May Metropolitan Corp. v. May Oil Burner Corp.

New York Court of Appeals · Contracts

Contractsagreement to agreerenewal clausesreasonablenessgood faithagreement to agreerenewal rightautomatic renewal

Facts

Plaintiff had acted as defendant's Brooklyn dealer since 1929 under eight successive annual franchise agreements, and the later agreements stated that if plaintiff performed, it would automatically have the right to renew from year to year, provided it signed a new quota agreement for each year that exceeded the previous year's quota and was mutually agreed upon. In 1937, plaintiff proposed increasing its quota from 100 to 150 units, while defendant demanded 250 units and, after plaintiff refused, defendant declined renewal and stated it would make other arrangements in Brooklyn. Plaintiff alleged that by custom, usage, and the parties' conduct, the quota-increase language contemplated increases not exceeding 10 percent of the prior year's quota, making defendant's demand unreasonable. Plaintiff also alleged a separate breach concerning defendant's supposed obligation to supply names of advertising prospects, but the writings did not contain such a binding promise.

Issue

Whether the renewal provision in the parties' franchise agreements was unenforceable as a mere agreement to agree because the annual quota had to be mutually agreed upon, or whether the complaint stated a viable claim that defendant breached an enforceable renewal right by insisting on an unreasonable quota increase. Also, whether the second cause of action stated a claim for breach based on defendant's alleged obligation to furnish names of prospective customers.

Rule

A contract is incomplete and unenforceable when, as to an essential term, there has been no agreement but only an agreement to agree in the future. But a contract is not necessarily unenforceable merely because some material term refers to future agreement; if the contract, read as a whole, does not make future mutual assent the sole condition of obligation and does not negate an implication of reasonableness and good faith, evidence of custom, usage, and course of dealings may be used to supply a standard of reasonableness for performance.

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For seven years, Redwood Hearth Systems has appointed Lena Ortiz as its exclusive dealer in Cleveland under annual contracts. Each contract states that if Lena fully performs, she "shall automatically have the right to renew from year to year," provided she signs a new annual minimum-purchase schedule "in excess of the prior year and mutually agreed upon." After years of small increases, Redwood refuses renewal unless Lena accepts a 300% increase, and Lena sues for breach, alleging trade custom and the parties' prior dealings show only moderate increases were contemplated.

On Redwood's motion for judgment on the pleadings, what is the strongest argument that Lena's complaint should survive?

Explanation. The majority rule is that an open term does not automatically make the contract unenforceable. The court must read the entire writing. Where the contract repeatedly grants an automatic right to renew and does not provide that failure to agree ends the relationship, the writing may imply reasonableness and good faith as limits on the unresolved term. Allegations of custom, usage, and course of dealings may therefore state a claim sufficient to survive the pleadings. (Derived from May Metropolitan Corp. v. May Oil Burner Corp. (n.d.).)