Seventh Circuit Construes Written Contract With Confusing Handwritten Amendment

QUALITY OIL, INCORPORATED v. KELLEY PARTNERS, INCORPORATED, Court of Appeals, 7th Circuit 2011 - Google Scholar:

This is a classic case of contract interpretation. Lawyers often become alarmed when they learn that their clients have made handwritten amendments to their written contracts. Here Quality Oil and Kelley Partners entered into a transaction under which Quality loaned Kelley $150,000. The loan was to be forgiven over a five year period as Kelley purchased certain motor oil products from Quality.

The confusion was created when the clients added a handwritten clause to the Agreement as follows:

"On July 1, 2003, Quality Oil, an Indiana auto-lubricants distributor for Exxon Mobil Corp., and Kelley Partners, an independent operator of automotive quick-lube facilities in Illinois, entered into a "Product Payback Loan and Supply Agreement." Under the Agreement, which by its terms is governed by Indiana law, Quality Oil agreed to loan Kelley Partners $150,000 "at no cost," and Kelley Partners in turn agreed to purchase its motoroil requirements from Quality Oil.^[1] Specifically, in Paragraph 4 of the Agreement, Kelley Partners agreed to

purchase from Quality Oil . . . at least eighty-five percent (85%) of [Kelley Partners'] requirements of motor oils during the term of this Agreement. [Kelley Partners] further agrees to purchase not less than two hundred twenty-five thousand (225,000) gallons of Mobil motor oil and 225,000 Mobil branded filters within 60 months from the date hereof.

Immediately following this language in the typewritten contract is the handwritten notation that is central to Kelley Partners' appeal. It states as follows: "This Supply Agreement will terminate after 225,000 gallons and 225,000 filters of Exxon/Mobil is purchased or 60 months, whichever comes first." The president of Kelley Partners and owner/general manager of Quality Oil initialed this handwritten provision and signed the Agreement in two places."

Quality Oil sued Kelley and the district court entered summary judgment in favor of Quality Oil. The Seventh Circuit affirmed and explained its reasoning as follows:

"The same is true of Kelley Partners' interpretation of the contract at issue here. It would make no commercial sense for Quality Oil to forgive its loan to Kelley Partners after five years regardless of how much motoroil product Kelley Partners purchased. This was a loan and supply contract, after all. Under Paragraph 4 of the Agreement, Kelley Partners bound itself to purchase at least 85% of its motor-oil needs from Quality Oil during the term of the Agreement. Paragraph 6 and Exhibit A imposed a Premature Termination Penalty on any early termination, and Paragraph 7 required that if Kelley Partners sold its business, it was to assign its obligations to its successor or remain liable under the Agreement. Reading the contract as a whole and harmonizing all of its provisions shows that Kelley Partners' literal interpretation of the handwritten provision is commercially absurd."

Kelley argued that the contract expired in 60 months so it had no duty to repay the loan. The Seventh Circuit held that this was incorrect and would make the contract commercially unreasonable.

Comment: cases like this one cause corporate lawyers to tear their hair out - but the Court did an excellent job of deciphering the true meaning of the contract.

Edward X. Clinton, Jr.