Enforceable Contracts and Agreements to Agree
In the recently released movie “Pig,” Nicholas Cage portrays a truffle hunter living in the wilderness of Oregon with his prized truffle-hunting pig. Full disclosure, I have not seen the movie, but I understand that at some point, the pig is pig-napped, and Cage must recover his prized pig. Obviously, the pig is far more valuable to Cage’s character for its truffle hunting abilities than it would otherwise be if simply sold for bacon.1
The North Carolina Business Court recently issued an opinion that dealt with a contract for the sale and purchase of pigs – not the truffle hunting kind, but the kind that ends up in barbecue joints all across North Carolina. The opinion discusses when a contract may be unenforceable because it is indefinite and when a contract is an unenforceable agreement to agree. It is also a cautionary tale of drafting contracts that will be in place for a long time.
The Contract
The case is Maxwell Foods, LLC v. Smithfield Foods, Inc. 2 Maxwell Foods is a hog supplier. In the mid-1990s, Maxwell entered a contract to sell its pigs to Smithfield. The contract was an output contract, which means that Smithfield was obligated to buy all of the pigs that Maxwell could produce. Pricing was determined by the spot-market price of hogs in the Iowa – Southern Minnesota spot market, which at the time was an important hog market. In short, the contract said that Smithfield would buy all of Maxwell’s hogs and pay the price as determined by the spot market at the time of the sale.
The contract contained an additional provision that is relevant to the discussion. Maxwell knew that Smithfield was one of if not the largest purchasers of pigs in the country, and Smithfield purchased pigs from a variety of sellers. Maxwell wanted to make sure it was treated fairly, so it included a “most-favored-nation” provision in the contract, which stated that Smithfield would give Maxwell the same economic incentives given to its other suppliers and the “benefit of future changes in economic benefits” given to its other suppliers.
Market Changes
Flash forward nearly 30 years since the contract was executed, and there have been a lot of changes in the market for hogs. The hog market had consolidated, and pork suppliers, including Smithfield, had vertically integrated and brought hog production in-house. Meanwhile, there was less and less demand for spot-market sale of pigs, which made the spot-market price on the Iowa – Southern Minnesota spot market unworkable to set prices for Maxwell’s hogs. These factors, according to Maxwell, allowed Smithfield to drive the price of hogs down making it impossible for Maxwell to turn a profit. Finally, the Covid-19 pandemic allowed Smithfield to decrease the number of hogs it was purchasing from Maxwell.
The Lawsuit
Maxwell sued, asserting multiple claims. Relevant for the discussion here, Maxwell claimed that Smithfield breached the most-favored-nation clause and refused to negotiate in good faith over a new price-setting mechanism once the spot market model ceased to be effective.
Vagueness
Smithfield moved to dismiss, claiming that the most-favored-nation clause of the contract was unenforceable because it was ambiguous and vague. It argued that the phrases “economic incentives” and “benefit of future changes in economic benefits” were vague, overly broad, and therefore unenforceable.
As the court noted, a contract must be sufficiently definite to be enforceable. Definiteness goes to the very formation of a contract. The parties must agree, and to agree, there must be a “meeting of the minds.” If the contract is not definite, then it cannot be said that the contracting parties agreed. However, all contracts have some level of indefiniteness, and courts will attempt to enforce parties’ agreements by seeking to ascertain the parties’ intent.
Interpreting the contract as a whole, the court found that the most-favored-nation clause was not unenforceable. From the context, the court determined that economic benefits referred to things like the market value and average price. Therefore, the court held that the clause was not so indefinite as to be unenforceable.
Agreement to Agree
Smithfield also argued that the most-favored-nation clause was an unenforceable agreement to agree. In contract law, an agreement now to agree to something else in the future, is unenforceable. The reason is obvious – parties cannot have a meeting of the minds on the terms of an agreement they have not yet reached. Smithfield argued that, because the economic benefits referenced in the most-favored-nation clause were not strictly defined, it was an agreement to agree. The court quickly rejected this argument, stating that the clause was not an indefinite agreement to agree in the future but rather a “fixed and final obligation to offer Maxwell the economic benefits given to other major suppliers.”
However, this argument also arose as to another claim in the lawsuit. Recall that using the spot market price had become unworkable because the market no longer had sufficient volume to make it a reliable indicator of price. The agreement called for the parties to “designate” a new method of determining market price if the spot market method failed. Maxwell argued that Smithfield’s refusal to negotiate over a new designation was bad faith. But the court noted that the requirement to designate a new method was, in fact, an unenforceable agreement to agree.
Lessons Learned
It is very difficult to draft long-term contracts that adequately anticipate the future. At the time this contract was drafted, the Iowa – Southern Minnesota spot market for pigs was robust. But changes in the industry over decades made it an unreliable indicator. Moreover, there is a fine line between what is so indefinite as to be unenforceable versus what is sufficiently definite. Finally, in attempting to address future contingencies, avoid anything that might be construed as an agreement to agree. Involving your lawyer early in the process is money well spent.
And of course, when it comes to truffle-hunting pigs, all bets are off.
1 More on the movie at https://www.imdb.com/title/tt11003218/
2 The opinion can be found at https://www.nccourts.gov/documents/business-court-opinions/maxwell-foods-llc-v-smithfield-foods-inc-2021-ncbc-50
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The information included here is for informational purposes only, is not exhaustive of all considerations when creating documents, is not intended to be legal advice, and should not be relied upon for that purpose. We strongly recommend you consult with an attorney and do not attempt to create your own documents.