Opinion ID: 1532378
Heading Depth: 1
Heading Rank: 8

Heading: air products right to early termination of the alliance agreement

Text: Honeywell also challenges the Court of Chancery's determination that Air Products was entitled to terminate the Agreement on two years notice, and that as a consequence, Honeywell's damages recovery would cover only that two year post-notice period. That claim raises an issue of contract interpretation: whether Products and Customers within the meaning of the termination clause [Section 2(c)] of the Agreement means the Products and Customers that were originally listed on Exhibits A and B, or the Products and Customers as modified by the parties' conduct under the Agreement. The Court of Chancery adopted the former interpretation. Because we conclude that New York law required the latter interpretation, we must reverse the Court of Chancery's determination of that issue. Exhibits A and B of the Agreement defined the Products and Customers that the parties initially agreed would be covered by the Alliance. In the Agreement itself, the parties repeatedly used the terms Products and Customers to define the scope of their relationship and the conditional rights of each party under the Agreement. Thus, Honeywell was contractually prohibited from promoting Products to Customers under its own labels, but if Alliance sales fell below 40% of specific sales targets for two consecutive years, Honeywell could terminate the agreement upon two years' notice. Under Section 2(c) Air Products was entitled to terminate the Agreement on two years' notice if Honeywell's direct sales to Customers for two consecutive years exceeded 10% of Alliance sales. The Agreement also expressly provided that the parties would modify Exhibits A and B from time to time to reflect the parties' current assessment of the scope of the Alliance. Honeywell concedes that its direct sales of Products, as listed on the original Exhibit A, to Customers, as listed on the original Exhibit B, exceeded the 10% threshold specified in Section 2(c). Honeywell argues, however, that those defined terms (Products and Customers) were not limited by the contents of the original Exhibits A and B, because those terms were continually modified by the parties' actual course of performance. Honeywell also presented uncontested evidence that if the parties' modifications to Exhibits A and B are the basis for applying Section 2(c), then Honeywell's direct sales did not exceed the 10% threshold. The issue turns, therefore, upon whether Products and Customers are to be determined from the original or the as-modified Exhibits A and B. Air Products urges that the parties did not modify Exhibits A or B in a legally effective way. Alternatively, Air Products contends that even if the parties did effectively modify those Exhibits by their conduct, those modifications should not be accorded legal effect for purposes of applying Section 2(c) of the Agreement. Although the Alliance Agreement required all modifications to be in writing, the Court of Chancery found, nonetheless, that Honeywell and Air Products had modified Exhibits A and B by their course of performance. That conclusion is consistent with New York law, which gives effect to oral modifications to a written contract (even where that contract prohibits such modification), if the parties' partial performance of the contract is unequivocally referable to the oral modification. [33] Partial performance is unequivocally referable to a modification if it will admit of no other possible explanation except one pointing directly to the existence of the oral agreement claimed. [34] In other words, if the performance can be viewed as consistent with the terms of the agreement as written, then that performance is not unequivocally referable to the oral modification, and will not be treated as a contract modification [35] In this case, the Court of Chancery found that under New York law Honeywell and Air Products had modified the original Exhibit A and Exhibit B definitions of Products and Customers, and that the modification was entitled to be accorded legal effect. The parties' actual, historical treatment of what and who would constitute Products and Customers far exceeded what had been initially listed as Products and Customers in the original Exhibits A and B. It was undisputed that Air Products always filled its wet process chemical orders from a manufacturer through Honeywell, even if the manufacturer was not listed as a Customer. Air Products' employees admitted that they did not consult Exhibits A or B when deciding how to fill a purchase order. The uncontroverted evidence establishes that through 2001, over 75% of Air Products' sales of Honeywell products were made to customers that were not listed as Customers on Exhibit B. And, with one exception, the profits from a Honeywell chemical sold by Air Products were split according to the Agreement's profit sharing formula, even though that chemical was not listed as a Product on Exhibit A. We find that the Court of Chancery correctly concluded that the definition of Products and Customers had been modified by the performance of the parties under the Agreement. That Court also concluded, however, that the parties had modified Exhibits A and B only for one purpose  to define the scope of the parties' obligation to share profits  but not for the purpose of determining whether either party was entitled to terminate the agreement. We conclude that that specific ruling was legally erroneous, because under New York law the undisputed facts compel the conclusion that the contract definitions of Products and Customers were modified for termination clause [Section 2(c)] purposes as well. In effect, the Court of Chancery ascribed two different meanings to the parties' use of Products and Customers  one for purposes of profit sharing, and another for purposes of contract termination. But the record contains no persuasive evidence that the parties intended that identical terms in their contract would be given disparate meanings. Generally, and absent evidence calling for a different result, all parts of a contract must be read in harmony to determine the contract's meaning, with one portion of a contract not being read to negate a different portion. [36] The New York law of contracts prefers consistency in contractual interpretation: where parties attach a particular meaning to a term, that meaning should be given effect, [37] and wherever possible, courts should strive to read an agreement consistently with the parties' manifest intentions. [38] The Court of Chancery relied upon the New York case of All-Year Golf, Inc. v. Products Investors Corp. [39] That case, however, actually supports Honeywell's position that modifications to technical terms should normally be applied consistently throughout a contract. In All-Year Golf, the parties executed two integrated agreements: a sales contract wherein All-Year Golf agreed to purchase 20 Golfomat units from the defendant, and a dealership agreement wherein All-Year Golf agreed to be the defendant's exclusive dealer in western New York. Both agreements contained a clause providing that the agreements would be contingent upon All-Year Golf obtaining a suitable lease in Camillus, New York. [40] When All-Year Golf was unable to find a lease in Camillus, the parties looked for a location outside Camillus. [41] The New York Supreme Court, Appellate Division, found that the parties had modified the lease condition through their course of performance, such that the site was no longer geographically limited to Camillus. The Court then applied the same modification to both the sales agreement and the dealership agreement  the very approach that Honeywell contends should have been employed here. [42] The only case Air Products cites to support its position is Time Assoc., Inc. v. Blake Realty, Inc. [43] In Time, the parties entered into an agreement wherein Blake purchased certain assets of Time's real estate business, and Time agreed not to compete in the local real estate market. The Agreement contained two clauses that were at issue in the litigation: one that required Time to formally change its corporate name, and a second clause that prohibited Time from using the name Time Associates in the local real estate market. At the closing, the parties orally agreed that Time would not be required to formally change its name. The court concluded that although the parties had waived the contractual requirement that Time Associates formally change its corporate name, they had not waived the term that restricted Time from actually using that name in the real estate business. The Court specifically found that those two contractual provisions were not interdependent, [44] and that a waiver of one provision did not establish a waiver of the other, because the two conditions had different implications and importance in the agreement. Time Associates is inapposite to this case, however, because here the parties intended for both their profit sharing agreement and their termination rights to be dependent upon the same Products and Customers that were being sold and serviced by the Alliance. New York courts strive to read interdependent terms of a contract consistently. [45] In this case, the parties purposefully made both their profit sharing and their termination rights dependent upon the Products and Customers as defined in the Agreement. It is logical to conclude that when the parties expanded the scope of their profit sharing rights, they intended their termination rights to change as well. There is no evidence that the parties intended to modify Exhibits A and B for purposes of one section of the agreement, but not for purposes of other sections whose operative terms also were made dependent upon Exhibits A and B. [46] Absent such evidence of intent, New York law encourages the consistent interpretation of contractual terms. Accordingly we are constrained to conclude that the Court of Chancery erred in holding that the parties, by their conduct, had not modified Exhibits A and B for purposes of Section 2(c). The Court of Chancery did correctly conclude that the parties had modified Exhibits A and B by their course of conduct. But, because those modified definitions of Products and Customers should have been applied consistently within Section 2(c), Air Products' right to terminate the Agreement was not triggered, and the Court of Chancery erred in holding otherwise. Therefore, Honeywell is entitled to recover lost profits damages through the end of the Agreement's original term, i.e. 2008. Accordingly, we reverse the Court of Chancery's limitation of the period for which Honeywell's damages are to be calculated, and remand the case to that Court for a determination of those damages.