News & Noteworthy

Contract Rights – Use ‘Em or Lose ‘Em

Oftentimes businesspeople sign a contract and put it in a drawer never to see the light of day again – unless a dispute arises.  Especially with long-term contracts, trying to informally work things out might be efficient from a business perspective at the time, but it can lead to waiver of important legal rights in the end.

A recent decision by a New York appellate court, Kamco Supply Corp. v. On the Right Track, LLC , 149 A.D.3d 275, 49 N.Y.S.3d 721 (2d Dep’t 2017), should provide a wake-up call to anyone who believes in the casual administration of a contract.  Kamco Supply Corp. concerned disputes arising out an approximately 18 month long distribution agreement.  The intermediate appellate court held that the seller, by accommodating the underperforming purchaser, waived the right to enforce minimum purchase requirements for the construction product under the contract.  The parties entered into the distribution agreement in mid-2005.  The agreement required the purchase of 15 million feet of the product during the remainder of 2005 and ramped up dramatically to require purchase of 164 million feet in 2006 with a monthly minimum of 8 million feet.  The purchaser agreed to use its “best efforts” to market, sell and distribute the product.

From the start, the purchaser failed to meet the 2005 purchase requirements, let alone the tenfold increased requirements in 2006.  The seller did not default the purchaser, but instead tried to work with the purchaser.  By May 2006, the purchaser opened discussions with the seller to end the relationship and, by July 2006, the seller recognized the purchaser would miss all purchase requirements.  Regardless, the seller decided to stick with the purchaser as the seller’s best hope to increase sales of the product.  By the end of 2006, in an act that surely stung, the nonperforming purchaser sued the seller for breach of contract in failing to refund $17,500.  The seller countered with claims of breach of the purchase requirements seeking $71 million in damages.

The court focused on the importance of “course of performance” in “relational” contracts (i.e., contracts involving continuing relationships) in determining not only whether a party committed a retrospective waiver of a prior obligation, but also whether a party prospectively waived an executory, or future, obligation of the other party.  The court held that where a contracting party waives an ongoing obligation, it may retract the waiver on reasonable notice and without undue prejudice to the counterparty.  The case, involving the sale of goods, also triggered the Uniform Commercial Code, which recognizes the importance of course of performance in interpreting agreements and finding waiver of future rights.  The court upheld the trial court’s finding that, despite an express “no waiver” provision in the contract prohibiting oral waivers, the seller by its conduct (i) waived the past due purchase requirements; (ii) made an election not to terminate the contract because of those breaches; and also (iii) waived the future purchase requirements because the seller failed to give timely notice withdrawing its waiver.  The court dismissed the seller’s claims because the seller did not enforce the purchase requirements or make written reservations of rights and, instead, made accommodations to the purchaser in the hopes of increased sales.

The end result for the seller was that after 11 years of litigation (over seven times longer than the contract term), and after trial and appeal, the court granted the purchaser a $17,500 verdict on its breach of contract claim and dismissed the seller’s claims holding the seller waived the purchaser’s admitted breaches of every purchase requirement in the contract.  This case provides a cautionary tale that contracting parties should avoid informal changes, and instead enforce their contracts and document amendments and new understandings.

While the above presents an extreme situation, you might face a less severe situation that could still result in a court later finding you waived your rights by failing to enforce your contract rights or by making oral changes without reservations of rights and proper documentation.  If you have any questions about your contractual relationships and how you can best protect your business (whether to enforce or avoid a particular contract), please do not hesitate to contact us.