Recent Ruling Reinforces the Importance of Understanding Contract Terms

(December 2, 2016) An opinion issued recently by the Michigan Court of Appeals highlights the need for business organizations to pay special attention to not only the language of contracting documents, but also to understand the meaning and consequences of any documents incorporated into those contracts “by reference.”

In Naturipe Foods, LLC v Siegel Egg Company, Inc, Plaintiff Naturipe (“Naturipe”) and Defendant Siegel (“Siegel”) entered into a contract for Naturipe to deliver 316,800 pounds of frozen blueberries to Siegel.  Prior to executing the contract, Siegel’s buyer crossed out a reference to “Georgia blueberries” and wrote “Grade A” under the reference to Michigan blueberries.  Siegel’s buyer then signed the contract.  Below the buyer’s signature read, “Subject to Seller’s [Naturipe’s] Terms and Conditions.”   Per the contract, delivery was to be completed by August 24, 2012.

Naturipe delivered two shipments of blueberries in February and March 2012.  Despite realizing that the blueberries were sub-Grade A, Siegel accepted the delivery and sent the blueberries along to its end-use customers, who found them to be unsuitable for their purposes.  As a result, Siegel never requested nor paid for the remaining blueberries under the contract.  Naturipe sued Siegel in November 2012, claiming that Siegel’s failure to request or pay for the remaining blueberries was a breach of the contract.  The trial court granted summary disposition in favor of Naturipe in the amount of $723,578.83, and Siegel appealed.

On appeal, Siegel first argued that because the Naturipe “Terms and Conditions” referenced in the contract were not attached to the contract, and because none of Siegel’s employees were ever provided a copy of Naturipe’s Terms and Conditions, the terms could not be incorporated into the contract.  The Court of Appeals disagreed:

To the extent defendant argues that plaintiff never explained the applicable Terms and Conditions or never explained what the phrase ‘Subject to Seller’s Terms and Conditions’ meant, it was defendant’s duty to obtain an explanation of the contract term.  Defendant’s apparent failure to do so constitutes negligence and estops it from asserting that the Terms and Conditions do not apply on the grounds of ignorance. [. . .] Defendant’s argument that the contract stated that it was ‘Page 1 of 1’ and, therefore, encompassed the entirety of the parties’ agreement, is also unpersuasive.  It is well established that a contract may incorporate ‘another’ document by reference.  Thus, even if the contract is considered to be only one page, its unambiguous language still incorporates by reference the Terms and Conditions.

Siegel next argued that the limitation of remedies found in Naturipe’s Terms and Conditions, which limited Siegel’s remedy to replacement of the defective products or credit of the purchase price (at Naturipe’s election) did not prevent Siegel from cancelling the contract after the sub-Grade A blueberries were delivered.  In other words, Siegel argued that, because cancellation of the contract was not specifically mentioned in the warranty provision, the warranty provision did not apply. Again, the Court of Appeals disagreed.  According to the Court of Appeals, Siegel conceded that it cancelled the remainder of the contract because the first two shipments were sub-Grade A.  The failure to deliver Grade A berries constituted a breach of the warranty on the part of Naturipe.  However, in the case of such a breach, replacing the goods or crediting Siegel for the purchase price were “the exclusive and sole remedies for any breach of warranty or contract.”  Siegel sought neither.  Moreover, “the Terms and Conditions explicitly provided that, if defendant did not give plaintiff 30 days’ notice of the breach of warranty, ‘any remedy’ was barred.”  Because Siegel did not notify Naturipe of the breach within 30 days, all of Siegel’s available remedies were barred, including cancellation, because cancellation of a contract is a “remedy” under the plain meaning of the word.

Finally, Siegel argued that a 90-day notice requirement in the warranty provision, not the 30-day requirement relied on by Naturipe, applied to this situation and that Siegel met that requirement.  Once again, the Court of Appeals disagreed.  The warranty provision provided that whether the 30 or 90-day notice period applied depended on whether “the breach or defect in the goods was or should have been discovered upon inspection of the goods.”  Siegel’s buyer and CEO both testified at deposition that they personally inspected the February and March shipments, and found them to be clearly sub-Grade A.  However, Siegel offered that only its end-user customers, and not Siegel’s own employees, could determine whether the blueberries met the specifications of the contract.  The Court of Appeals found this argument to be unpersuasive, as there was “simply no language in the parties’ agreement or the Terms and Conditions to suggest that defendant’s end users were the only parties empowered to determine whether the delivered blueberries were Grade A quality.”

The Naturipe decision carries with it important lessons for contracting parties.  First, if a document is incorporated into a contract by reference, it will be deemed to be part of the contract itself and binding on the contracting parties.  Therefore, contracting parties must be extremely vigilant about any documents that are incorporated into the contract “by reference,” such as terms and conditions.  If other documents are incorporated by reference, make sure those documents are reviewed in detail and their ramifications understood prior to executing the contract.  Failure to obtain an explanation of a contract term, even those found in an incorporated document, will not prevent enforcement of that term, nor will it excuse non-performance or some other breach of the contract.

Second, contracting parties should pay special attention to limitation of remedies provisions, such as those found in Naturipe’s warranty provisions.  Failure to pay particular attention to these limiting provisions may result in an innocent party being bound to fulfill a contract despite the other party’s breach.  The same goes for notice provisions.  Notice provisions, such as the 30 and 90-day provisions at issue in Naturipe, are fully enforceable in Michigan and must be strictly complied with.  Failure to provide timely notice may result in an innocent party waiving its right to relief or a remedy.

Finally, and particularly with respect to contracts for the sale of goods, receiving and purchasing parties must be sure to promptly inspect delivered goods and communicate any deficiencies to the seller.