QUALITY OIL, INC. v. KELLEY PARTNERS (September 19, 2011)

Kelley Partners operates a number of quick-lube facilities in Illinois. In 2003, it entered into an agreement with lubricants distributor Quality Oil which provided: a) Quality “loaned” $150,000 to Kelley without cost, b) Kelley agreed to purchase 85% of its motor oil requirement from Quality and agreed to purchase at least 225,000 gallons of oil and 225,000 oil filters over five years, c) the agreement terminated when Kelley either met the purchase requirements or 60 months, whichever came first, d) Kelley agreed to pay a penalty if it terminated the agreement early, and e) Kelley agreed that it could be liable for the termination penalty if it transferred any of its locations without obligating the purchaser to the contract terms. Two years into the agreement, and before it met its purchase requirements, Kelley sold its business without obligating its purchaser to the contract. Kelly refused to pay an early termination penalty. Quality brought a breach of contract claim against Kelley. Magistrate Judge Cox (N.D. Ill.) granted summary judgment to Quality for the termination penalty and prejudgment interest. Kelley appeals.

In their opinion, Seventh Circuit Judges Ripple, Evans (who, as a result of his death, took no part in the decision), and Sykes affirmed. Kelley's principal argument was that the five-year/225,000 gallon contract termination clause was handwritten, that it should therefore take priority over other contract terms, and that it should be interpreted to relieve Kelley of any obligation after five years, even if it did not meet the purchase requirements. The Court rejected that argument on several grounds. One, handwritten terms are not given priority if they alter the fundamental contractual bargain. Two, a contract must be ready in its entirety. And three, a contract should be interpreted so as not to produce absurd results. Here, although the Court conceded that a literal interpretation of the handwritten term could support Kelley's argument, it made no commercial sense to read it that way, taking the agreement as a whole. Kelley stopped purchasing motor oil from Quality after two years without having met its contractual obligation and then sold its business. It therefore breached the agreement and was liable to Quality for the early termination penalty.