Anabi Oil Case: Word “Breach” vs. “Termination” in Contract Difference Between Win and Loss
How a San Diego business contract is written is crucial for how California courts will evaluate, apply, and interpret the contract. More to the point, specific word choice in a contract can make all the difference between winning the case or losing. This is among the many reasons that every California business should seek the advice and counsel of an experienced San Diego corporate attorney for drafting your contracts and reviewing contracts that you are being asked to sign.
A recent case called Anabi Oil Corporation v. Highland Park Oil, Inc., Case No. B283511 (Cal. App. 2nd Dist. August 15, 2019) provides a good example of how words matter when courts evaluate and interpret the contract. In that case, the notable words were “terminate” as opposed to “breach.” In Anabi Oil, the parties signed a retail sales agreement in which Highland Park promised to buy a minimum number of gallons of gasoline. The retail sales agreement provided that if either party terminated the contract early, Highland Park would be liable for liquidated damages of three cents per gallon on all non-purchased gasoline. Highland Park went out of business in 2012 and, thereafter, Anabi Oil sued Highland Park and its owners seeking to enforce the liquidated damages clause. However, at no point did Anabi Oil (or Highland Park) ever actually terminate the agreement. Highland Park stopped buying gasoline which was a breach of the contract. But Highland never terminated the retail sales agreement and neither did Anabi Oil.
During the trial of the case, Highland Park and its owners defended the case on the grounds that the liquidated damages clause was never triggered because the contract was never “terminated.” In response, Anabi Oil argued that failure to buy gasoline was a “termination” and that filing the lawsuit was a “termination.” However, the trial court agreed with Highland Park. The contract contained enumerated reasons that the agreement could be terminated and specific steps that had to be taken to effectuate the termination. Among other requirements, Anabi Oil was required to provide notices to Highland Park of any breach of the retail sales agreement “in writing and in compliance with the Petroleum Marketing Practices Act and other applicable Law.” The Petroleum Marketing Practices Act is a federal law governing the contractual and business relationship between suppliers and dealers of gasoline and petroleum products. Further, the termination was only effective after the expiration of various time periods that were provided to allow to Highland Park to cure or fix the alleged breaches of the agreement. Anabi Oil never sent the notices that were required under the retail sales agreement. As such, the trial court held that the agreement was never terminated. Since payment of liquidated damages was conditioned on “termination” of the agreement, and since the agreement was never terminated, Anabi Oil was denied any recovery of liquidated damages.
On appeal, the Court of Appeal agreed. Anabi Oil restated its argument that it did effectively terminate the retail sales agreement under California law by filing its lawsuit and that Highland Park’s breach of the agreement was the same as a termination. However, like the trial court, the Court of Appeals rejected those arguments. First, as noted, this particular retail sales agreement was governed by federal law — the Petroleum Marketing Practices Act — that preempts California state law and controls the process of terminating a petroleum oil and gasoline franchisee/dealer. The Petroleum Marketing Practices Act requires certain notices of termination and limits the grounds on which a franchisor/supplier can terminate a dealer. Further, the retail sales agreement in this case itself required certain notices and specifically referenced the Petroleum Marketing Practices Act. As such, filing suit in California state court did not satisfy either the Petroleum Marketing Practices Act or the specific provisions of the retail sales agreement. Since there were no notices of termination, the agreement was never terminated. It was also noted that the liquidated damages clause could have been written to allow such damages based on breach of the agreement. However, the parties chose to use the word “terminate” in the liquidated damages clause. The courts gave effect to the words used. One legal lesson: Words matter when crafting a business contract.
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For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.