698 N

Indiana-Amercian Water Co., Inc. v. Town of Seelyville
698 N.E.2d 1255 (Ct. App. Ind. 1998)

Bailey, Judge

Case Summary

    Appellant-Plaintiff Indiana-American Water Company, Inc. ("Water Company") appeals the trial court's determination that Appellee-Defendant Town of Seelyville, Indiana ("Town") would not be in breach of the contract between Water Company and Town by developing its own water supply to reduce its need to purchase water from Water Company. We affirm.

Issues

    Water Company raises one compound issue which we restate and expand into the following two issues:

    I. Whether the contract is an unenforceable, illusory "indefinite quantities" contract or an enforceable "exclusive requirements" contract.

    II. Whether the Town will breach the contract by developing its own water supply to reduce (or perhaps eliminate) its need to purchase water from Water Company.

Facts

    The evidence is undisputed. In 1983, Water Company and Town entered into a contract which provides in
pertinent part as follows:

Company agrees to sell to the Town, and Town agrees to purchase from Company, at the rates hereinafter mentioned, such quantities of water as the Town may hereafter from time to time need (subject to all limitations contained in this Agreement) . . . .

The term of the contract is twenty-five years and will expire in the year 2008. The contract limits the quantity of water the Town may purchase to one million gallons of water per day. The contract contains other limitations and provides that "in no event shall the Company be obligated to supply water in excess of the limitations on usage as provided for expressly in this Agreement . . . ."

In 1967 (many years before the present contract was executed), Town acquired land which could be used as a wellfield to supply water. In 1997, Town announced its plan to sell bonds to finance the construction of the improvements necessary to obtain water from the wellfield. (R. 10).

Water Company initiated the present lawsuit seeking a declaratory judgment that Town's plan to develop its own supply of water would constitute a breach of the contract which, Water Company contends, requires Town to purchase all the water it needs from Water Company. After a hearing, the trial court entered findings and a judgment order which reads in pertinent part as follows:

'WHEREFORE, IT IS HEREBY ORDERED, ADJUDGED AND DECREED that the Agreement is valid and binding, that it permits the Town to purchase its water need from [Water Company] but does not require it to purchase all of its water from [Water Company] and that the Town's development and utilization of its own source of water diminishes its need and does not violate the Agreement."

This appeal followed.

Discussion and Decision

    . . .

I. Indefinite Quantities or Exclusive Requirements Contract

    Output and requirement contracts are governed by the Uniform Commercial Code ("UCC") as adopted in Indiana under IND. CODE § 26-1-2-306(1) as follows: . . .

    As discussed above, Water Company contends that the contract requires Town to purchase all its water from Water Company and, in effect, prohibits Town from developing its own water supply. Water Company asserts that any other interpretation of the contract renders it unenforceable for lack of mutuality or indefiniteness because, although Water Company is required to supply all the water Town needs (within the limitations provided in the contract), Town is not required to purchase any minimum amount of water from Water Company. Thus, Water Company raises the implied threat that, if Town does not purchase all of its water from Water Company, Water Company is not bound by the contract and is free to leave the Town "high and dry" unless the Town capitulates to its demands.

    A requirements contract is one in which the purchaser agrees to buy all of its needs of a specified material exclusively from a particular supplier, and the supplier agrees, in turn, to fill all of the purchaser's needs during the period of the contract. On the other hand, an indefinite quantities contract is a contract under which the buyer agrees to purchase and the seller agrees to supply whatever quantity of goods the buyer chooses to purchase from the seller. A requirements contract differs from an indefinite quantities contract in that, under a requirements contract the buyer agrees to turn exclusively to the seller to purchase his requirements as they develop. However, in an indefinite quantities contract, even if the buyer needs the commodity in question, he is not obligated to purchase it from the seller. Thus, an indefinite quantities contract, without at least the requirement that the buyer purchase a guaranteed minimum quantity from the seller, is illusory and unenforceable. As expressed under Indiana law: "it is fundamental that a contract is unenforceable if it fails to obligate the parties to do anything." Licocci v. Cardinal Associates, Inc., 445 N.E.2d 556, 559 (Ind. 1983).

    As noted above, we will strive to interpret a contract as valid rather than void. Additionally, where it is apparent that a binding exclusive requirements contract was intended, the buyer's promise to purchase from seller exclusively will be implied. Moreover, the requirement of good faith, specifically imposed under UCC § 2-306, prevents requirement contracts from being illusory or too indefinite to be enforced. UCC § 2-306 (official comment 2).

    The present contract under scrutiny provides that Town will purchase "such quantities of water as the Town may hereafter from time to time need . . ." from Water Company. Moreover, the contract provides that "in no event shall the Company be obligated to supply water in excess of [one million gallons per day]."   There has never been any contention that the contract permits Town to shop around and purchase its water needs up to one million gallons per day from any supplier other than Water Company. Thus, we interpret the present contract as a valid and enforceable exclusive requirements contract which requires Town to use Water Company exclusively to supply all the water it must purchase to meet its needs up to the amount of one million gallons of water per day.

II. Good Faith Reduction or Curtailment of Requirements

    The most common problem arising out of a requirements contract is the situation where the price of the commodity is advantageous to the buyer who then demands a quantity unreasonably in excess of his needs in order to resell the excess at a profit, placing himself in competition with the seller. The provision in § 2-306(1) forbidding the "demand" by a buyer under a requirements contract to a "quantity unreasonably disproportionate to any stated estimate" applies only to this type of situation where the buyer requests more, as opposed to less, of the commodity in question. . . . [T]here was no indication that the drafters of the UCC were equally, if at all, concerned about the case, such as the one at bar, where the buyer takes less than his estimated requirements, provided, of course, that he does not buy from anyone else.

    Generally, the buyer in a requirements contract governed by UCC § 2-306(1) is required merely to exercise good faith in determining his requirements and the seller assumes the risk of all good faith variations in the buyer's requirements even to the extent of a determination to liquidate or discontinue the business. However, the buyer is not free, on any whim, to quit buying from seller. How exigent the buyer's change of circumstances must be to allow him to scale down his requirements is a difficult question. The seller assumes the risk of a change in the buyer's business that results in a substantial reduction in the buyer's needs, but the buyer assumes the risk of a less urgent change in circumstances. The essential ingredient of the buyer's good faith under such circumstances is that he not merely have had second thoughts about the terms of the contract and want to get out of it. However, if the buyer has a legitimate business reason for eliminating its requirements, as opposed to a desire to avoid its contract, the buyer acts in good faith.

    It is well-settled that it is not bad faith to take advantage of a technological advance which reduces the buyer's requirements. See Southwest Natural Gas Co. v. Oklahoma Portland Cement Co., 102 F.2d 630 (10th Cir. 1939). In Southwest, the buyer agreed to buy all its gas from seller for fifteen years. Seven years later, the buyer replaced its boiler, which had worn out, with more modern equipment which reduced its requirements for gas by 80%. The court held that this was a good faith reduction in requirements because it would have been unreasonable to require the buyer to replace its boiler with an obsolete, inefficient unit. Id.

    Understandably, Water Company relies on the case of Andersen v. La Rinconada Country Club, 4 Cal. App. 2d 197, 40 P.2d 571 (1935) which held that a golf course which had agreed to buy water under a requirements contract breached that contract by purchasing a wellfield in order to obtain its own supply of water. However, Andersen is distinguishable from the case at bar. The Andersen contract provided that the golf course would "purchase water from no other source." 40 P.2d at 572. Thus, the Andersen court held that the golf course's "purchase" of a wellfield to supply its water constituted a breach of the contract. In the present case, Town did not purchase or otherwise acquire its wellfield during the term of the contract. Instead, Town had owned the wellfield for many years before the present contract was executed.

    In the present case, Town had acquired a wellfield many years before the execution of the contract under scrutiny. Town's decision to develop its preexisting wellfield constitutes a legitimate, long-term business decision, and not merely a desire to avoid the terms of its contract with Water Company. Therefore, based on the above, we cannot conclude that Water Company carried its burden of overcoming the negative judgment in this case by demonstrating that the evidence leads unerringly to the conclusion that Town's development of its pre-existing wellfield to reduce its need to purchase water from Water Company constitutes bad faith. Although the specific findings entered by the trial court did not discuss the dispositive issue of Town's good faith under IND. CODE § 26-1-2-306, we are confident that our affirmance of the trial court's judgment is consistent with all of the trial court's findings of fact and the inferences reasonably drawn therefrom.

Affirmed.

BAKER, J., and DARDEN, J., concur.