Opinion ID: 202487
Heading Depth: 3
Heading Rank: 2

Heading: Abbott's planning obligations

Text: Hancock's position is easily summarized. The contract allowed Hancock to stop paying if Abbott did not reasonably demonstrate in its Annual Research Plan, its intent and reasonable expectation to expend on Program Related Costs during the Program Term an amount in excess of [the Aggregate Spending Target] (emphasis added). The contract defines Program Term as a period of four (4) consecutive Program Years (emphasis added). The contract defines Program Year as a period of twelve (12) consecutive calendar months commencing on January 1 of each year, except that the first Program Year shall commence on the Execution Date and end on December 31, 2001. This means, according to Hancock, that the -12- Program Term ended on December 31, 2004, and that Abbott was required to budget in its Annual Research Plans to spend the Aggregate Spending Target by that date. Since Abbott planned to spend less than the Aggregate Spending Target by the end of 2004, Hancock could stop paying. Abbott's more complicated position relies on the fact that the carryover provisions in the contract allowed the company to postpone actual attainment of the Aggregate Spending Target threshold until the end of 2005. According to Abbott, the carryover provisions, by implication, also freed the company of any obligation to plan to spend all of the Aggregate Spending Target by the end of 2004. Hancock counters that the carryover provisions do not by their terms apply to Abbott's planned spending, but only to its actual spending. The sense of this distinction, Hancock and the district court agreed, is that unforseen circumstances during the fourth year might reasonably have been thought by the contract's drafters to excuse strict compliance with the contractually agreed spending, even if a mere change in plans on Abbott's part would not. Hancock has by far the stronger argument. As the district court recognized, Abbott's approach is belied by the contract's definition of Program Term. In Illinois, as elsewhere, [i]t is a basic and fundamental tenet of contract law [] that even if a contract offers only a -13- limited definition of a term, it must be applied as written. Conn. Specialty Ins. Co. v. Loop Paper Recycling, Inc., 824 N.E.2d 1125, 1133 (Ill. App. 2005). Put another way: A court . . . may not interpret [a] contract in a way contrary to the plain and obvious meaning of its terms. Krilich v. American Nat. Bank & Trust Co. of Chicago, 778 N.E.2d 1153, 1164 (Ill. App. 2002). See also In re Blinds to Go Share Purchase Litigation, 443 F.3d 1, 7 (1st Cir. 2006) (Where the parties to a contract take pains to define a key term specially, their dealings under the contract are governed by that definition.); Alexian Bros. Health Providers Ass'n v. Humana Health Plan, Inc., 330 F. Supp. 2d 970, 975 (N.D. Ill. 2004) ([P]arties to a contract may serve as their own lexicographers and may assign a particular meaning to any word they choose.). In light of these precedents, we need look no further than the contract's own definition of Program Term as a period of four (4) consecutive Program Years. When the contract said that Hancock's obligation to make any remaining Program Payments . . . shall terminate if Abbott did not reasonably demonstrate in its Annual Research Plan, its intent and reasonable expectation to expend on Program Related Costs during the Program Term an amount in excess of [the Aggregate Spending Target] (emphasis added), the contract meant that Hancock could stop paying if Abbott did not demonstrate . . . its intent and reasonable expectation to spend -14- the money by the end of 2004. Abbott insists that [n]owhere does [the contract] provide that Abbott must forfeit Hancock's payments if Abbott forecasts [] that it will need [a] fifth year to spend the Aggregate Spending Target. But the contract provides exactly that. As the district court stated, reading the contract as it was written does not somehow make the contract illogical, irrational, or commercially unreasonable. Cf. Beanstalk Group, Inc. v. A.M. Gen. Corp., 283 F.3d 856, 860 (7th Cir. 2002) ([A] contract will not be interpreted literally if doing so would produce absurd results that the parties, presumed to be rational persons pursuing rational ends, are unlikely to have agreed to seek.). Abbott and Hancock reasonably could agree that Abbott would be bound by the contract to make all reasonable efforts to spend the Aggregate Spending Target on the joint project by the end of 2004. Hancock had obvious reasons to prefer such an obligation: the more Abbott spent on the project during its first four years, the greater Hancock's returns were likely to be. Abbott had good reasons to accede to Hancock's demands: Hancock provided an enormous infusion of funds on favorable terms. And Abbott and Hancock reasonably could agree that, despite Abbott's obligation to make all reasonable attempts to spend the Aggregate Spending Target through 2004, the company should have the ability to stretch its actual expenditure of funds into a fifth year, if unexpected events during -15- 2004 made it impossible to spend the money as soon as planned. The parties shared an interest in avoiding unnecessary or inefficient last-minute spending on the project. In light of these plausible goals, it made sense for the contract to provide that Abbott was required to plan to spend the Aggregate Spending Target by December 31, 2004, but that it was not required to actually spend the money by that time. Whether this was the best, fairest, or most efficient way to structure the contract is not our concern.4 Referring to the rule that a contract must be read as a whole, Abbott places great reliance on the appearance of the phrase any extension period of the Program Term in the contractual definition of Program Related Costs. Program Related Costs, not otherwise relevant here, were costs that Abbott could count as expenditures on the joint program. The definition provided: Program Related Costs shall mean (i) all direct and indirect costs and expenses that are incurred by Abbott during a given Program Year . . . and (ii) the milestone and license fees paid during a given Program Year or during any extension period 4 Abbott says repeatedly -- in its brief and at oral argument -- that the contract must be read to impose a two to one ratio of Abbott's spending to Hancock's. Abbott criticizes the district court for allowing actual spending in roughly a four to one ratio. But the contract never required Hancock to spend half as much as Abbott. Indeed, Abbott's initial projection was that it would spend five times as much as Hancock. What the contract did not allow was for Abbott to spend less than 1.87 times as much as Hancock (Hancock's maximum contribution was approximately one-third of the Aggregate Spending Target, and Abbott's minimum was approximately two-thirds of the Aggregate Spending Target). Our resolution of this dispute is fully consistent with these principles agreed to by the parties. -16- of the Program Term . . .. According to Abbott, the phrase extension period in the abovequoted paragraph frees the company from any obligation to plan for spending the Aggregate Spending Target by the end of 2004. The district court found Abbott's extension period argument unpersuasive. We agree, though for different reasons.5 The language Abbott relies on does not purport to alter the meaning of Program Term, which is the definition that matters in the section allowing Hancock to terminate its payments. As the district court stated, the Agreement defines 'Program Term' specifically and without exception as 'a period of four (4) consecutive Program Years. . . . Thus, the Program Term, as defined by the Agreement, ran from March 13, 2001 through December 31, 2004. The contractual relationship between Abbott and Hancock would continue beyond the end of 2004, the district court recognized, because Abbott would remain responsible for making payments to Hancock. But that continuation did not free Abbott from its obligation to plan to spend the Aggregate Spending Target during the Program Term itself. Additionally, there are contextual clues far more 5 The district court found the extension period language ambiguous. It then conducted a skillful and convincing analysis of some 40 contract drafts that preceded the final version. On the basis of that review, the district court found that extension period was a vestige from a previous draft that the parties mistakenly failed to delete from the final contract. If we were not able to resolve the issue on the plain language of the contract, we would readily adopt the district court's factual findings on the ambiguity. -17- relevant to this controversy that eliminate any chance that the parties to the contract intended the Program Term to be five years rather than four. For instance, the very carryover provisions Abbott relies on refer to the Program Term and the subsequent year commencing immediately after the end of the Program Term. The only plausible reading of the contract is that the subsequent year commencing immediately after the end of the Program Term is the year 2005. The Program Term itself ended on December 31, 2004. In short, the contract required that Abbott plan to spend the Aggregate Spending Target during the Program Term. The contract defined the Program Term as the period beginning on the day the contract was signed and ending on December 31, 2004. Abbott unambiguously revealed in its 2003 plan that it did not plan to spend the Aggregate Spending Target by the end of 2004. Therefore, under the terms of the contract, Hancock could terminate its payments.