Opinion ID: 2995342
Heading Depth: 2
Heading Rank: 3

Heading: Interpretation of the December

Text: Contract
Taking the view that the two paragraphs set forth above were unambiguous, the district court held that Zemco’s promise to refrain from litigation with respect to contract AZ010B was the sole consideration that Zemco gave in return for Navistar’s commitment to purchase at least sixty days worth of parts and to purchase any remaining material and inventory that Zemco may have. The agreement to cooperate during the transition period described in the first paragraph was considered to be a mere reference to an earlier oral promise./5 Some factors support this reading of the December Contract. The words and phrases the parties used to express their agreement provide some plausible evidence that the promise not to sue formed the sole consideration for the December Contract. A good deal, although not all, of the contract’s first paragraph is cast in the past tense. This section of the agreement states as I told you then; furthermore, as if referencing some prior arrangement between the parties, it continues You agreed to cooperate 100%. In some sense, this language lends itself to Navistar’s position that the first paragraph merely references some past agreement between the parties. If the first paragraph is read as an attempt to place the relationship of the parties in some historical context, this section would not provide additional consideration for Navistar’s promise to purchase Zemco’s remaining inventory. In addition, the location of the pertinent sentences also bolsters Navistar’s interpretation of the December Contract. The sentence You agreed to cooperate 100% is a simple declaratory statement. It arguably lacks a textual connection with Navistar’s promise contained in the second paragraph to purchase raw materials and inventory. In contrast, the agreement to refrain from litigation on Contract AZ010B is embedded in the text relating to Navistar’s promise to purchase these goods from Zemco. Finally, the bulk of the language in the second paragraph is cast in the future tense. A reasonable person, construing these factors, could determine that the promise to refrain from litigation provided the sole consideration for the December Contract. This interpretation of the agreement raises the possibility that there has been a failure of consideration. Indiana law provides that consideration fails when a party to a contract . . . [does not] perform the acts promised. Alber v. Standard Heating & Air Conditioning, Inc., 476 N.E.2d 507, 510 (Ind. Ct. App. 1985). If the agreement not to sue on Contract AZ010B formed the only consideration for the December Contract, Zemco would have a difficult time proving that it satisfied its end of the bargain. Having sued on Contract AZ010B, Zemco’s failure to perform the acts promised would foreclose its attempts to enforce the agreement. See, e.g., Crumpacker v. Farrell, 516 F. Supp. 276, 281 (N.D. Ind. 1981); Licocci v. Cardinal Assoc., Inc., 492 N.E.2d 48, 52 (Ind. Ct. App. 1986) (indicating that a party in material breach of a contract cannot maintain an action on that contract). Under this interpretation of the December Contract, the district court’s ultimate decision to prohibit Zemco’s suit would not only be plausible but would most likely be correct. However, the contract seems susceptible to other interpretations.
Although the above interpretation of the December Contract is a plausible one, it is not the only reasonable reading of the agreement’s language. Specifically, the agreement could be construed to have imposed a broad obligation on Zemco to cooperate throughout the transition period. In return, Navistar agreed to purchase certain parts, inventory and raw materials from this supplier. Both the syntax of the sentences and structure of the overall agreement indicate the plausibility of this reading. Notably, at oral argument, counsel for Navistar took the position that the correctness of the district court’s ruling turned on the differences in tense employed in the two paragraphs. However, a closer examination of the December Contract reveals that the language of the first paragraph is not cast exclusively in the past tense. Indeed, the contract begins Navistar will now continue the outsourcing of its products from Zemco. This language can be construed as stating that Navistar would continue to purchase parts from Zemco as long as Zemco continued to cooperate. Moreover, when focusing on the contract in its entirety, this reading of the first paragraph is quite compatible with the text of the second paragraph. In particular, paragraph two may be read to set forth a mere example of the type of cooperation that might be expected--no litigation over Contract AZ010B. In short, rather than reading each paragraph as a distinct element of the agreement, the December writing can be read as a totality. A reasonable person could construe the document as creating a binding agreement as of December 7 that governed how the parties would conduct themselves during the transition period; Zemco would cooperate in the transition while Navistar continued to purchase not only parts but also any excess raw material and inventory held by the supplier. Under this interpretation of the contract, the district court’s conclusion that a complete failure of consideration rendered the contract unenforceable is far from inevitable. At first blush, the second interpretation of the agreement appears to implicate Indiana’s doctrine of partial failure of consideration. See, e.g., Alber, 476 N.E.2d at 510. A partial failure of consideration occurs when an individual does not deliver a portion of his promised performance. See id. Unlike complete failure of consideration, partial failure does not render the entire contract unenforceable. Instead, if the undelivered consideration is allocable to an independent covenant by the other party, the contract may be avoided on a pro tanto basis. Id. (citing Beal v. Beal, 79 Ind. 280 (1881)). However, the application of the doctrine poses problems under the second interpretation of the contract. Assuming that Zemco’s decision to sue on Contract AZ010B amounts to partial nonperformance, the undelivered consideration could not be allocated to an independent provision of the December Contract. Because the partial performance is not conducive to allocation, Navistar could not avoid the contract on a pro tanto basis. The more apt inquiry under this reading of the agreement is whether Zemco has substantially performed its obligations underneath the December Contract. As we have emphasized, failure of consideration, whether partial or complete, relates to a party’s performance of its contractual promises. When a party does not perform at all, the case resolves itself; there is a failure of consideration, and the party cannot enforce the contract. When an individual does perform some of its contractual obligations, a more complicated situation arises. The early common law traditionrequiring perfect compliance with the terms of a contract has long been ameliorated by the doctrine of substantial performance. See Dove v. Rose Acre Farms, Inc., 434 N.E.2d 931, 933 (Ind. Ct. App. 1982); Richard A. Lord, Williston on Contracts sec. 44.52, at 217-18 (4th ed. 2000). The doctrine of substantial performance applies when performance of a nonessential condition is lacking, so that the benefits received by a party are far greater than the injury done to him by the breach of the other party. Dove, 434 N.E.2d at 933. Rather than permitting a slight breach to preclude recovery, the doctrine allows a party to maintain its cause of action on the contract in spite of minimal noncompliance. See F. McConnell & Sons, Inc. v. Target Data Sys., Inc., 84 F. Supp. 2d 961, 978 (N.D. Ind. 1999); Dove, 434 N.E.2d at 933. Whether a party substantially performed its contractual obligations generally poses a question of fact. See F. McConnell & Sons, Inc., 84 F. Supp. 2d at 978-79; E. Allan Farnsworth, Farnsworth on Contracts sec. 8.12, at 467 (2d ed. 1998). Such a fact question exists under the second interpretation of the agreement. The December Contract can be read to impose a broad obligation on Zemco to cooperate with Navistar during the transition period. Upon reviewing the record, a fact question exists whether Zemco has performed its portion of the agreement. In particular, Zemco supplied Navistar with the necessary parts throughout the transition period. Zemco never attempted to shut down Navistar’s assembly lines by withholding supplies. This course of performance creates a fact question whether Zemco substantially, if not completely, complied with its contractual obligations under the December agreement. Thus, the district court’s conclusion that the contract was unenforceable due to a failure of consideration is not compelled under the second reading of the agreement.
Indeed, the previous interpretations of the agreement are not the only plausible readings of the December Contract. There is a third variation of the contractual language that is also reasonable. The first paragraph of the agreement can be read to impose on Zemco a general obligation to cooperate in the transition. The specific cooperation of refraining from litigating the parties’ disputes over Contract AZ010B serves as specific consideration for Navistar’s purchase of the excess material over the sixty-day commitment. Under this interpretation of the agreement, the contractual consideration for Navistar’s purchase of the parts was Zemco’s cooperation. Zemco’s obligation entailed making the parts available to Navistar in a timely fashion. Simply put, Zemco agreed not to shut down Navistar’s operations by refusing to supply the much needed parts. In contrast, the more specific promise to refrain from litigation over Contract AZ010B served as consideration for Navistar’s purchase of the excess material inventory over its sixty-day commitment. Zemco’s suit against Navistar for the breach of Contract AZ010B would constitute a failure of consideration with respect only to the purchase of the excess material inventory. Unlike previous readings of the contract, this interpretation of the agreement would implicate the doctrine of partial failure of consideration. As we noted earlier, partial failure of consideration occurs when a party performs only a portion of its contractual obligations. To the extent the failure to perform is allocable to a specific provision of the contract, the agreement may be avoided on a pro tanto basis. Alber, 476 N.E.2d at 510. The third interpretation of the contract binds Zemco’s promise to refrain from litigation to Navistar’s commitment to purchase the excess material inventory. As the failed performance is allocable to a specific provision of the contract, Navistar could avoid this portion of the agreement. However, if Zemco cooperated in the transition, then Navistar would remain liable on the remainder of the December Contract.
Because reasonable people could come to different conclusions about the agreement’s meaning and resort to extrinsic evidence will be appropriate, we hold that a genuine issue of material fact exists concerning the precise consideration supporting the December Contract. Accordingly, we reverse the entry of summary judgment for Navistar. We, along with the Indiana courts, have noted that contract interpretation is often a question of law well suited for disposition on summary judgment. See Bechtold, 19 F.3d at 325; Ferrel v. Dunescape Beach Club Condominiums, 751 N.E.2d 702, 709 (Ind. Ct. App. 2001) (citing Rogier v. American Testing & Eng’g Corp., 734 N.E.2d 606, 614 (Ind. Ct. App. 2000)). However, when a contract contains ambiguities that the parties must explain through extrinsic evidence, the trier of fact, not this court, must resolve the conflicting interpretations of the agreement. Upon viewing the terms of the agreement in the light most favorable to Zemco, we believe that the December Contract is susceptible to at least three distinct interpretations. As we have already noted, the district court correctly ruled that Zemco had the right to use the late summer conversations to explain the December Contract if the agreement contained ambiguities. Given the alternate reasonable interpretations of the December Contract, Zemco, as well as Navistar, may introduce extrinsic evidence to explain but not alter or contradict the terms of the written accord. We note that if the three interpretations merely resulted in the same ultimate conclusion--the contract failed for lack of consideration--then summary judgment would remain appropriate. However, as we have already indicated, the distinct interpretations of the agreement may produce radically different resolutions to the litigation on Count II. Were a trier of fact to find that the promise to refrain from litigation provided the only consideration to the December Contract, Navistar could raise successfully its failure of consideration defense. If a trier of fact were to determine that the entire contract was supported by Zemco’s promise to cooperate fully and by its promise not to sue on Contract AZ010B, it will be necessary to determine whether there has been substantial performance by Zemco. If the finder of fact determined that the agreement not to sue on Contract AZ010B was specific consideration only for the agreement to purchase materials over the sixty-day commitment, Navistar could avoid the contract only on a pro tanto basis. Given the ambiguities in the December Contract and the importance that resolution of this issue will have on the ultimate outcome of the litigation, summary judgment is precluded on Count