Summary of a Recent
Judicial Development in
Bankruptcy

Ag Retailer and Supplier Not Bound
by Supplier's Prior Oral Statement

Chuck Munson
National AgLaw Center Graduate Assistant

Summary of Decision

In Advanta USA, Inc. v. Farmers Fertilizer Company, Inc., No. 2005-CA-00062-MR, 2006 WL 1561489 (Ky. Ct. App. June 9, 2006), the Kentucky Court of Appeals held that the lower court erred when it denied a defendant's motion in limine to exclude parol evidence of an oral agreement that allegedly varied the terms of a written contract executed by the parties. The court also held that any recovery of damages should have been limited to a thirty-day period in accordance with the written contract. Advanta USA, 2006 WL 1561489, at *1.

Background

This litigation arose after the Defendant, Advanta USA, Inc. (d/b/a Garst Seed Company) (hereinafter "Garst") terminated its business relationship with Farmers Fertilizer Company ("FFC"). Id. at 1. FFC, a family owned business that sells agriculturally related products and services, agreed in October of 1998 to begin selling Garst manufactured seed product in its store. Id. In their dealings, a representative from Garst communicated to the President of FFC that he would not actively solicit any of FFC's competitors in the local market and promised an ongoing relationship between FFC and Garst. Id.

No contracts were signed until January of 1999, when the FFC President signed the "Garst Seed Company Sales Representative Agreement" without actually reading the document. Id. In 2002, a newly hired Garst representative informed the FFC President that the relationship was being terminated for cause. Id. FFC filed suit against Garst alleging wrongful termination of the agreement to supply seed to FFC based on the original representative's oral statement of October of 1998 that the business relationship would continue indefinitely. Id. The jury found that there was no written contract, but that the oral agreement existed as a result of the October 1998 meeting. Id. It awarded FFC $175,000.00 in compensatory damages based on expert testimony that calculated lost profits over a five-year period. Id.

Analysis and Holdings

Noting that the contract at issue was governed by the Uniform Commercial Code ("UCC"), the court held that the parol evidence rule effectively barred FFC from later disclaiming the contract because it was unsatisfied with the outcome after the President chose not to read the written contract in January of 1999. Id. at *2. The court stated that

[i]t is true . . . that the UCC liberalizes the parol evidence rule somewhat by permitting certain forms of extrinsic evidence to explain or supplement a written agreement. The UCC does not, however any more than does the common law, permit evidence of a prior oral agreement to contradict the terms of an integrated written contract. Id.

The court then addressed Garst's claims of error as to jury instructions that allowed the jury to determine whether an oral or written contract existed between the parties. Id. at *3. Here, the court held that the instructions were improper because such evidence was clearly barred by the parol evidence rule. Id. Lastly, the court held that the damages based on lost profits should have been limited to a period of thirty days following termination, rather than the five-year period relied upon by expert testimony. Id. The court reasoned that "‘[t]he parties did not contemplate several years' lost profits as damages because the contractual period for notice of termination was only 30 days . . . . Awarding lost profits for a period longer than 30 days was an improper windfall for plaintiff.'" Id. (quoting Royal's Reconditioning Corp. v. Royal, 689 N.E.2d 237, 241 (Ill. Ct. App. 1997)).

The court reversed the lower court and remanded the matter with instructions to grant Garst a new trial. Id. at *4.

The case was decided on June 9, 2006; this summary was posted November 6, 2006.