Summary of a Recent
Judicial Development in
Commercial Transactions

Meaning of "Termination" in a Hog Contract Found to be Ambiguous

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Swift & Co. v. Elias Farms, Inc., 539 F.3d 849 (8th Cir. 2008), the Eighth Circuit Court of Appeals held that there were sufficient facts in dispute regarding the plaintiff's breach of contract claim to preclude summary judgment, but affirmed summary judgment in favor of the plaintiff as to the defendants' meritless counterclaims.

Background

Swift & Co. brought a breach of contract claim against several hog producers. Id. at 851. The contracts for the supply of hogs stated that the buyer would pay market price or no less than $40/100 pounds live weight, and that if the market price was below that price, the producers' adjustment accounts would be debited for the deficiency. Id. At the end of the contract term, the producers had debit balances in their account. Id. The contracts provided that if, at the termination of the agreements, there was a debit balance in the adjustment account, the seller had to reimburse the buyer for that amount. Id. The issue was whether "termination" referred to the end of the contract by any means, or whether it only included affirmative acts of termination. Id. The producers also cross-claimed for breach of contract based on price adjustments made by Swift, and for violation of the Minnesota Consumer Fraud Act (MCFA). Id. at 855. The district court held that the plain language of the contract limited "termination" to affirmative acts precipitated by the other party's default and granted summary judgment in favor of the producers on that issue, but granted Swift summary judgment on the counterclaims, and both parties appealed the rulings. Id. at 852, 855.

Arguments

Swift argued that "termination" of the agreement simply meant "end," whether by natural expiration or by some affirmative act, and that the producers' interpretation led to absurd results because the purpose of the adjustment account was to protect them from market volatility and allowed them to level their income over time. Id.

The hog producers argued that "termination" meant an affirmative act and did not include the natural expiration of the contract, because that section of the contract was a "penalty" section meant to punish the producers if they defaulted and Swift exercised its termination rights. Id. at 853.

Analysis and Holdings

The court found that the meaning of "termination" in the contract was ambiguous, and therefore summary judgment was improper. Id. The court also found that trade usage of "termination" did not help to clarify the meaning of the term as used in the contract. Id. at 854. The court explained that although Minnesota does follow the rule that an ambiguous contract will be construed against the drafter, the rule applies only as a last resort, after all other evidence fails to demonstrate the intent of the parties. Id. Because there was disputed extrinsic evidence and testimony, summary judgment was improper and the court remanded the case for further proceedings. Id. The court affirmed summary judgment in favor of Swift on the producers' cross-claims for breach of contract and MCFA violations because of undisputed evidence that Swift's price adjustments probably resulted in an increased price for the producers, and because their MCFA claims were without merit. Id. at 856-57.

The case was decided on August 25, 2008.