Parties sometimes draft their own contracts. If it is a simple transaction or deal, or if they have a go-by to use, they might think, “Why not?” This can lead to some serious problems, not the least of which is that the contract does not state what the parties agreed to. I see this sometimes in my litigation practice. A client might ask us to demand that the other party do such and such. After reviewing the contract, we learn that the contract does not require the other party to do such and such. This problem can arise even in complex contracts drafted by lawyers and involving sophisticated business parties. A recent case out of the Fourth Circuit Court of Appeals reminds us of this pitfall.
Foodbuy, LLC is a Delaware Limited Liability Company (with offices in Charlotte, North Carolina) that is part of a Group Purchasing Organization which pools entities to maximize buying power and negotiate prices. Gregory Packaging, Inc. is a New Jersey Corporation that manufactures and sells juice cups to schools and hospitals. These two parties entered into a complicated and detailed supplier agreement whereby, generally, Foodbuy agreed to purchase juice cups at a price negotiated by the GPO and receive an allowance for a volume rebate. After years of working together, a dispute arose between the parties. GPI claimed that Foodbuy miscalculated its sales and credits causing an overpayment by GPI to Foodbuy of over $6,000,000. Foodbuy claimed that GPI overcharged its customers leading to substantial damages. Both parties claimed that the other party had misinterpreted the parties’ agreement. The case ended up in court in a fight over, ostensibly, contract interpretation.
North Carolina law provides that “when a contract is fairly susceptible of two constructions, one of which makes it fair and customary and which prudent persons would naturally enter into while the other makes it inequitable, the former interpretation must be preferred to the latter.” Management Sys. Assocs., Inc. v. McDonnell Douglas Corp., 762 F.2d 1161, 1172 (4th Cir. 1985). North Carolina law also provides that a court must construe ambiguous contract terms against the drafter. Cosey v. Prudential Ins. Co. of Am., 735 F.3d 161, 170 (4th Cir. 2013). The trial court, relying on North Carolina’s contract interpretation principals, found that the parties’ agreement was ambiguous, and that GPI’s interpretation was correct. Based on this and other findings, the court dismissed Foodbuy’s claims.
In Foodbuy, LLC v. Gregory Packaging, Inc., the Fourth Circuit Court of Appeals reviewed the rulings of the trial court. 2021 U.S. App. LEXIS 2691 (4th Cir. Feb. 1, 2021). The appellate court agreed with the trial court that the underlying pricing and purchasing agreement was ambiguous. Additionally, the appellate court affirmed the trial court’s holding in which it applied the above-cited principals of contract interpretation to ascertaining the meaning of the parties’ agreement.
The appellate court, however, reversed the trial court’s dismissal of Foodbuy’s claim for violations of the North Carolina Unfair and Deceptive Trade Practices Act. It sent the case back to the trial court to look at those claims again.
The takeaway: make sure that your contract terms state what you mean and that the contract reflects the actual agreement of the parties. If not, you could be headed for trouble.
If you need representation in a dispute involving a breach of contract or contract interpretation, please give us a call to discuss. The attorneys at Vann Attorneys would be happy to discuss these matters with you and help if we can.