. Itstates: "This Section is not intended to exclude the use of any other reasonable method of determiningmarket price or of measuring damages if the circumstances of the case make this necessary."(54) This would

certainly allow the use of a market price that is not inconsistent with the language of the Section, as itappears even to sanction measures that are inconsistent when it is reasonable to do so.

Professor Thomas Jackson makes a very persuasive case that the appropriate measure is the market price fora forward contract.(55) While the specifics of his argument are too complex to explore in this Chapter,Jackson provides a sound economic analysis for choosing the market price for a forward contract over thespot market price in measuring a seller's damages, whether the spot market price is measured at the time ofthe buyer's repudiation or at the time of delivery.(56)

In addition to Professor Jackson's argument, there are other sound reasons to choose the market price for aforward contract. Oversimplified, the price for a forward contract is the market's best guess as to what themarket price of the goods will be at the time of delivery.(57) The spot market price reflects current marketconditions, not those anticipated in the future when deliveries would have been made under the contract.Because contract damages are designed to compensate the aggrieved party as closely as possible for itsactual loss,(58) the forward contract price, rather than the spot price, should be used to calculate themarket/contract differential under Section 2-708(1). While this may result in smaller damages to the sellerthan the spot market price,(59) it is the appropriate measure.(60)

The single reported case confronting this issue is Manchester Pipeline Corp. v. Peoples Natural Gas Co.(61)

Manchester involved a 10 year gas supply contract. The buyer breached after the first year of the contractwithout taking any gas. The seller brought suit. At trial, the jury was instructed to determine damages foryears 2 through 10 of the contract on the basis of the market price for gas at the time and place in the futurewhen delivery of the gas would have been made. Damages were awarded in the amount of $1,450,000.

The Tenth Circuit reversed the district court's instruction on damages. The Circuit Court relied on Section 2-723,(62) stating that it saw no reason to depart from that Section's mandate to measure damages at the timeof repudiation rather than the time of performance.(63) It quoted from the Oklahoma Code Comment toSection 2-723 that by measuring damages at the time of repudiation, "the jury need not `speculate byattempting to predict what the future market value will be.'"(64) Thus, the court concluded that damagesshould be measured at the time of repudiation, not the time of performance.

The court noted, however, that the evidence and arguments of the parties had focused on the spot marketprice of the gas, not on the price for a similar forward contract. The court said that this was improper;Manchester's damages should be measured by the price of a similar long-term contract.(65) In recognizingboth the volatility of the natural gas spot market and the fact that long-term contracts often contained termsnot found in spot market contracts, which might also affect the difference in price of the two contracts, thecourt found use of the spot market price inappropriate.(66)

The decision of the court should be applauded. The court understood that forward price is the market's bestguess as to the price of the good at the time of delivery.(67) There is no reason to believe that a jury is morecapable, even with expert help, than the market itself to forecast the future market price.(68) The courtunderstood that the presence of different terms in spot and long-term contracts will generally affect price,and that spot prices have been historically volatile, thus making the spot price particularly unsuitable as ameasure of the future market price.

It would be comforting if the insights of economics and the Manchester case resolved the problem ofmeasuring damages for breach of long-term supply contracts. Unfortunately, of course, they do not. Anumber of other problems remain. First, the state of the market at the time of repudiation may be such that

few long-term supply contracts are being offered in the market and, therefore, there is an insubstantial basisfor comparison. This appears to describe, in large part, the state of the recent market in the natural gasindustry, where spot and short term contracts appear to be the order of the day.(69) Second, it may be evenmore difficult to find long-term contracts that are not only similar in duration but contain comparablecollateral terms as well. There appears to be a great deal of variety in contract terms in long-term gaspurchase contracts,(70) even those with similar durations. Perhaps most difficult, some long-term contractswill have a price that is, itself, somehow indexed to the future market price,(71) which takes us back tosquare one.

There is, of course, no magic formula to resolve these problems. It is clear, however, that they should notpreclude recovery. Over the past three decades, courts have become increasingly willing to grant recovery oflost profits for breach of long-term contracts over the objection that these damages are too speculative.(72)

The so-called "new business" rule which prevented the recovery of future profits for new businesses, hasalmost completely disappeared.(73) Courts have permitted lost profits to be established by many differentkinds of evidence, including profits from similar(74) (and not so similar)(75) businesses, prior track recordsof the participants, and, sometimes, largely on the basis of expert testimony.(76) A number of recentdecisions have indicated that, so long as the plaintiff presents the best evidence available under thecircumstances and there is some basis on which to estimate damages, the issue of damages should go to thejury.(77)

These developments contain a number of lessons for the recovery of damages in the context of long-termgas supply contracts. First, the seller's lawyer must insure that whenever the buyer makes a plausible claimthat market/contract damages are speculative, he or she gathers the best evidence under the circumstances tosupport the claim of damages. Second, it is unlikely to be necessary in proving damages that there be aprecise replica of the breached contract available in the market. If similar forward contracts can be foundand expert testimony provided as to how any differences might impact on price, a sufficient basis should beestablished under current law for proving damages. Similarly, even if contracts of the same duration are fewin the market, forward contracts of similar duration should be sufficient, particularly when it can be shown,by expert testimony or otherwise, that the contracts are otherwise reasonably comparable.

[4]--Action for the Price.

In certain instances, the Code permits a seller to recover the price of the goods which are the subject of abreach by the buyer. Section 2-709(1)(78) is the governing provision and permits the recovery of the price inthree instances: (1) when the buyer has accepted the goods and failed to pay for them, (2) when conforminggoods are lost or damaged within a commercially reasonable time after the risk of loss has passed to thebuyer, and (3) when the seller is unable to resell the goods at a reasonable price after making reasonableefforts to do so. With respect to gas purchase contracts, for obvious reasons (2) and (3) will rarely beapplicable. Natural gas is not the kind of good which is very often lost or damaged after the risk of loss haspassed to the buyer,(79) nor is it the kind of unique or specially manufactured good to which (3) is generallyapplicable. Thus, Section 2-709 will apply almost exclusively in those cases where the buyer has alreadytaken gas under the contract.

Assuming that the buyer has taken delivery of gas under a contract and failed to pay the agreed price,application of Section 2-709 should not present serious difficulty. The price will have been stipulated in thecontract or, if the price was to be ascertained by some market index, the index usually can be consultedwithout difficulty. If the contract was one that left the price to be agreed on by the parties, and an agreementhad not been reached prior to delivery, the court can set a reasonable price.(80) If the parties intended to bebound by the contract, the fact that they "agreed to agree" on the price later will not render the contract

unenforceable.

One area of controversy is whether the seller has the right to recover the price under a take-or-paycontract(81) when the buyer refuses to pay the price for gas not taken. Because the buyer has not takendelivery of the gas, Section 2-709(1) is, by its terms, inapplicable. In addition, subsection (3) is inapplicablebecause courts have generally held that natural gas is not identified to the contract until extracted.(82) Yet,under the express terms of the contract, the seller is entitled to the price regardless of whether the buyeractually takes delivery of the gas. A brief discussion of a recent case will illustrate the problems courts haveencountered dealing with this issue.

In Prenalta v. Interstate Gas Co.,(83) the contract had a take-or-pay provision that required the buyer to takea minimum of 1,000 Mcf of gas per day for each 7.3 Mcf of committed reserves attributable to the contractwells. If the buyer did not take this quantity, it was obligated to pay the seller the price for the differencebetween the minimum amount and the amount actually taken. The buyer then had five years to "make-up"gas paid for but not taken by ordering quantities in excess of the minimum.(84) The buyer did not take theminimum quantity required and refused to pay the price under the take-or-pay provision of the contract.The seller sued.

The trial court rejected the seller's claim on the basis that the seller had failed to plead the proper measure ofdamages. It said that the U.C.C. applied to the case and that the seller was seeking the contract price for thegoods. However, according to the trial court, the remedy for the price under the Code was found in Section2-709, which was inapplicable to the facts of the case. Rather, any remedy should be measured underSection 2-708(2),(85) which allows for the recovery of lost profits, and which had not been pleaded by theseller. The court then found for the buyer on the basis of the seller's failure to plead the proper basis forrecovery of damages.

The Tenth Circuit reversed the district court, probably reaching the correct result, but doing so in aconfusing and contradictory manner. The court began by accepting the plaintiff's argument that the take-or-pay provision constituted a contractual remedy for breach.(86) It stated that, under Section 2-719 of theCode, contractual remedies were generally enforceable, and may serve to limit or alter the measure ofdamages recoverable under the Code.(87) It cited authority to the effect that take-or-pay clauses wereenforceable and briefly considered the economic reasons for their inclusion in contracts. The court, however,did not explain why it considered the relevant provision to be a remedy for breach when the language of thatprovision made no mention of breach or remedy but, rather, seemed to be a statement of the buyer'sperformance obligations.

The defendant argued that, if the provision was a contractual remedy for breach, it should be subject toSection 2-718(88) and unenforceable as a penalty. The defendant was clearly correct in arguing that theprovisions of Section 2-719 are subject to scrutiny under Section 2-718, which regulates the liquidation ofdamages. The introductory phrase of Section 2-719 specifically contains a proviso making contractualremedies subject to Section 2-718.(89) However, rather than examining the provision under the strictures ofSection 2-718, as it properly should have done, the opinion takes a very odd twist.

The court spent the next two pages discussing the take-or-pay provision as if it described alternativeperformances, rather than providing remedy for breach. In fact, in the very next paragraph after the court'sunequivocal statement that the provision constituted a contractual stipulation of remedy, the court stated thatthe provision provided for alternative performance rather than for liquidated damages.(90) After quotingProfessor Corbin's treatise on the issue, the court restated this conclusion: the proper measure of damages forbreach of the "pay" alternative is the payment called for by the contract.(91)

While it has been long recognized by prominent contracts scholars that it is often difficult to distinguishbetween a provision for liquidated damages and a contract providing for alternative performances,(92) it isclear that the two are mutually exclusive. A term either liquidates damages in the event that a party is inbreach or it provides alternative methods of performing, thus avoiding breach. Since a party cannot be inbreach and not in breach at the same time, a provision cannot both provide for liquidated damages (or anyremedy for breach) and be an alternative performance term at the same time.

Further, assuming the provision is one calling for alternative performances rather than liquidated damages,the court never indicated which Section of the Code it relied on in awarding damages for the failure to payfor the gas not taken. It had earlier concluded that the contract was one for the sale of goods and, therefore,governed by the Code, including, presumably, the remedial provisions. Yet in awarding the price for the gasnot taken, it did not mention which Code Section, if any, permitted this recovery. If Section 2-708(2) is theappropriate Section,(93) the trial court decision may have been correct since recovery under this Section hadnot been pleaded.

Apart from its inherently contradictory analysis, the end result in the case is unexceptional. The greatmajority of reported cases have held take-or-pay clauses valid(94) despite attack on a host of grounds,(95)

including that they are unenforceable penalties.(96) Further, most cases seem naturally to assume that theappropriate measure of damages is the agreed price for the gas not taken -- the measure adopted inPrenalta.(97) What makes the Prenalta case otherwise interesting is its failure (or inability) to ground thismeasure of damages in an appropriate provision of the U.C.C., despite the court's recognition that thecontract was governed by the U.C.C. Actually, there are a number of ways in which this might be done,some better than others.

First, contrary to the interpretation of most cases, the take-or-pay provision might be viewed as a liquidateddamage clause. According to Professor Corbin(98) and other contract authorities,(99) whether a contract callsfor alternative performances or attempts to liquidate damages is a matter of the objective intention of theparties. Particularly if the contract provides no "make-up" period,(100) a court could construe the provisionas one liquidating damages. Even when construed as a liquidated damage term, however, take-or-payprovisions should generally be upheld.

Many cases have recognized the sound economic reasons that a buyer might want to enter into a take-or-pay contract.(101) It guarantees the supplier a dependable cash flow in return for (often) exclusivelydedicating its output to the buyer; it assures the buyer a minimum supply. These contracts generally involveparties of equal bargaining strength and sophistication. If, in this context, the parties choose this measure asan estimation of damages, it should at least presumptively be considered to be reasonable.

Courts are becoming less inclined to scrutinize liquidated damage clauses where there is likely to be noimpairment in the bargaining process.(102) Recent scholarship has advocated sound economic reasons fortheir enforcement in freely bargained agreements.(103) While it may be true that, in some situations,enforcement of take-or-pay provisions will result in overcompensation because the gas that was not takencan now be sold to others,(104) often it will take the seller some time to dispose of the quantity of gas nottaken in an alternative market, thus losing the benefit of the cash flow for this period. In addition, it is likelythat the market price has dropped dramatically if the buyer decides to forego taking the gas at all, rather thantaking it and reselling it or assigning its contract rights to the gas at a discount. Thus, damages measured bytraditional formulas are likely to be high in any event. Further, it is possible (perhaps likely, given thebuyer's decision to repudiate the contract) that, even if the contract had continued, the buyer would not have"made up" the gas and that gas could have been sold twice in any event. These factors, coupled with the

transaction costs of disposing of the gas on the market, will likely make the provision a reasonableestimation of damages.

It is much more likely that, if it is properly drafted, the provision will be interpreted as an alternativeperformance term rather than a liquidated damage clause. The great majority of courts have reached thisconclusion.(105) So interpreted, what is the U.C.C. authority under which damages can be given equal to theprice of the gas not taken?

Section 2-709 is unlikely to provide a basis for recovery. Only if the failure to pay for gas not takenconstitutes a partial breach and there has been no repudiation of the contract by the buyer, might Section 2-709 provide a basis for recovery for the gas not taken. The seller can argue that the exclusive nature of thecontract and the requirement that the seller permit the buyer to take the gas at a later date, usually withinfive years, prevents the seller from being able to sell the gas with reasonable effort at a reasonableprice.(106) However, as previously mentioned, Section 2-709(3) requires that the goods be identified to thecontract. Thus, recovery under Section 2-709 is problematic even when the seller is precluded fromotherwise disposing of the gas (which is unlikely to be the case in the event of a repudiation).(107)

Section 2-708(2) provides a more promising basis for recovery of the price for gas not taken. Section 2-708(2) permits the recovery of lost profits by an aggrieved seller.(108) It can be argued by the seller that itsprofit on the contract should be measured by the price of the gas not taken, since under the contract theseller is entitled to the price for the contractual minimum whether or not the buyer actually takes any gas.By repudiating the contract, the buyer has disabled itself from taking any gas in the future or making up gasnot taken in the past.(109) Because of that repudiation it cannot now be known whether the buyer wouldhave taken gas in the future or made up for past deficiencies. Since the buyer's own act of repudiation hascreated this uncertainty, one should not assume that the buyer would have taken gas in the future or madeup prior deficiencies as this assumption might result in undercompensation for the seller. Therefore, theseller's lost profits should be measured by the price of the minimum "take" for each year of the contract.(110)

There are a couple of potential problems with this analysis, although a similar application of Section 2-708(2) has been suggested by another commentator.(111) The first difficulty is that the seller generally hasthe burden of proving lost profits under the Code.(112)

This could reasonably be construed to mean that the seller, in order to receive the price for the minimumtake for the entire contract as its lost profits, would have to show that the buyer would not have taken gas inthe future, nor made up past deficiencies. To the extent that the buyer would have made up past deficienciesor have taken gas in the future, recovery of the price would net the seller more than its lost profits had thecontract been performed. Proving that the buyer would not have taken gas in the future or made up pastdeficiencies might be a difficult burden for the seller to meet.

The other problem with applying Section 2-708(2) is that this Section requires that the buyer be given "duecredit for payment or proceeds of resale." While this provision has been ignored when the seller is in theposition of a lost volume seller,(113) suppliers of natural gas will often not be able to claim this status. If thebuyer is given credit for the proceeds of the resale, however, the very purpose of the take-or-pay provisionis defeated, in that the seller only recovers the contract/resale differential which would have been availableeven in the absence of the take-or-pay provision.

An alternative way of looking at a take-or-pay provision is as an option. The essence of the take-or-paycontract, along with the other obligations of the seller,(114) is the purchase of an option to buy gas for theperiod of the contract.(115) The price of the option is the agreed on price of the gas. While this appears to be

a high price for an option, in most contracts the option extends for quite a period of time beyond the yearthat the buyer fails to take the minimum quantity; under current federal regulations, a minimum of fiveyears.(116) In addition, if the option is "exercised" and the minimum amount made up at a later time, theprice of the option itself turns out to be quite small -- the use value of the funds paid to the seller earlier thanthey otherwise would have been under a straight sale. Finally, depending on how the contract is structured,the buyer may end up paying below market prices for gas paid for in one year and taken in another.(117)

If this is the proper way to look at a take-or-pay provision, then the price of the gas not taken is theappropriate measure of recovery. After all, the repudiation of an option is not fundamentally different from adecision not to exercise the option. Of course, the grantor of an option is entitled to the consideration for theoption, whether or not the optionee chooses to exercise it.(118) The Code, however, does not explicitly dealwith option contracts nor with remedies for their breach. Thus, the problem remains how to permit the sellerunder the Code to recover the price of the minimum take on the buyer's repudiation.

I think the answer is simply that the remedial provisions of the Code were not drafted with options in mindand were not designed to provide remedies for their repudiation. However, both Section 1-103,(119) whichsanctions the application of common law principles, and Section 1-106,(120) which provides for the liberaladministration of Code remedies to put the aggrieved party in as good a position as performance, can beused to justify the remedy of the price in a take-or-pay contract.

One final complication -- even if the correct way to view a take-or-pay provision is as an option, and itsrepudiation as the failure to exercise the option, the full price for all of the gas not taken may be over-compensatory, unless properly discounted. For example, assume a 10 year supply contract, which includes atake-or-pay provision requiring the buyer to take a minimum quantity of gas per year and to pay for anydifference between the agreed minimum and the amount taken at the end of the year. The buyer then hasfive years to "make-up" the amount not taken by taking gas over the agreed minimum.

In the first two years, the buyer takes the agreed minimum. In year 3, it takes less than the agreed minimum,but refuses to pay for the difference. It then repudiates the entire contract. Under the above analysis, thecorrect damage figure is (1) the price for the gas not taken in year 3 and (2) the price for the entire minimumquantity not taken for the remaining term of the contract.(121) By repudiating, the buyer has declined toexercise its option for the term of the contract but should, nonetheless, be responsible for paying theprice.(122) However, the price for years 4 to 10 must be discounted at an appropriate discount rate. Thismoney would not have been received until future years and should not presently be recoverable in a lumpsum, without proper discounting.

In evaluating this result, a number of things should be kept in mind. In agreeing to the take-or-payprovision, the buyer was guaranteed a reliable supply at a reliable price. In addition, it is possible that otherterms of the contract were more favorable to the buyer than they otherwise might have been as a result ofits willingness to bear the risk of the take-or-pay provision.(123) If there were, in fact, some gross inequalityin the bargaining process, the doctrine of unconscionability is available to police the bargain.(124) Thebuyer's alternatives, of course, are either to avoid entering into contracts with these provisions or to avoidrepudiating them.

[5]--Specific Performance or Periodic Payments.

There are two related alternatives to recovery of damages in one lump sum at trial: either (1) enjoining thebuyer from breach, thus forcing the buyer to purchase the gas from the seller under the contract, or (2)requiring the buyer to pay damages based on the contract-market differential throughout the term of the

contract. A full consideration of these alternatives is beyond the scope of this paper, but neither of thesealternatives, although unusual, should be dismissed out of hand.

There are a number of cases, dating from almost a century ago to the present, in which a long-term supplycontract has been specifically enforced because determination of damages was deemed too speculative.Significant among the older cases is Texas Co. v. Central Fuel Oil Co.(126) The case involved a 10 yearcontract for the supply of crude oil, which appears to have been repudiated by the seller early in theterm.(127) The buyer sought specific performance, a complaint that was met by a number of objections bythe seller. Foremost among them was the claim that damages were adequate at law and that equity shouldnot be called on to supervise a long-term contract.(128) The court rejected both objections in terms relevantto the specific enforcement of long-term gas supply contracts.

As to the objection that damages were adequate at law, the court responded that, when damages are toospeculative to be proven, an action for specific performance in equity is appropriate.(129) Otherwise, thevictim of the breach would not be compensated for the damage suffered. As to the claim that enforcement inequity would involve the long-term judicial supervision, the court drew a distinction between contractsinvolving "skill, personal labor, and cultivated judgment," which are likely to give rise to continuingdisputes between the parties, and contracts where these problems are unlikely to arise between partiesoperating in good faith.(130) The court said that the seller's only obligation was to deliver all the oilproduced, up to 540,000 barrels per month for a period of 10 years. The pipelines were already in place andhad sufficient capacity. Since the obligations of the parties were simple and unambiguous, and required no"skill, personal labor, or cultivated judgments," specific performance was appropriate.(131)

At the other end of the time spectrum, a recent case from the Supreme Court of Ohio again makes the pointthat specific performance of a long-term contract is appropriate when determination of damages is toospeculative. In Oglebay Norton Co. v. ARMCO, Inc.,(132) the court upheld the exercise of equitablejurisdiction to order specific performance of a contract having a 30 year term with more than 20 yearsremaining.

In 1957, ARMCO and Oglebay entered into a contract in which Oglebay agreed to ship iron ore forARMCO. The price under the contract was to be "the regular net contract rate for the season as recognizedby the leading iron ore shippers" or, if there were no such rate, the parties were to "mutually agree upon arate." The contract was extended in 1980 to run until 2010.

In 1984, the parties were unable to agree on a mutually satisfactory rate. Oglebay billed ARMCO $7.66 pergross ton, while ARMCO refused to pay more than $5.00. The following year they again failed to reach amutually satisfactory rate. In April, 1986, Oglebay sued, requesting the court to affirm the rate it had beencharging ARMCO or, in the alternative, to determine a reasonable rate. Despite the lawsuit, Oglebaycontinued to ship iron ore for ARMCO until the following year when ARMCO sought a declaration that thecontract was no longer enforceable.

The trial court found that the parties had intended to be bound, despite the failure of the pricing mechanism,and found that a reasonable price for the 1986 season was $6.25 per gross ton. In addition, the court orderedthat the contract be specifically performed and ordered the parties to negotiate or, on the failure ofnegotiations, to mediate each annual season throughout the term of the contract. Thus, the court requiredthat the contract be performed for the next 24 years.

ARMCO objected to the order of specific performance. The Ohio Supreme Court rejected this position,stating that specific performance was necessary because the volatility in market prices of Great Lakeshipping rates and the length of the contract made it impossible to award Oglebay accurate damages.(133)

The parallels to long-term gas contracts are apparent. The volatility of the spot market makes it anobviously unreliable source for determining contract/market damages in a long-term contract.(134) Also, thepricing mechanism or other factors in some long-term contracts may make it difficult to determine damageson the basis of a comparable forward contract.(135) In these cases, Oglebay suggests that specificperformance would be an appropriate remedy, at least where other factors are not present making specificperformance unwise.(136)

The modern trend clearly evidences an increased willingness to exercise equitable jurisdiction.(137) Theschool desegregation cases illustrate the increased willingness of courts to engage in even detailedsupervision over long periods in order to supervise an equitable order.(138) It is clear that Section 2-716 ofthe Code is intended to make the remedy more available in commercial cases.(139) Finally, there is littledoubt that an acceptable basis for an equitable decree is the inability to overcome uncertainty in calculatingdamages. All of these suggest that specific performance may have a significant part to play in theenforcement of long-term gas supply contracts.(140)

The final possibility, only briefly mentioned here, is one that is seen even less frequently in the cases as anenforcement mechanism: periodic payment of damages. This differs from a decree of specific performancein that the buyer is allowed to repudiate the contract; it is not forced to perform by paying the price andaccepting the goods. Rather, damages are measured in accordance with the appropriate Code Sections butare not measured and awarded until the time for performance has occurred. Thus, under a long-term gassupply contract, damages would be measured and paid periodically as information (presumably about themarket price) becomes available.

Research indicates few cases in which such awards have been ordered and upheld. In fact, the first objectionto them might be that they are not even permissible under the Code. Section 2-610 of the Code permits anaggrieved party to resort to any remedy for breach immediately upon the repudiation of the contract by theother party.(141) Further, Section 2-723 clearly contemplates a recovery of contract/market damages prior tothe time of performance.(142) There is no indication anywhere in the Code that the drafters contemplateddelaying the collection of damages until the time for performance in the event the suit was brought prior tothat time.

Furthermore, although the common law rule measured a seller's damages as of the time for performance, incases of anticipatory repudiation, damages for breach were awarded at trial despite the fact that the time forperformance had not yet arrived.(143) There is exceedingly sparse authority in Anglo-American lawgenerally for periodic payments of damage awards measured and paid after the time of trial.(144)

Nonetheless, there are a number of statutory schemes that validate periodic payments of damages(145) and afew recent cases have begun to explore them as alternatives to the traditional lump sum payment.(146) Infact, because incentive problems present in tort cases are not present in most contract cases,(147) they maybe more appropriate in contract than in tort, the area in which most experimentation has occurred.(148)

Certainly, the periodic determination of market based damages would not impose too great a burden oncourts, given the relative lack of difficulty determining market based damages under the Code has presentedto courts thus far.(149) A full evaluation of this possibility will, however, have to await further scholarship.

§ 23.04. Conclusion.

The presence of some difficult, perhaps even intractable, problems in measuring damages for breach of

long-term supply contracts should not be surprising. The dislocations in the market caused by politicalevents, both internal and external, unpredictable, uneven, and inefficient regulation, the rise and fall ofalternative energy sources, and even natural events make future predictions of the market sometimes littlebetter than guesswork. Nonetheless, some approaches are better than others. A working knowledge of boththe practice and the theory of the U.C.C. damage provisions is an essential starting point. This Chapter hasattempted to do that, as well as to begin the process of resolving some of the more difficult problems.

1. * My thanks to my colleagues, Mike Braunstein and Al Clovis, for their helpful comments on prior drafts. I am also grateful forthe research assistance of Greg Russell and Lakesia Johnson.

2. 1. Order No. 636, "Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation underPart 284 of the [Federal Energy Regulatory] Commission's Regulations," 59 FERC Rep. Stats. & Regs. ¶ 30,939 (1992), as amendedby Order No. 636-A, 60 FERC Rep. Stats. & Regs. ¶ 61,103 (1992). [For a comprehensive discussion of Order No. 636, see P.G.Esposito, "FERC's Order No. 636: Restructuring the Legal Relationship Underlying Natural Gas Sales in the United States," 13Eastern Min. L. Inst. ch. 15 (1992) -- Ed.]

3. 1. U.C.C. § 2-107 (1978) (emphasis added).

4. 2. See, e.g. , United Crude Mktg. & Transp. Co. v. Robert Gordon Oil Co., 831 P.2d 659, 661 (Okla. Int. App. Ct. 1992);American Expl. Co. v. Columbia Gas Transmission Corp., No. C-2-85-266 (S.D. Ohio 1985). [For a discussion of the U.C.C. andgas sales contracts generally, see L.M. McCorkle & T.O. Ruby, "Contracts for the Sale of Gas: A Uniform Commercial CodeAnalysis," 7 Eastern Min. L. Inst. ch. 15 (1986) -- Ed.]

5. 1. U.C.C. § 2-703.

6. 2. The Section is applicable whenever a buyer (1) wrongfully rejects or revokes acceptance of goods, (2) fails to make a paymentdue on or before delivery, or (3) repudiates with respect to all or part of the goods under contract.

7. 3. Long-term gas purchase contracts are "installment contracts" under § 2-612 of the Code. Kennedy & Mitchell, Inc. v.Internorth, Inc., 1988 U.S. Dist. LEXIS 17106 (N.D. Okla. 1989). Under § 2-612(3), a breach with respect to one or moreinstallments must "substantially impair the value of the whole contract" to be a breach of the whole contract, as opposed to a breachwith respect to only an installment or installments. Only if there is a breach of the whole contract is a seller entitled to cancel thecontract and bring an action based on the entire undelivered balance. In Kennedy & Mitchell, the court refused to find, as a matter oflaw, that the failure to comply with its contractual obligations for 3 years on a contract with 15-20 years remaining constituted abreach of the whole contract. Id. at 17.

8. 4. Under the provisions of § 2-610, the seller is entitled to bring an immediate action for breach despite the fact that the time forperformance is not yet due. This is consistent with general contract doctrine since the case of Hochster v. De la Tour, 2 Ellis & Bl.678 (1853).

9. 5. Both the contract/market differential and the lost profits measures of damages are in § 2-708.

10. 6. U.C.C. § 1-106.

11. 7. T.H. Jackson, "`Anticipatory Repudiation' and the Temporal Element of Contract Law: An Economic Inquiry into ContractDamages in Cases of Prospective Nonperformance," 31 Stan. L. Rev. 69, 101 n. 106 (1978) [hereinafter cited as Jackson].

12. 8. U.C.C. § 2-712.

13. 9. U.C.C. § 2-706.

14. 10. J. White & R. Summers, Uniform Commercial Code § 7-6 at 347 (3d ed. 1989) (Practitioner's ed. vol. 1) [hereinafter citedas White & Summers].

15. 11. In addition to the contract/resale differential, § 2-706(1) also permits recovery by the seller of incidental damages. Thesedamages are provided in § 2-710; they include "any commercially reasonable charges, expenses or commissions incurred in stopping

delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with the return or resale of the goodsor otherwise resulting from the breach." U.C.C. § 2-710.

16. 12. MMBTU is one million British Thermal Units, a measurement of the heating value of natural gas.

17. 13. Discussed in the text, infra, at § 23.03[2], [3], & [4].

18. 14. U.C.C. § 2-706(2).

19. 15. See Servbest Food, Inc. v. Emessee Indus., Inc., 403 N.E.2d 1 (Ill. Int. App. Ct. 1980).

20. 16. See text, infra, at § 23.03[3].

21. 17. U.C.C. § 2-708(1). This subsection provides in full:

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

22. 18. Jackson at 101; E.A. Farnsworth, Contracts § 12.12 at 902 (2d ed. 1990).

23. 19. See text, infra, at §23.03[3].

24. 20. But see R.E. Scott, "The Case For Market Damages: Revisiting the Lost Profits Puzzle," 57 U. Chi. L. Rev. 1155 (1990).

25. 21. See Ritz Cycle Car Co. v. Driggs-Seaburg Ordnance Corp., 237 F. 125 (S.D. N.Y. 1916); Brunswick-Balke-Collender Co.v. Wisconsin Mat Co., 24 F.2d 78 (7th Cir. 1928).

26. 22. See White & Summers at § 7-9 n.1.

27. 23. U.C.C. § 2-708(2).

28. 24. Professors White and Summers use four categories to describe those who are entitled to lost profits under 2-708(2). White &Summers at 357-365. The first is the lost volume seller who sells completed goods on the market and loses a sale as a result of thebuyer's breach. The second is the "components seller" who agrees to manufacture or assemble the contract goods, but ceasesmanufacture prior to completion. The third category is the "jobber" or a "middleman" who never acquires the contract goods. As thetext points out, the underlying premise in all three cases is that the seller has made one fewer sale as a result of the buyer's breach.Professors White and Summers also have a fourth category -- "other cases" -- that does not depend on the "lost volume" concept. It isunclear, however, whether cases in this category are already adequately covered by §§ 2-706 and 2-708(1).

29. 25. R. Nordstrom, The Law of Sales § 177 (1972).

30. 26. On one side are those who seek to severely limit the application of the lost profits principle. See, e.g. , C.J. Goetz & R.E.Scott, "Measuring Seller's Damages: The Lost Profits Puzzle," 31 Stan. L. Rev. 323 (1979) [hereinafter cited as Goetz & Scott]; R.E.Scott, "The Case for Market Damages: Revisiting the Lost Profits Puzzle," 57 U. Chi. L. Rev. 1155 (1990); Comment, "A TheoreticalPostscript: Microeconomics and the Lost Volume Seller," 24 Case W. Res. L. Rev. 712 (1973). On the other side are those who argue,on various grounds, for an expansive application of the lost profit measure. See R. Childres & R.K. Burgess, "Seller's Remedies: ThePrimacy of U.C.C. 2-708(2)," 48 N.Y.U. L. Rev. 833 (1973); V.P. Goldberg, "An Economic Analysis of the Lost Volume Retailer,"57 S. Cal. L. Rev. 283 (1984) [hereinafter cited as Goldberg]. This selection of articles is by no means complete.

A full discussion of this ongoing controversy is beyond the scope of this Chapter. See White & Summers at § 7-14 for a short, butexcellent, summary of the economic arguments; and see, infra, § 23.03[3] at n. 35.

31. 27. A LEXIS search in the U.C.C Reporter using the terms "natural gas" and "2-708" revealed only 11 cases, most of whichwere not helpful in understanding the application of § 2-708.

32. 28. 887 F.2d 242 (10th Cir. 1989).

33. 29. See, supra, § 23.03[2] at n. 25.

34. 30. See, e.g. , Copymate Marketing, Ltd. v. Modern Merchandising, Inc., 660 P.2d 332 (Wash. Int. App. Ct. 1983).

35. 31. 845 F.2d 575 (5th Cir. 1988).

36. 32. U.C.C. § 2-708(1). This conclusion assumes that the seller has suffered no incidental damages.

37. 33. It appears that the seller may have some control over when the lost sale is "made up." By adjusting the price for widget 4downward, the seller may be able to sell it to a customer who would not otherwise have purchased from this seller. This assumes,however, that the seller has the ability to price discriminate among its buyers. Otherwise it will be restrained by the loss in totalrevenues that an overall price cut would entail. More importantly, if the seller had the ability to price discriminate, and nonethelesssell above its marginal cost, it would do so whether or not the buyer performed its contract. Were the seller to sell below his marginalcost, damages under section 2-706 would exceed those recoverable under § 2-708(2). Thus, the seller's ability to "speed up" thereplacement sale through price manipulation is more apparent than real. See Goetz & Scott at 332 n.26.

38. 34. Under what circumstances this can occur lies at the heart of the economic criticism of the lost profit measure of damages. In acompetitive market, the price of a product will be equal to the marginal cost of producing that product. Assuming a producer at somepoint will face a rising marginal cost curve, it will not produce a quantity greater than that produced where marginal cost is equal tothe price it received for the product. In simple terms, a seller will not produce a product that costs it more to make (or market) than itcan sell the product for.

As a consequence, when a buyer breaches a contract, the seller is afforded the opportunity to make a sale that it would not otherwisehave made because the marginal cost would have been too great. Even if the market is not perfectly competitive and its price isgreater than marginal cost, if the seller faces a rising marginal cost curve, it will not lose a "full" (average) profit on the sale becausethe breach allows it to produce for the next buyer at a lower marginal cost than would have otherwise been the case.

For a full explication and more sophisticated economic analysis, see Goetz & Scott. For a suggestion that the analysis of Goetz &Scott is inapplicable in some markets, see V. Goldberg; R. Cooter & M. Eisenberg, "Damages For Breach of Contract," 73 Calif. L.Rev. 1433 (1985).

39. 35. Any recoupment could be deducted as an expense saved by the breach under § 2-708(2).

40. 36. See U.C.C. § 1-103.

41. 37. In Colorado Interstate Gas v. Natural Gas Pipeline Co. of Am., 661 F. Supp. 1448 (D. Wyo. 1987), the court wasconfronted with a choice between §§ 2-708(1) and 2-708(2). Because the plaintiff was a transporter of gas rather than a producer andwas unable to transport gas during the contract period because defendant had plaintiff "shut-in," it was clear that the plaintiff had lostthe opportunity to transport gas during this period and application of § 2-708(2) was appropriate. The case involved none of thecomplexities discussed above.

42. 38. This is because the models in the existing literature generally ignore the timing of replacement sales and, instead, concentrateon whether there is a replacement sale and at what price.

43. 39. U.C.C. § 2-708(1).

44. 40. See J.H. Medina, "The Take-or-Pay Wars: A Cautionary Analysis for the Future," 27 Tulsa L.J. 283, 286-88 (1991)[hereinafter cited as Medina]; A.F. Brooke, Note, "Great Expectations: Assessing the Contract Damages of the Take-or-PayProducer, 70 Tex. L. Rev. 1469, 1470-74 (1992) [hereinafter cited as Brooke]; Manchester Pipeline Corp. v. Peoples Natural Gas Co.,862 F.2d 1439 (10th Cir. 1988).

45. 41. See 1 R. Dunn, Recovery of Damages for Lost Profits § 6.13 (4th ed. 1992) and cases cited therein. While forecasting lostprofits and future market prices are not equivalent, future profits are obviously highly dependent on future market conditions. Iffuture market conditions could be forecast with precision, much of the difficulty of forecasting lost profits would be removed.

46. 42. See Commercial Damages: A Guide to Remedies in Business Litigation, § 22.06[2] at 22-17 (Knapp ed. 1992).

47. 43. See, supra, § 23.03[3] at n. 40.

48. 44. Cf. Tampa Elec. Co. v. Nashville Coal Co., 214 F. Supp. 647 (M.D. Tenn. 1963) (court adopted presumption that contractprice and market price would be equivalent over long-term contract to avoid problems of speculativeness).

49. 45. U.C.C. § 2-723.

50. 46. See Jackson at 104. Professor Jackson is not clear why he draws this conclusion. In any event, he believes § 2-723 is wrongin using the spot market price. See text, infra, at §22.03[3] n. 50.

51. 47. See, e.g. , Friedman Iron & Supply v. J.B. Beaird Co., 63 So. 2d 144 (La. 1952), 1st rhg. , 63 So. 2d 149 (La. 1952), 2drhg. , 63 So. 2d 151 (La. 1952).

52. 48. It is true, however, that the buyer must expect that the spot market price will remain low for a significant portion of theremaining period of the contract. Otherwise, a rational buyer would not repudiate the contract in the first place.

53. 49. While it is always with some trepidation that one concludes the existence of a negative, my research, that of my studentresearch assistant, and the assistance of a very capable reference librarian has turned up nothing.

54. 50. U.C.C. § 2-723 official comment.

55. 51. Jackson at 82-98.

56. 52. Greatly simplified, Jackson's argument is that using the spot price to measure damages has the potential to deter efficientbreaches. Therefore, it is not the measure that the parties themselves would adopt if they specifically contracted on the measure ofdamages. The reasons why using the spot price might deter efficient breach are complex, but they are based on the fact that, inassessing its potential liability, the breaching party cannot capture any benefit of a market change that actually results in a gain to thevictim because it can cover (or resell) at a price more favorable than the contract price. Thus, using the spot price will "overdeter" apotential breacher. See Jackson at 94-97, 108-109.

57. 53. While generally accurate, the statement is oversimplified for a number of reasons. First, it does not account for the fact thatthe money for a forward contract will be received immediately rather than at the time of delivery. Presumably, the seller will bewilling to take a lesser price than the projected market price at the time of delivery because he can earn interest on the money in themeantime. Conversely, inflation may wipe out some considerable amount of that gain. The remainder, the "real" time-value ofmoney, will unlikely be greater than 1-2% per year. Therefore, with these qualifications, it is fair to say that the market price for aforward contract is the market's best guess as to what the price will be at the time of delivery. The forward market price also reflectsthe aggregate risk adverseness of buyers in the market. See Jackson at 85.

58. 54. U.C.C. § 1-103.

59. 55. This is because the spot market price is likely to be greater than the market price for a forward contract. See Jackson at 95-96. This will not necessarily be true, however, particularly when there is a temporary "glut" of the commodity on the market. Whilethe market will eventually adjust (i.e., through suppliers holding supplies back to take advantage of the higher forward price) the spotprice may be lower than the forward price for a temporary period.

60. 56. But see Medina at 291 n. 22.

61. 57. 862 F. 2d 1439 (10th Cir. 1988).

62. 58. U.C.C. § 2-723.

63. 59. The court relied on the Oklahoma Code Comment to § 2-723, which stated that use of the time of repudiation to measuremarket damages when the time for performance had not yet arrived has "the virtue of certainty." 862 F.2d at 1447.

60. Id. (quoting Ok. Stat. Ann. tit. 12A, § 2-723 cmt. (1963)).

65. 61. Id. at 1448.

66. 62. Id. The parties settled prior to the hearing on remand.

67. 63. See, supra, § 23.03[3] at n. 53.

68. 64. In fact, there is every reason to believe that a jury of 12 or fewer persons will be unable to forecast the future market pricewith any degree of accuracy. The forward price represents the interaction of a multitude of market actors, virtually every one havingbetter information about the commodity than the members of a jury. To the extent that a jury simply relies on experts, who base theirtestimony as to the future market price on the present price for a forward contract, nothing is gained by not using the contract price fora forward contract directly.

69. 65. See 4 W.L. Summers, Oil & Gas Law § 762 (Supp. 1993); Medina at 288 n. 14 (1991).

70. 66. 4 H. Williams, Oil & Gas Law § 720 (1992) (stating that there is practically no standardization in gas purchase contracts).

71. 67. Obviously, if the forward price under the contract is simply measured by the market price at the time of delivery, there shouldbe no contract/market differential for purposes of § 2-708(1). The market price and contract price at the time and place of tender willnecessarily be the same. In this case, the only damages would be incidental damages under § 2-710. This would also be the result of acontract containing a "market out" clause permitting the buyer to refuse to take delivery except at the market price. When the price,however, is measured by some premium over the market price, there may be other damages caused by the breach. For example, if theprice for gas in the breached contract is 2% over the prevailing market price at the time of each delivery, and the price for a similarlong-term contract at the time of repudiation is 1% over the prevailing market price at the time of delivery, the 1% differential willrepresent damages to the seller that will be difficult to measure without knowing the future market price.

72. 68. See, e.g. , Super Valu Stores, Inc. v. Peterson, 506 So. 2d 317 (Ala. 1987); Commercial Damages: A Guide to Remedies inBusiness Litigation, § 5.04[1] (Knapp ed., 1992). While not technically a recovery of lost profits, the difficulties cited above presentthe same issue of speculativeness.

73. 69. See R. Dunn, Recovery of Damages for Lost Profits, § 4.2 (1992). While not directly applicable in this context, the demise ofthe "new business" rule evidences an increasing disfavor among courts to deny damages on the basis of speculativeness or uncertainty.

74. 70. See Cardinal Consulting Co. v. Circo Resorts, Inc., 297 N.W.2d 260 (Minn. 1980).

75. 71. See Fera v. Village Plaza, 242 N.W.2d 372 (Mich. 1976).

76. 72. See Larsen v. Walton Plywood Co., 390 P.2d 677 (Wash. 1964), modified, 396 P.2d 879.

77. 73. Commercial Damages: A Guide to Remedies in Business Litigation § 5.05[2][a] (Knapp ed., 1992).

78. 74. U.C.C. § 2-709(1).

79. 75. I was unable to find a single reported case under the U.C.C. where this had occurred.

80. 76. U.C.C. § 2-305.

81. 77. A take-or-pay contract is one in which the buyer is required to purchase a minimum volume of gas (usually set on an annualbasis); if the buyer does not purchase this minimum it must nonetheless pay for it. Typically, deficiencies can be "made up" oversome limited future period by taking in excess of the minimum amount. See M. Medina, G. McKenzie, & B. Daniel, "Take orLitigate: Enforcing the Plain Meaning of the Take-or-Pay Clause in Natural Gas Contracts," 40 Ark. L. Rev. 185 (1987) [hereinaftercited as Medina et al. ].

82. 78. See, e.g. , Piney Woods Country Life School v. Shell Oil Co., 726 F.2d 225, 234 (5th Cir. 1984) cert. den., 471 U.S. 1005(1985); Prenalta Corp. v. Colorado Interstate Gas Co., 944 F.2d 677, 690 (10th Cir. 1991).

83. 79. 944 F. 2d 677 (10th Cir. 1991).

84. 80. The provision read as follows:

4.2 FAILURE OF BUYER TO TAKE CONTRACT QUANTITY. If during any 1 year period, commencing with the 1st day of themonth in which initial delivery is made from each well, Buyer shall fail to take the Contract Quantity of gas from such well, thenBuyer shall pay Seller on or before the 20th day of the 2d month of the next following year for that quantity of gas which is equal tothe difference between the Contract Quantity and Buyer's actual takes during such period. . . . During the 5 years next succeeding ayear in which Buyer has failed to take the gas so paid for, all gas taken by Buyer from Seller which is in excess of the ContractQuantity of gas for the current year . . . shall be delivered without charge to Buyer until such excess equals the amount of gaspreviously paid for but not taken . . ..

85. 81. U.C.C. § 2-708(2).

86. 82. "We find that the language of § 4.2 . . . unambiguously expresses the intent of Prenalta and CIG to fashion a specific remedyfor breach by requiring CIG to pay the value of the shortfall . . .." 944 F.2d at 677. The court states this conclusion in other places aswell.

87. 83. U.C.C. § 2-719.

88. 84. U.C.C. § 2-718.

89. 85. U.C.C. § 2-719(1).

90. 86. "Because one of the alternative performances in a take-or-pay contract is the payment of money, courts have distinguished the"pay" provision from a liquidated damage provision." 944 F.2d at 689.

91. 87. "Prenalta's damages are therefore measured by CIG's obligation to pay -- the value of which is the contract price in effect atthe time such deficiency occurred multiplied by the difference between the contract quantity and the actual quantity of gas purchasedfor any year . . .." Id. at 690.

92. 88. Professor Farnsworth describes the "tension" involved in interpreting a term as either a liquidated damage clause or oneproviding for alternative performance. 3 E.A. Farnsworth, Farnsworth on Contracts § 12.18 at 294-95 (1990); 5 A. Corbin, Corbinon Contracts § 1082 at 463 (1964) ("It is evident that some alternative contracts giving the power of choice between the alternatives tothe promisor can easily be confused with contracts that provide for the payment of liquidated damages in case of breach, provided thatone of the alternatives is the payment of a sum of money.").

93. 89. See text, infra, at 23.03[3] nn. 104-109.

94. 90. See, e.g. , Medina at 294.

95. 91. See Medina at 293-98 for a brief discussion of each of the many defenses asserted by pipelines against enforcement of take-or-pay contracts. For a more detailed discussion, see Medina et al. at 210-252.

96. 92. See Sabine Corp. v. ONG Western, 725 F. Supp. 1157 (W.D. Okla. 1989); Universal Resources Corp. v. Panhandle E. PipeLine Co., 813 F.2d 77 (5th Cir. 1987).

97. 93. See, e.g. , Colorado Interstate Gas Co. v. Chemco, Inc., 833 P.2d 786 (Colo. Int. App. Ct. 1991); Universal Resources Corp.v. Panhandle E. Pipeline Co., 813 F.2d 77 (5th Cir. 1987).

98. 94. 5 A. Corbin, Corbin on Contracts § 1070 at 397 (1964 & Supp. 1992).

99. 95. J. Murray, Murray on Contracts § 125D at 714 (3rd ed. 1990).

100. 96. But see 18 C.F.R. § 154.103 (1992) (requiring a make-up period of at least five years in certain contracts).

101. 97. See, e.g. , Universal Resources Corp. v. Panhandle E. Pipe Line Co., 813 F.2d 77, 80 (5th Cir. 1987); Prenalta v. ColoradoInterstate Gas, 944 F.2d 677 (10th Cir. 1991); Brooke at 1470 and authorities cited therein.

102. 98. See, e.g. , 3 E.A. Farnsworth, Contracts § 12.18 at 286 (Pract. ed. 1990), and cases cited therein.

103. 99. R. Posner, Economic Analysis of Law § 14.10 at 129 (4th ed. 1992); C.J. Goetz & R.E. Scott, "Liquidated Damages,Penalties and the Just Compensation Principle: Some Notes on an Enforcement Model and a Theory of Efficient Breach," 77 Colum.L. Rev. 554, 593-94 (1977); see also, V.P. Goldberg, "Further Thoughts on Penalty Clauses," in Readings in the Economics ofContract Law 161 (V. Goldberg ed. 1989).

104. 100. This assumes a "total" breach by the buyer (i.e., a breach that permits the seller to declare the contract at an end andeliminates any further obligation on the part of the seller). The breach may be one where the contract continues despite the breach(i.e., a "partial" breach, or in the language of § 2-612, a breach that does not impair the value of the contract as a whole). See, supra, § 23.04 at n. 2.

105. 101. See Medina at 295-96 and cases cited therein.

106. 102. See U.C.C. § 2-709(1)(b).

107. 103. Under § 2-703 when a buyer repudiates the contract, and the repudiation substantially impairs the value of the wholecontract to the seller, the seller is entitled to cancel the contract. As a general matter, this permits the seller to alternatively dispose ofthe goods. But see infra, § 23.03[4] at n. 120.

108. 104. See text, supra, at § 23.03[2].

109. 105. Interestingly, there have been relatively few cases where the buyer has repudiated and the seller has sought damages forfuture years of the contract. The producer normally seeks relief only for the pipeline's failure to make deficiency payments alreadydue under the contract, not for its failure to take future gas or for repudiation of future payments. See Medina at 292 n. 25. But seeKoch Hydrocarbon Co. v. MDU Resources Group, 1993 U.S. App. LEXIS 4555 (8th Cir. 1993) (producer brought action foranticipatory repudiation by buyer).

110. 106. This appears to be the measure of damage permitted in Koch Hydrocarbon Co. v. MDU Resources Group, 1993 U.S.App. LEXIS 4555 (8th Cir. 1993). While the opinion is not clear, an action was brought for anticipatory repudiation in the seventhyear of a 20 year contract. The court's discussion and the large amount of damages awarded indicate that damages were measured bythe price of the minimum takes for each year remaining on the contract.

111. 107. See Brooke at 1480-1483. The author would require that the buyer be obligated to pay the price for deficiencies that couldnot be made up over the make up period. On the other hand, the author suggests that damages for deficiencies that could be made upshould only be measured by the contract-market differential.

In the event of a repudiation of the contract by the buyer, I do not believe that recovery of the price of the gas not taken should belimited to gas that could not have been made up over the remaining "make up" period. By repudiating, the buyer is, in effect,signaling that it is very unlikely that it would make up the gas not taken. After all, under current conditions, the buyer has refused totaken even the minimum. If it anticipated that the contract would become sufficiently attractive that it would take even more than theminimum over the remaining term of the contract, a repudiation seems unlikely. Thus, I believe the method suggested by Brookewould systematically undercompensate sellers. Brooke does not indicate how damages would be computed on the minimum amountrequired to be taken in future years when the buyer repudiates prior to the end of the contract period. See Sabine Corp. v. ONGWestern, Inc., 725 F. Supp. 1157 (W.D. Okla. 1989) ("whether or not ONG [the buyer] will be able to recoup take-or-pay paymentsis not material in calculating damages").

112. 108. See White & Summers at § 7-14. (Seller has burden of proving its "basic case" of lost profits; burden then shifts to buyerto show that market conditions make lost profits overcompensatory).

113. 109. See text, supra, at § 23.03[2] nn. 23-25.

114. 110. E.g. , to sell exclusively to the buyer for the term of the contract or to supply the buyer's requirements during the term ofthe contract, among other obligations.

115. 111. See W.L. Summers, The Law of Oil & Gas § 762 (Supp. 1993) ("To economists, take-or-pay clauses provide for a typeof `demand charge,' a charge for receiving an option to use.").

116. 112. 18 C.F.R. § 154.103 (1992).

117. 113. Under most take-or-pay contracts, the recoupment quantity is determined by the market price of the gas at the time ofrecoupment. See Medina et al. at 189. This is generally done by making the buyer pay the difference between the amount paid for thegas at the time of the deficiency and the market price at the time the gas is recouped. See, e.g. , Universal Resources Corp. v.Panhandle E. Pipeline, 813 F.2d 77, 78 (5th Cir. 1987). However, not all take-or-pay contracts have these provisions. Under sometake-or-pay contracts, once paid for, the make up gas can be recouped without additional charge. See, e.g. , American La. Pipe Co. v.Gulf Oil Corp., 180 F. Supp. 155 (E.D. Mich. 1950); affd. sub nom. Gulf Oil Corp. v. American La. Pipe Line Co., 202 F.2d 401(6th Cir. 1960); Paragon Resources, Inc. v. National Fuel Gas Distrib. Corp., 797 F.2d 264, 265 (5th Cir. 1986); Colorado InterstateGas v. Chemco, 833 P.2d 786 (Colo. Int. App. Ct. 1991).

118. 114. See J. Calamari & J. Perillo, Contracts § 2-25 at 121-22 (3rd ed. 1987).

119. 115. U.C.C. § 1-103.

120. 116. U.C.C. § 1-106.

121. 117. The suggestion in this Chapter is probably the most favorable to the seller of those that have been written on the verydifficult issue of computing damages in take-or-pay contracts. A number of authors have suggested various resolutions to this damagedilemma. As mentioned earlier, Brooke, has suggested that, to the extent that deficiencies cannot be made up over the remainder ofthe contract, the seller should receive the price of the gas not taken. To the extent that deficiencies could have been made up in thefuture, the seller is only entitled to the contract-market differential. As to future minimum takes, the author is silent, but presumablythese would be calculated by using the contract-market difference.

The authors of Medina et al. , seem to suggest that the proper measure of damages on anticipatory repudiation is simply the differencebetween the market price and the contract prices of the gas not taken. See Medina et al. , at 200. This, of course, has the effect ofwriting the take-or-pay provision out of the contract, at least for purposes of future minimum takes, since this would be the measureof damages in the absence of the take-or-pay provision.

Professor Williams' treatise is not clear on whether the buyer should be required to pay for future minimum takes in the event ofrepudiation. He does say that the remedy for the buyer's failure to take the quantity of gas specified in a take-or-pay contract, ispayment for the specified quantity of gas. 4 H. Williams, Oil & Gas Law § 724.5 at 665 (1990). He cites the Prenalta case for theproposition, however, and the facts of Prenalta did not involve a repudiation. Rather, it involved a suit for past deficiencies under acontinuing contract. Thus, it is not clear how Professor Williams would handle damages for future minimum takes and pastdeficiencies when a contract is canceled due to anticipatory repudiation.

122. 118. A further limitation on the effect of this result is that the rejection (intention not to exercise) of a binding option prior to thetermination date of the option does not terminate the option unless the grantor materially changes its position on the rejection. A.Corbin, Contracts, § 94 (1964 & Supp. 1990); 1 Restatement (Second) of Contracts § 37, illus. 2 (1981). If, as suggested in the text,the repudiation of the take-or-pay contract should be treated as the rejection of an option, the buyer should be able to rescind itsrejection at a later date and take gas as provided in the contract, unless the producer has materially relied on the repudiation (e.g. , bycommitting its remaining reserves to another buyer).

123. 119. This is not true with respect to the price term of take-or-pay contracts drafted during the 1970s. Because of priceregulation, price terms were already exceedingly favorable to buyers. Long-term contracts and take-or-pay provisions were aresponse by pipelines unable to compete by offering higher prices. See 4 W.L. Summers, Law of Oil & Gas § 762 (Supp. 1934).

124. 120. It is, however, true that unconscionability has usually been unsuccessful in attacking take-or-pay provisions. See Medinaat 296.

125. 121. The remaining discussion assumes that the relevant contract does not include a take-or-pay provision. However, much ofthe discussion remains applicable even if such a term were included. In fact, because of some of the difficulties discussed indetermining an appropriate measure of damages under a take-or-pay provision, the remedy of specific performance might be evenmore appropriate than a contract without such a provision.

126. 122. 194 F. 1 (8th Cir. 1912).

127. 123. It appears that the contract was signed in 1910, with a Supplementary Agreement signed early in 1911, followed by breachshortly thereafter.

128. 124. Id. at 14.

129. 125. Id. at 11.

130. 126. Id. at 15.

131. 127. Id.

132. 128. 556 N.E.2d 515 (Ohio 1990).

133. 129. Id. at 521.

134. 130. See text, supra, at § 23.03[3] nn. 40 & 61.

135. 131. See text, supra, at § 23.03[3] n. 68.

136. 132. It is important to note that the court upheld the order of specific performance in Oglebay despite the fact that the contractrequired continued negotiations between the parties on the price term for the next 24 years. This would certainly be much more likelyto lead to disputes and require the intervention of the court than a pricing mechanism that did not rest on the agreement of the parties.

137. 133. E.A. Farnsworth, Contracts § 12.4 at 854 (2d ed. 1990).

138. 134. It is true, however, that in cases involving school desegregation there will often be few, if any, other viable alternativeremedies. Because school desegregation is constitutionally mandated, it can be argued that such supervision is required as a matter ofconstitutional law.

139. 135. U.C.C. § 2-716 official comment 1.

140. 136. Routine use of specific performance to enforce contracts has been criticized on economic grounds as leading to thepotential performance of inefficient contracts. That is, it may be in the interests of both parties that damages be paid by the breacher,and both the parties be free to employ their resources in other, more valuable ways, rather than be forced to deal with each other. SeeR. Posner, Economic Analysis of Law § 4.8 at 118-119 (4th ed. 1992). A short example will illustrate. Assume that Seller has acontract to sell 100 widgets to Buyer for $10,000. Buyer repudiates the contract. Seller's damages measured by the market/contractdifferential equal $1,000. Because conditions have changed since the time of contracting, and because Buyer does not have easyaccess to the resale market, the widgets are only worth $8,500 in the hands of Buyer. Specific performance would make Seller whole,but would require Buyer take goods that are worth less in its hands than in Seller's, an inefficient result.

A response to this analysis is that, if Seller and Buyer have the opportunity to negotiate around the specific performance order, theyboth have an incentive to do so. Seller should be willing to take some sum between $1,000 and $1,500 dollars to not enforce thespecific performance order, while Buyer would be willing to pay somewhere between these amounts. Seller will retain the resource(in whose hands it is more valuable), an efficient result. See A.T. Kronman, "Specific Performance," 45 U. Chi. L. Rev. 351, 353-54(1978). Specific performance will give Seller the opportunity to capture some additional wealth from Buyer, however, and will resultin additional transaction costs. For a full explanation, see R. Posner, Economic Analysis of Law § 4.11 at 131 (4th ed. 1992).

141. 137. U.C.C. § 2-610(b).

142. 138. U.C.C. § 2-723. Section 2-723(1) provides that "if an action based upon anticipating repudiation comes to trial before thetime for performance . . . any damages based on market price shall be determined according to the price . . . prevailing at the timewhen the aggrieved party learned of the repudiation."

139. See, e.g. , Goldfarb v. Campe Corp., 164 N.Y.S. 583 (N.Y. tr. ct. 1917).

144. 140. See B. Kolbach, Note, "Variable Periodic Payments of Damages: An Alternative to Lump Sum Awards," 64 Iowa L. Rev.138 (1978); D. Flora, "Periodic Payments of Judgments in Washington," 22 Gonz. L. Rev. 155, 158 (1986-87).

145. 141. See M.L. Plant, "Periodic Payment of Damages For Personal Injury," 44 La. L. Rev. 1327 (1984) and statutes citedtherein.

146. 142. See Holden v. Construction Mach. Co., 202 N.W.2d 348 (Iowa 1972).

147. 143. Critics of periodic payments argue that periodic payments in tort cases will remove the incentive for rehabilitation andreturn to productive activity because the periodic payment would generally represent lost wages. These payments would not beavailable if the plaintiff were to return to productive employment. Since the contract/market differential in contract cases assumes thatgoods are available for resale, there is no effect on the seller's incentive to dispose of the goods profitably.

148. 144. While a significant number of states have passed periodic payment statutes, virtually all are limited to tort, and most arelimited to medical negligence. See D. Flora, "Periodic Payments of Judgments in Washington," 22 Gonz. L. Rev. 155, 159 (1986-87). But see Holden v. Construction Mach. Co., 202 N.W.2d 348 (Iowa 1972) (upholding order of periodic payment in contractcase).

149. 145. See White & Summers § 7.7 at 356.