ContractsProf Blog

Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, July 30, 2012

Nice Parol Evidence Case (with Facts Vaguely Reminiscent of Nanakuli)


A Completely Different James Brown

In late 2005, James Brown (“Brown) and Stern Oil Co., Inc. (“Stern Oil”), a fuel distributor for Exxon Mobil Corp., executed an agreement regarding fuel supply.  When Brown notified Stern Oil that he would no longer purchase its fuel, Stern Oil filed suit for breach of contract.  Brown counterclaimed, alleging fraudulent inducement.  The trial court granted summary judgment to Stern Oil moved, and after a trial on damages, it awarded Stern Oil eight years of lost profits in the amount of $925,317 plus attorneys’ fees.  On appeal, the Supreme Court of South Dakota reversed, finding the award of summary judgment to have been improper.


Under two Motor Fuel Supply Agreements (“MFSAs”) the parties established a maximum annual amount of fuel that Stern Oil was obligated to sell to Brown each year.  For each year thereafter, the maximum was adjusted according to sales.  Brown was obligated to purchase at least seventy-five percent of the annual maximum, and if he failed to do so, Stern Oil had the option to terminate the agreement or to refuse to renew. 

In addition, the MFSAs stating that “unless otherwise specified, all prices shall include applicable taxes, and are subject to change by Stern Oil at any time and without notice.”  Further, under a brand incentive program (“BIP”), Brown and Stern executed a Repayment Agreement wherein Stern Oil would reimburse Brown for certain improvements such as equipping the stations with Exxon Mobil-approved fuel dispensers and payment systems, but provided Stern Oil with the option of reimbursement in the event Brown breached or defaulted. 

In his Counterclaim, Brown alleged that Stern Oil fraudulently induced him to enter in the MFSAs and the BIPs by orally “guaranteeing a five-cent profit on every gallon of fuel he sold,” evidence that the circuit court found to be barred by the parol evidence rule.  However, the Supreme Court noted that, as the MFSA’s deal primarily with goods, South Dakota’s version of the UCC governs.  The UCC which allows for the introduction of parol evidence to establish fraud as a ground for rescinding a contract.  Whether or not the parol evidence is ultimately credited  will turn on questions of credibility, which are best left to a jury. 

Brown challenged the MFSAs’ enforceability on the ground that they do specify the price of the fuel Brown was to purchase.  Open price term contracts are permissible under South Dakota’s version of the UCC, but only where the parties possess the requisite intent to enter such an agreement. Here again, the Supreme Court found that the trial court’s erroneous exclusion of parol evidence rule regarding the alleged five percent profit guarantee, prevented it from recognizing a material issue of fact relating to the parties’ intent to enter into an open price term contract. 

Moreover, the MFSAs state that “all prices shall include applicable taxes, and are subject to change by Stern Oil at any time and without notice.” Such language gives Stern Oil practically unlimited power to fix the fuel prices.  Thus, whether Stern Oil set these prices in good faith also remains a question of fact.

[Christina Phillips & JT]

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