Opinion ID: 2994264
Heading Depth: 3
Heading Rank: 1

Heading: Did the Parties Enter a Requirements

Text: Contract? Brooklyn Bagel argues that the parties’ Contract is an exclusive requirements contract obligating Earthgrains to order all of its bagel requirements for the Fort Payne facility from Brooklyn Bagel. Brooklyn Bagel contends that the Contract is ambiguous and that extrinsic evidence demonstrates that the parties intended to enter a requirements contract. In many American jurisdictions, including Illinois (which the parties agree governs this dispute), a requirements contract exists only when the contract (1) obligates the buyer to buy goods, (2) obligates the buyer to buy goods exclusively from the seller, and (3) obligates the buyer to buy all of its requirements for goods of a particular kind from the seller. Zemco Mfg., Inc. v. Navistar Int’l Transp. Corp., 186 F.3d 815, 817 (7th Cir. 1999) (citing James J. White & Robert S. Summers, Uniform Commercial Code sec. 3-9, at 154-55 (1995), and E. Allan Farnsworth, Farnsworth on Contracts sec. 2-15, at 135-37 (1990)); see Wald v. Chicago Shippers Ass’n, 529 N.E.2d 1138, 1146 (Ill. App. Ct. 1988). While Brooklyn Bagel asserts that the Contract is ambiguous and therefore capable of being interpreted as a requirements contract, the district court determined that, as a matter of law, the Contract is not a requirements contract./1 In examining whether the Contract is ambiguous,/2 we first look to the plain language of the Contract. See Atlantic Mut. Ins. Co. v. Metron Eng’g & Constr. Co., 83 F.3d 897, 898 (7th Cir. 1996); Metalex Corp. v. Uniden Corp. of Am., supra, 863 F.2d at 1333. Brooklyn Bagel argues that the plain language of the Contract is ambiguous as to whether it is a requirements contract since the Contract lacks a quantity term. However, we are bound to construe the Contract as a whole, see Echo, Inc. v. Whitson Co., Inc., 121 F.3d 1099, 1105 (7th Cir. 1997) (interpreting Illinois law), and the lack of a quantity term itself does not necessarily render a contract ambiguous. In relevant part, Paragraph 2(a) of the Contract states: Subject to Paragraph 2(d) below, upon order by [Earthgrains], [Brooklyn Bagel] will process and pack the ordered quantity of the Product. The Product will be packed in accordance with the packaging instructions set forth in Exhibit B. [Brooklyn Bagel] shall not produce Product in advance of an order, and in no event shall it produce more than 104% of any quantity of Product ordered by [Earthgrains]. Paragraph 2(d), in turn, provides: On or before each January 1, April 1, July 1 and October 1 during the term hereof, [Earthgrains] shall submit [Brooklyn Bagel] a written forecast (in such form as may be agreed to by the parties) of [Earthgrains’] anticipated requirements for the next succeeding 3 months; provided that such forecasts shall not be binding on either party. [Earthgrains] shall use reasonable efforts to notify [Brooklyn Bagel] at least 4 weeks in advance if [Earthgrains] anticipates a material increase in [Earthgrains’] demand for the Product. After examining these provisions in context with the Contract as a whole, we agree with the district court that the Contract is not a requirements contract as it does not expressly obligate Earthgrains to purchase all, or any specified quantity, of its requirements of bagels for the Fort Payne facility from Brooklyn Bagel. While such an obligation can be implicit, the district court correctly characterized the Contract as a buyer’s option, similar to the agreement at issue in In re Modern Dairy of Champaign, Inc., 171 F.3d 1106 (7th Cir. 1999). In Modern Dairy, two school districts argued that a dairy contractor was obligated to supply their milk requirements. In examining the existence of a requirements contract, this court observed that the parties’ contractual documents did not explicitly, or by implication, require the school districts to buy their milk requirements exclusively from the dairy. Insofar as the dairy merely agreed to sell milk to the school districts at a specified price, within a specified period of time, the court characterized the parties’ agreement as a buyer’s option rather than a requirements contract. Brooklyn Bagel, however, asserts that the Contract is no different from the ambiguous supply contract involved in Zemco Mfg., Inc. v. Navistar Int’l Transp. Corp., supra. The facts here are far different than those in Zemco. In Zemco, this court found the supply contract, which also did not include a quantity term, to be susceptible to more than one interpretation. By contrast, in this case, there is but one reasonable interpretation of the contractual language. Paragraph 2 of the Contract clearly gave Earthgrains the discretion to order its bagel needs from Brooklyn Bagel. The contractual language here cannot be alternatively read as an articulation of the manner in which [the buyer] should place its orders as it has need for the [specified goods], like the contractual language in Zemco. 186 F.3d at 817. Furthermore, the contract in Zemco, unlike here, contained a priority clause in the event the supplier was unable to meet the production need of the buyer manufacturer. Zemco also involved exclusive dealings between the parties over a period of twelve years, a circumstance not present in this case. Therefore, a variety of textual and non- textual considerations precluded the Zemco court from ruling out the existence of a requirements contract. Under the Contract, Earthgrains clearly had no obligation to buy all, let alone any quantity, of its bagel requirements from Brooklyn Bagel. Paragraph 2 makes this clear, and the Contract specified a fee to be paid for the ordered bagels, which could only increase or decrease at six-month intervals. Under the Illinois Commercial Code, such an agreement is enforceable even though Earthgrains made no reciprocal commitment to buy all its bagel needs from Brooklyn Bagel. See 810 Ill. Comp. Stat. sec. 5/2-205;/3 Modern Dairy, 171 F.3d at 1110 (noting [a] seller’s firm offer to supply the buyer’s needs for some good at a specified price and other terms is enforceable . . . even though the buyer makes no reciprocal commitment to buy all its needs from this seller). Therefore, the district court’s characterization of the Contract as a buyer’s option was appropriate./4 In an effort to demonstrate that the parties had a requirements contract, Brooklyn Bagel also points to sec. 2-306(1) of the Uniform Commercial Code,/5 which functions as a primary gap-filler for open quantity terms in requirements contracts. Under Illinois law, however, an essential element of a requirements contract is the promise by the buyer to purchase all of its requirements, or at least a minimum quantity, from the seller. See Torres v. City of Chicago, supra, 632 N.E.2d at 58. No promise of that nature can be found in the Contract. Moreover, Brooklyn Bagel cannot genuinely dispute this lack of exclusivity in the Contract./6 In the absence of exclusivity, there can be no valid requirements contract. See id.; see also White & Summers, supra, sec. 3-9, at 155-56 (noting [b]ecause section 2-306 depends on exclusivity to determine the quantity, there can be no valid requirements contract without it). While Brooklyn Bagel argues that Paragraph 2(d) contemplates the use of estimates or forecasts--a common feature of a requirements contract--the Contract provides that such forecasts shall not be binding on either party, and Brooklyn Bagel acknowledges that the parties rarely used this feature. With respect to Brooklyn Bagel’s contention that the parties intended for Brooklyn Bagel to be the sole supplier of bagels at the Fort Payne facility, this promise is nowhere to be found in the Contract. In fact, the Contract does not reference any geographic region or distribution facility. The parties surely could have included this term in the Contract had they desired. In any event, Brooklyn Bagel cannot point to any contractual language indicating that it would be a breach of contract for Earthgrains to either (1) stop ordering from Brooklyn Bagel, (2) use another manufacturer, or (3) manufacture its own bagels. Accordingly, the Contract, taken as a whole, overwhelmingly establishes that the parties did not enter a requirements contract. Instead, the Contract provided an agreement by Brooklyn Bagel to manufacture bagels for Earthgrains at a specified price, within an agreed period, subject to Earthgrains’ bagel needs. Brooklyn Bagel nevertheless argues that extrinsic evidence demonstrates that Earthgrains was obligated to buy all of its bagel requirements for the Fort Payne facility from Brooklyn Bagel. The district court found Brooklyn Bagel’s extrinsic evidence inadmissible or, alternatively, unsupportive of its position. As an initial matter, the Contract contains an integration clause stating that the Contract between the parties constitutes the entire agreement of the parties, and supersedes all prior and contemporaneous agreements. (Contract para. 25.) Given such a clause, the parol evidence rule generally forbids the use in evidence of a prior or contemporaneous agreement or terms not included in the Contract. See Sunstream Jet Exp., Inc. v. International Air Serv. Co., Ltd., 734 F.2d 1258, 1265 (7th Cir. 1984) (noting under Illinois law if the contract imports on its face to be a complete expression of the whole agreement, it is presumed that the parties introduced into it every material item, and parol evidence cannot be admitted to add another term to the agreement). Notwithstanding the parol evidence rule, extrinsic evidence can be admitted to discover the parties’ genuine intent when a contract is ambiguous, see FDIC v. W.R. Grace & Co., supra, 877 F.2d at 620-21; Modern Dairy, 171 F.3d at 1109, but there must be either contractual language on which to hang the label of ambiguous or some yawning void . . . that cries out for an implied term. Bidlack v. Wheelabrator Corp., 993 F.2d 603, 608 (7th Cir. 1993) (en banc) (lead opinion). Extrinsic evidence cannot be used to create a conflict completely apart from the contract itself. R.T. Hepworth Co. v. Dependable Ins. Co., Inc., 997 F.2d 315, 318 (7th Cir. 1993). Brooklyn Bagel neither points to any contractual language that is reasonably susceptible to differing interpretations, nor suggests a void that cries out for an implied term in the Contract. As a further constraint on the consideration of this evidence, the Illinois Commercial Code only allows extrinsic evidence including course of performance, course of dealing, and usage of trade to be considered when it is reasonably consistent with the express terms of the contract. See 810 Ill. Comp. Stat. sec.sec. 5/2- 208(2), 5/2-202. Brooklyn Bagel does not seek to introduce evidence that is consistent with the terms of the Contract,/7 and it otherwise fails to establish any ambiguity in the terms of the Contract. We conclude, as a matter of law, that the parties did not enter a requirements contract.