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7th Circuit: Contract enforceable by mutuality of obligation

August 17, 2018

A contract dispute between a rubber product maker and its supplier was settled when the 7th Circuit Court of Appeals reversed a decision that claimed the parties’ agreement was unenforceable.

BRC Rubber & Plastics, Inc. produces rubber‐based products for the automotive industry. Continental Carbon Co. is a supplier of carbon black, a raw material that is a key ingredient in rubber products.

In January 2010, BRC and Continental entered into a five‐year contract in which Continental agreed to sell approximately 1.8 million pounds of prime carbon black annually, to be taken in equal monthly quantities. In return, Continental obtained the right to review and meet any better offers that BRC received during the term.

But in March 2011, demand for carbon black began to exceed Continental’s ability to produce it. Continental notified its buyers, including BRC, that the N762 grade of carbon black would be unavailable in May due to plant outages and lack of inventory. Nonetheless, BRC placed an order for 360,000 pounds of carbon black, including N762, for delivery in the coming weeks. BRC eventually purchased one railcar’s worth of N762 from another supplier at a higher price than what was considered in its agreement with Continental.

BRC then sought to recover costs from Continental for the purchase from a separate supplier, arguing Continental had to fill every order BRC placed because the companies had a requirements contract.  The Indiana Northern District Court granted partial summary judgment to BRC and awarded the company more than $982,000 in damages.

But in a previous appeal, the 7th Circuit vacated that judgment after rejecting the characterization of the agreement as a requirements contract, agreeing with Continental that the contract “does not obligate BRC to buy any amount of carbon black… .” The district court then granted summary judgment to Continental on remand, finding BRC’s complaint failed to state a claim for relief under any theory of the agreement other than as a requirements contract and that the agreement was unenforceable for a lack of mutuality and consideration.

The 7th Circuit reversed summary judgment for Continental on Thursday, finding first that the agreement was, in fact, supported by mutuality and consideration and therefore enforceable. It noted the agreement imposed a definite mutual obligation on both BRC and Continental considering their respective promises made in the agreement.

“It is clear under Indiana law that ‘the doctrine of mutuality of obligation does not require that every duty within an agreement be based upon a corresponding obligation,’” Judge Kenneth Ripple wrote for the court. “…Therefore, BRC’s obligation under the Agreement need not mirror that of Continental; it is not the case that the seller be required to sell and the buyer be required to buy.”

Next, the 7th Circuit found that the agreement was not an unenforceable “buyer’s option” and did not fail for a lack of essential terms – specifically, precise quantity terms for the total amount of carbon black and for each grade of carbon black.

The court noted that any flexibilities found in the supply agreement were not unrealistic for entities operating at different tiers in the manufacturing process. It also found the approximation of the annual quantity reflected in the agreement did not undermine the definiteness of the contract.

“We also conclude that BRC’s complaint alleges adequately a claim of anticipatory repudiation under its revised theory of the Agreement,” Ripple concluded. “These revisions alter only BRC’s legal theory, not the fundamental factual basis for its claim. Nor do they prejudice Continental or unreasonably delay the case.”

Therefore, the 7th Circuit reversed and remanded BRC Rubber & Plastics, Incorpo v. Continental Carbon Company, 17‐2783, permitting BRC to recover costs from Continental.

 

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