Beware lurking terms and conditions in your contracts
We all know various beasties lurk about in October, the month of Halloween, but beastly provisions also can lurk in contracts, ready to cause misery to the unwary. This is exactly what happened to a Massachusetts food distributor, Siegel Egg Company, in a contract for the purchase of frozen blueberries from Naturipe Foods, the marketing arm of the Michigan Blueberry Growers, in the Kent County Circuit Court case of Naturipe Foods, LLC v. Siegel Egg Company, Inc.
In 2011, Naturipe submitted a written offer to sell a large quantity of frozen blueberries to Siegel in multiple shipments. The blueberries would be from Michigan and Georgia. Siegel’s employee reviewed the offer and made a few edits: He crossed out “Georgia,” and wrote “Grade A” under the reference to Michigan blueberries. Siegel's employee then accepted the offer by signing it. Naturipe’s offer included the notation “subject to seller's terms and conditions” under the Siegel employee’s signature.
Things went “down the tube” from that point. Naturipe delivered two shipments of blueberries to Siegel in February and March 2012. The blueberries were sub-Grade A, but Siegel nevertheless sent the blueberries to its end-user customers, who found them unfit for human consumption. So, Siegel canceled the contract, i.e., it didn't request or pay for any more blueberries due under the contract, which expired August 2012. Siegel never informed Naturipe the first two shipments of blueberries were unacceptable.
Naturipe eventually sued Siegel for breach of contract, and Kent County Circuit Court Judge Christopher Yates granted Naturipe’s summary judgment motion. The verdict in Naturipe’s favor was over $700,000. Siegel appealed to the Michigan Court of Appeals. The crux of the case was whether Naturipe's terms and conditions governed the contract. Siegel argued “no way,” because it didn't read the terms and conditions and wasn't furnished a copy.
But the Michigan Court of Appeals was not persuaded. It ruled Naturipe's terms and conditions were controlling even if Siegel never read them. After all, Siegel's employee could have crossed out the “subject to terms and conditions” notation just as he did to the “Georgia” blueberries reference. Citing prior Michigan court decisions, the court ruled a party may incorporate the terms of another document by reference into a contract without attaching or otherwise providing a copy of the document.
Unfortunately, Naturipe's terms and conditions had a devastating impact on Siegel's defense to Naturipe's breach of contract. Under those terms and conditions:
- Even though Siegel had no business presence in Michigan, jurisdiction and venue of the lawsuit in Kent County Circuit Court was proper, thus affording Naturipe and its Michigan blueberry growers a hometown advantage.
- Siegel had no right to cancel the contract because that remedy was not listed in Naturipe's terms and conditions. The stated “sole and exclusive” remedy was for Naturipe to credit Siegel with the purchase price of the defective blueberries or replace them with Grade A blueberries. But for this remedy to be effective, Siegel had to notify Naturipe of the defective blueberries within 30 days of Siegel's receipt of the blueberries, and it failed to do so.
- Siegel had to pay Naturipe's legal fees incurred related to the lawsuit and the appeal; these amounted to over $200,000. (Note that in private civil cases for breach of contract, the winning party doesn't receive legal fees from the loser in the absence of a contractual provision stating otherwise.)
This case emphasizes the point every word in a contract must be considered, including seemingly innocent references to external documents. We don't know why Siegel's employee didn't simply cross out the reference to Naturipe's terms and conditions or ask to see them (or have his legal department review them) before he accepted Naturipe's offer. (Perhaps he was too busy with other deals; in my experience, the produce buying function is often hectic.) And we don't know why he didn't get on the phone to complain to Naturipe when Siegel received the first shipment of defective blueberries. Another tactic Siegel could have taken was incorporating its own favorable terms and conditions (sometimes called a “sales acknowledgment”) into the signed acceptance that would have negated Naturipe’s terms and conditions, but there is no evidence this occurred.
Are there “lurking” references to external documents in any of your contracts? If so, and if the contract is governed by Michigan law, you are most likely bound by them!
Attorney Chadwick C. Busk, a 1977 graduate of Notre Dame Law School and veteran of the corporate legal trenches, is now honing his contract drafting skills at busklaw.com.