Recently, the North Carolina Court of Appeals issued an opinion in a breach of contract case pitting a chicken grower against Johnson Breeders, Inc.  The case offers a good illustration and discussion of breach of contract claims in the agricultural context.

Texas A&M Agrilife Extension photo by Robert Burns

Background

The plaintiff in this case was a chicken grower who had contracted to grow chickens for Johnson Breeders Inc. from 1987 until 2011.  Under the contracts, Johnson furnished flocks of baby chicks to the grower, who then raised the chicks by providing labor, electricity, houses, and equipment, until the chicks reached maturity at 5-6 weeks.  Johnson would then pick up the chickens and pay the grower for his services based on the weight of the chickens.  The grower would then prepare his houses for the next flock, and this process continued for years.

The final contract between the parties was executed on June 30, 2010.  The contract provided “Johnson makes no representation, warranty, or guarantee as to the number of birds to be placed with grower under this contract.”  Further, the contract stated that “Johnson agrees to deliver the flocks (number and breed of which are to be determined by Johnson in its sold discretion” to the grower.  Additionally, the contract provided terms allowing termination by Johnson.  Johnson was permitted to terminate the contract for any reason, or for no reason at all, so long as it gave the grower at least 90 days written notice and the reasons for the termination.

In 2011, Johnson required its growers to update their chicken houses to meet certain standards.  Johnson sent two written notices to growers asking whether or not they planned to reply to the request.  There is a dispute as to whether the grower ever received the notices, and at least one other grower testified that he had not received such notices from Johnson.

In September, the grower was waiting for his next shipment of chicks to arrive, but they never came.  He contacted Johnson to inquire as to the missing flock, and was told that no more flocks would be delivered because the grower’s chicken houses were outdated.  Johnson never sent any written notice of contractual termination to the grower.

Lawsuit

In 2012, the grower filed a breach of contract suit against Johnson.  After a jury trial, the jury returned a verdict in favor of the grower, awarding him $42,235.96 in damages for Johnson’s breach of contract.  Johnson appealed the verdict.

Appellate Court Opinion

The appellate court affirmed the trial court’s decision.  [Read full opinion here.]

First, Johnson argued that it did not breach its contract with the grower because the contract’s terms gave it sole discretion to refuse to provide chickens to the plaintiff.  Johnson claimed that there was never contractual agreement as to the number of birds, or the timing of delivery of birds to be delivered.  The jury and appellate court both rejected this argument, reasoning that were Johnson able to merely refuse to deliver any birds to the grower, that would render the termination provisions of the contract meaningless.  Johnson did not have the right to cease deliveries without consequence or without complying with the termination terms in the contract.  Thus, when Johnson stopped delivering chickens, it breached the contractual agreement.

Second, Johnson argued that it was not required to follow the contractual termination procedures in the contract because the grower repudiated the contract by refusing to make the requested capital improvements.  Repudiation of a contract occurs when one party to a contract express an unequivocal and absolute refusal to perform his part of the contract.  When this occurs, the other party is excused from performance as well.  Although both parties agreed that the grower did not make the required updates, there was conflicting testimony as to whether the grower actually received the notices that such upgrades were required.  Because of the conflicting evidence and lack of an unequivocal statement that the grower would not make the updates, the court of appeals held that no repudiation occurred.  Thus, Johnson was not excused from its own performance under the contract.

Finally, Johnson challenged the amount of damages awarded by the jury as being too speculative.  The jury’s award was apparently calculated by multiplying the grower’s  highest payment for a flock in 2011 by two, on the theory that had Johnson properly followed the termination procedures under the contract, Johnson would have received two additional flocks before termination occurred.  The appellate court upheld this damage award, finding that although it was an approximation, there was sufficient evidence to support the award including evidence of the grower’s other 2011 payments from Johnson.

Why Do We Care?

Although this case is quite factually specific and out of North Carolina, it offers a great illustration of some basic principles of contract law.

First, the case shows the importance of reading the entire contract as a whole.  Johnson based its entire argument on the contractual provision allowing it discretion to select the number of birds (if any) to be delivered.  Were that the only contractual term, Johnson likely would have won the case.  However, when the entire contract is viewed as a whole, including the termination provisions requiring a 90 day written notice, the analysis greatly changes.  Courts construing contracts will view the contract as a whole and seek to construe the contract giving meaning to every clause.

Second, the case offers a great example of the danger of a party not following through on his contractual obligations based on belief that the other party breached first.  Here, Johnson argued that because the grower did not update his chicken houses, he repudiated the contract and, therefore, Johnson’s performance was excused.  This turned out to be a costly mistake for Johnson when the court determined no repudiation occurred.  This meant that Johnson had no excuse for not complying with its contractual duties and, because it failed to do so, it breached the contract.  We see this happen in several contract cases.  In order for a party to be excused from his or her contractual obligations, there are strict requirements, such as was the case here with repudiation.  If a party shirks his or her contractual obligations because of the argument that the other party breached first, this is always a somewhat dangerous position in the event the court disagrees.

Third, this case offers a lesson on keeping good records to be used as evidence if needed.  One major problem for Johnson in this case was it could not prove that the plaintiff received, and ignored, the letters requesting upgrades to chicken houses.  Had Johnson been able to offer evidence–a return receipt, a copy of the letter addressed to Johnson, proof of delivery, etc.–it would have been much better off.  Keeping careful records that could be used as future evidence is important for any business.