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Tel (754) 800-9550 | info@robtannerlaw.com
Admitted in Florida, the District of Columbia, and Maryland

MATERIAL SUPPLIERS – CONTRACT TERM REQUIRING NOTICE OF TERMINATION

IF YOUR CONTRACT DOES NOT INCLUDE A REQUIREMENT FOR NOTICE OF TERMINATION, THE LAW STILL MIGHT REQUIRE THE NOTICE

“Look, the contract says nothing about it, so I cannot be required to do that!”

Maybe.  But, maybe not.

Within the UCC (Sales) there are provisions that supplement the terms of a contract, or will be read into a contract, if the contract does not contain terms addressing the particular subject.  For example, certain sales agreements that are silent as to termination will be read to include termination provisions contained in the UCC (Sales).

FLORIDA UCC PROVISION THAT ADDRESSES TERMINATION OF A CONTRACT THAT IS TERMINABLE AT-WILL

Florida Statutes, section 672.309 states in relevant part that:

(2) Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.

(3) Termination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.

The quoted provisions establish a few conditions that must be met before they apply.  Only contracts for “successive performances” and that are for an “indefinite duration” may be subject to the provisions.  “Successive performances” would include contracts, such as distributorship contracts, that are not “one-offs”.

For the “indefinite duration” requirement to be met, the sales agreement cannot establish when performance under the agreement is concluded.  For example, one court ruled that an agreement to furnish concrete for a construction project would not be considered an agreement for an indefinite duration because, at the latest, the conclusion of the project would mark the conclusion of the sales agreement.

So, if the agreement for the sale of goods calls for successive performances and is indefinite in duration but is silent as to termination, Section 672.309(3) might apply.  As stated in that provision, this means that there will generally be a requirement on the parties to provide notice prior to terminating the agreement.

EXAMPLE OF OUTCOME FOR PARTY WHO FAILED TO COMPLY WITH UCC REQUIREMENT TO GIVE NOTICE OF TERMINATION OF A CONTRACT THAT WAS TERMINABLE AT-WILL

In Maytronics, Ltd.  V. Aqua Vac Systems, Inc., 277 F. 3d 1317 (11th Cir. 2002), Manufacturer made and sold automatic swimming pool cleaners and had an agreement with Distributor that automatically renewed for a yearly term, provided Distributor purchased sufficient quantities.  The agreement was renewed for three successive terms, with the sales to Distributor increasingly significantly during that period.

In the third renewal year, Distributor began developing its own robotic pool cleaner based on Manufacturer’s design.  Nevertheless, Distributor met with Manufacturer and one of Distributor’s retailers to discuss the upcoming year.  The retailer expressed an ability to sell substantially more of the product than Distributor itself had purchased the prior year.  Manufacturer began purchasing parts to prepare for the anticipated increase in sales.  However, the retailer privately informed Distributor that the retailer would not buy Manufacturer’s product because Manufacturer could not fill orders fast enough.

In order to “keep his options open”, Distributor’s president maintained the relationship with Manufacturer and did not notify Manufacturer that the retailer would not purchase Manufacturer’s product or that Distributor would not renew the agreement.  Two months after the meeting, Distributor entered into an agreement to sell to retailer the competing product that it had developed based on Manufacturer’s design.  It was another two months after that agreement was entered until Manufacturer learned that Distributor was not renewing the agreement.

Manufacturer filed suit for damages against Distributor.  The case was decided by jury trial.  The trial court ruled that the agreement between Manufacturer and Distributor was “terminable at will”, that Distributor had breached the agreement, that the agreement was extended for a reasonable time period after the date of termination, and that Distributor was liable for Manufacturer’s damages incurred during the reasonable period after the date of termination.  The jury determined that Distributor should have provided six months’ notification and that by failing to provide the required notice, Distributor and had caused Manufacturer to suffer $707,266.00 in damages, which included amounts for lost profits. The trial court further awarded $91,081.71 prejudgment interest.

Distributor appealed.

Distributor argued on appeal that when there is not sufficient notice of termination to the other party to a contract that is terminable at will, the measure of damages is limited to “out-of-pocket” expenses, but not lost profits. The reasoning was that a party has no right to expect future profits on a contract that may be terminated anytime.

Referring to Florida Statutes section 672.309(3) quoted above, the appellate court ruled that, “[s]ince the Florida UCC requires reasonable notification prior to the termination of a terminable-at-will contract, it follows that the parties have an expectation that the contract will not end without such notification, as it did here.”  The appellate court upheld both the award that included lost profits as well as the prejudgment interest awarded to Manufacturer.

INCLUDING TERMINATION PROVISIONS IN CONTRACT WILL PREVENT APPLICATION OF UCC 672.309(3) AND WILL GIVE THE PARTIES GREATER CERTAINTY

Including termination provisions in ongoing contracts for the sale of goods might be preferable to having the UCC provisions read into your contract. Specific terms for how far in advance notice must be given, what suffices for notice, and the manner in which notice must be given can be spelled out to increase the parties’ certainty about their rights and obligations.

FOR FURTHER INFORMATION

Companies that sell or buy construction materials may gain advantages in their transactions by being aware of the relevant legal issues.  If you have, or want to avoid, a legal dispute concerning the sale of construction materials, call the Law Office of Robert S. Tanner today.