Delta Services and Equipment, Inc. v. Ryko Mfg. Co.

• Decision Date: 13 August 1990
• Docket Number: No. 89-3790,89-3790
• Citation: 908 F.2d 7
• Parties: 14 UCC Rep.Serv.2d 414 DELTA SERVICES AND EQUIPMENT, INC., Plaintiff-Appellant, v. RYKO MANUFACTURING COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 7

908 F.2d 7

14 UCC Rep.Serv.2d 414

DELTA SERVICES AND EQUIPMENT, INC., Plaintiff-Appellant, v. RYKO MANUFACTURING COMPANY, Defendant-Appellee.

No. 89-3790.

United States Court of Appeals Fifth Circuit.

Aug. 13, 1990.

Phillip A. Wittmann, Alex J. Peragine, Sarah S. Vance, Stone, Pigman, Walter, Wittman & Hutchinson, New Orleans, La., for plaintiff-appellant.

William Forrester, Thomas M. Keiffer, Lemle & Kelleher, New Orleans, La., for defendant-appellee.

Appeal from the United States District Court for the Eastern District of Louisiana.

Before CLARK, Chief Judge, GARWOOD and DAVIS, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Delta Services and Equipment, Inc. (Delta) appeals the district court's order granting summary judgment in favor of Ryko Manufacturing Company (Ryko) and allowing Ryko to terminate its distributorship agreement with Delta. We affirm.

I.

Beginning in June 1979, Delta became the exclusive distributor of Ryko vehicle wash equipment in Louisiana. In 1983, relations between Delta and Ryko began deteriorating. After a dispute developed over the commission rate for certain accounts, Ryko filed suit in federal district court in Iowa alleging that Delta had breached the agreement by allowing one of its principals to leave the company. Ryko sought termination of the agreement. Delta counterclaimed alleging, among other things, fraud, antitrust violations and racketeering. The Iowa district court rejected Ryko's suit and held that a 1979 amended agreement was in effect which authorized the principal to leave. The court also dismissed Delta's counterclaims as meritless.

Sometime after the Iowa judgment became final, Ryko notified Delta that Ryko intended to terminate the agreement with Delta. Delta filed a complaint seeking declaratory and injunctive relief to prevent the termination. In April 1989, the district court issued a temporary restraining order prohibiting termination, and Ryko later agreed that it would not terminate the agreement during the pendency of the district court litigation. In November 1989, the district court granted Ryko's motion for summary judgment, holding that, under Iowa law, the agreement was one of indefinite duration and, therefore, terminable at will upon reasonable notice. The district court further held that six months provided Delta with adequate notice and set May 15, 1990 as the date on which Ryko could terminate the agreement.

This panel stayed the district court's judgment pending further order of this court. By our order of June 5, 1990, we lifted that stay.

II.

A.

The primary issue in this case is whether the agreement between Ryko and Delta is one of indefinite duration. Iowa's version of the U.C.C., which is taken directly from Sec. 2-309 of the model code governs this dispute. It states, in part:

(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.

Iowa Code Ann. Sec. 554.2309(2), (3) (emphasis added). According to these two subsections a contract is terminable at will upon reasonable notice unless a provision in the contract makes it a contract of definite duration. ¹

Delta argues that, because the agreement provides for termination upon the occurrence of a specified event, i.e., failure by Delta to maintain sales volumes at a specified level, the contract is not indefinite in duration. Delta also contends that the provision authorizing termination upon a breach of the agreement indicates that the parties have otherwise agreed that the contract is not terminable at will. This type of provision, that would have been implied if not stated in the contract, clearly does not support this inference. The Official Comments to Sec. 2-309 state that "[j]ustifiable cancellation for breach is a remedy for breach and is not the kind of termination covered by [Sec. 2-309]." See Iowa Code Ann. Sec. 554.2309, Historical Notes, Uniform Commercial Code Comment No. 9. Therefore, the only termination provision that arguably supports the inference that the parties did not intend to enter into a contract that was terminable at will is paragraph B relating to minimum sales.

Delta relies primarily on Besco Inc. v. Alpha Portland Cement Co., 619 F.2d 447 (5th Cir.1980), to support its argument that this agreement is terminable upon the occurrence of a specified event and is therefore not terminable at will. In Besco, the contract gave the plaintiff-distributor the exclusive right to purchase the defendant's product as long as the distributor sold a specified amount annually. The pertinent clause of the contract provided:

The right of [the manufacturer] to withdraw the exclusive right to purchase for said agricultural purposes shall be based solely on (1) either the failure of [the distributor] to dispose of at least 20,000 tons of this material annually or (2) upon the unavailability of the material due to its use in the cement manufacturing process at [manufacturer's] plant.

Id. at 448. The court held that this provision brought the contract within the category of those in which the parties "otherwise agreed" to limit termination rights within the meaning of Sec. 2-309. We agree with Ryko, however, that the language in the Besco contract is distinguishable from the Delta-Ryko contract because the Besco contract explicitly stated that termination would be allowed only upon the happening of specified events.

Delta further contends that the contract must be read as a whole and when it is read in this light the specific termination provisions are meaningless if the contract is terminable at will. Relatedly, Delta argues that the provision requiring Delta's principals to continue active participation for one year was unnecessary if the contract was terminable at will. Ryko takes comfort in the permissive language of the termination provision which states that, upon the occurrence of one of the specified events, Ryko "may" terminate the agreement "immediately." Ryko reads this language in the termination clause as defining when Ryko may, at its discretion, terminate at once and without reasonable notice. Ryko argues that such clauses allowing immediate termination for cause are not incompatible with a contract of indefinite duration allowing termination at will upon reasonable notice. Ryko, therefore, contends that the termination provisions are insufficient to transform the agreement into one of definite duration.

Ryko relies on a number of cases to support its position; but, like those cited by Delta, none control the outcome of this case. Ryko correctly argues that this circuit presumes that a contract is terminable at will and does not favor perpetual contracts. As we stated in Besco, "the construction of a contract conferring indefinite duration is to be avoided unless compelled by the unequivocal language of the contract." 619 F.2d at 449, citing Southern Bell v. Florida East Coast Ry. Co., 399 F.2d 854, 858 (5th Cir.1968).

Ryko also relies on Wilcox & Gibbs v. Ewing, 141 U.S. 627, 635-36, 12 S.Ct. 94, 96-97, 35 L.Ed. 882 (1891) to support its position. In Wilcox, a pre-U.C.C. case, the Court held that a provision in the contract stating that the agreement could be terminated if either party violated the spirit of the agreement did not mean that the contract could only be terminated for cause. Therefore, the Court concluded that even though the contract could be terminated for cause upon a violation of its spirit it was nevertheless terminable at will upon notice. Justice Harlan explained that very explicit provisions would be required to remove the manufacturer's ability to terminate the contract at will:

If Ewing had the privilege, upon reasonable notice, of severing the connection between him and the company after 1875, upon what ground could a like privilege be denied the company if it desired to dispense with his services? He contends that his life, or the continuance of the company in business, was the shortest duration of the contract, consistent with its provisions, provided he did his duty. This position is untenable. His appointment was made and accepted subject to the conditions expressed in the agreement. No one of those conditions is to the effect that so long as he devoted his time, attention and abilities to the company's business, he should retain his position as its exclusive vendor, within the territory named, without regard to its wishes. If the parties intended that their relations should be of that character, it was easy to have so stipulated. The only part of the contract that gives color to the theory for which the plaintiff contends, is the part declaring that a violation of the spirit of the agreement "shall be sufficient cause for its abrogation." This clause, it may be suggested, was entirely unnecessary if the parties retained the right to abrogate the contract after 1875, at pleasure, and implies that it could be abrogated only for sufficient cause, of which, in case of suit, the jury, under the guidance of the court as to the law, must judge in the light of all the circumstances. We cannot concur in this view. The clause referred to is not equivalent to a specific provision declaring, affirmatively that the contract should continue in force, for a given number of years, or without limit as to time, unless abrogated by one or the other party for sufficient cause. It was inserted by way of caution, to indicate that the parties were bound to observe equally the spirit and the letter of the agreement while it was in force.

Id. at 635-36, 12 S.Ct. at 97 (emphasis added). Delta, with justification, distinguishes the Wilcox...