In bad result for alcohol wholesalers, Delaware spirits distributor loses argument that franchise law created enforceable exclusive distribution contract where alcohol was purchased on invoice and no oral or written agreement set a quantity of goods to be purchased.
Following a trial over claims of an alleged exclusive oral distribution agreement under Delaware’s alcohol distribution franchise law a Delaware court has found that the lack of a specific “quantity” term in the arrangement between a spirits company and an alcohol wholesaler was the exact kind of missing term that Section 2-201 of the uniform commercial code warned against, holding that their course of dealing – buying on invoice – did not create an enforceable implied-in-fact distribution agreement:
The facts presented at trial fail to demonstrate agreement on any quantity. A written purchase order and partial performance are not sufficient to obligate Star [spirits importer] to WCW’s [alcohol distributor] exclusive distribution in perpetuity on the basis of an oral contract or an implied-in-fact distribution agreement. Therefore, the UCC statute of frauds prevents recovery on these facts.
This case is important as a reminder that the uniform commercial code should not be overlooked in review, discussing, negotiating, and litigating alcohol distribution agreements. The relevant findings of fact from the court’s opinion:
- Star Industries, a New York based supplier of alcoholic beverages began working with World Class Wholesale LLC a Delaware alcoholic beverages distributor in 2014.
- Star became concerned with WCW’s performance, late payments, inadequate level of distribution, and WCW bounced a few checks to Star at one point having over $175,000 overdue.
- The parties entered into a payment plan in late 2016 with which WCW complied and following the payment plan, Star alleged WCW agreed to make two-day advanced payments on future orders of spirits.
- Star alleged WCW engaged in transshipping (selling Delaware product to New York retailers buy product from Delaware wholesalers to avoid New York’s higher taxes). WCW denied engaging the practice. Star asked that WCW cease selling to retailers outside the territory. Star increased prices on its products to Delaware in an effort to even out any potential benefits a spirits wholesaler might gain from transshipping.
- WCW placed an order, but Star was still worried about transshipping and decided to surrender its Delaware license and cease operations in the Delaware market which it felt was the only way to put an end to transshipping. Delaware’s Alcoholic Beverage Control Commission accepted the surrender of Star’s license.
- WCW brought a proceeding in front of the Alcoholic Beverage Control Commission arguing that the surrender was a “constructive termination of their contract and inconsitent with Delaware alcohol wholesale franchise rights and the alcohol distribution franchise code of Delaware. https://regulations.delaware.gov/AdminCode/title4/900.shtml asking for remuneration for the distribution rights under the franchise code.
- The commission denied WCW’s request finding that WCW’s arguments were without merit, and that “the purpose of the [alcohol distribution franchise law] is to compensate a wholesaler for building a brand where another wholesaler in the state ultimately reaps the reward of such building and labor” but found that the “present matter is not a scenario where Star’s products are coming into Delaware through a different wholesaler while at the labor of WCW” and that to the extent any agreement existed between the parties, Star’s surrender of its Delaware supplier’s license was not a termination of the parties’ relationship within the meaning of the alcohol distribution franchise code.
- WCW did not appeal the administrative ruling and instead it brought suit against Star for breach of contract and other causes of action arguing the parties entered into an “oral exclusive distribution contract of indefinite term” and that “Star made clear and definite promises to WCW that WCW would be Star’s exclusive wholesaler for an indefinite period.”
- The court held a trial from which the above facts were adduced and in assessing whether common law applied found that the UCC controlled the parties sale of goods and that the UCC barred any such oral agreement under its statute of frauds and because no quantity of goods term was ever proven in asserting an oral or constructive contract and Section 2-201 of the uniform commercial code bars contracts that fail to state a quantity of goods.
In ruling against WCW, the court did something interesting that distributors and suppliers should pay attention to. The court applied the UCC in addition to the franchise laws. Since no express prohibition or statement that the alcohol franchise code excepted the UCC and selling and shipping spirits, wine and beer are the sale of goods, the court was right to apply the uniform commercial code. Something liquor attorneys sometimes forget in arguing about their agreements and looking for laws that apply. In applying the UCC – the noted that individual shipment orders cannot create or substantiate an ongoing distribution commitment.
Partial performance as a substitute for the required memorandum can validate the contract only for the goods which have been accepted or for which payment has been made and accepted.
Ultimately holding that an argument that an implied in fact exclusive distribution agreement existed failed where the purchases were done by invoicing and the allegations and proofs of an oral agreement for such failed because they did not meet the UCC’s requirement where they failed to state “quantity” as a term.
Although “[t]he required writing need not contain all the material terms of the contract” the UCC clarifies that “[t]he only term which must appear is the quantity term which need not be accurately stated but recovery is limited to the amount stated.” Here, Star argues, no such quantity term has been specified, thus any alleged agreement is unenforceable. Star asserts that WCW has not claimed, and did not offer any evidence at trial, that its alleged distribution agreement with Star contained any quantity term at all.
The Court finds that under UCC Section 2-201, a specific quantity provision is necessary for an enforceable agreement. The facts presented at trial fail to demonstrate agreement on any quantity. A written purchase order and partial performance are not sufficient to obligate Star to WCW’s exclusive distribution in perpetuity on the basis of an oral contract or an implied-in-fact distribution agreement. Therefore, the UCC statute of frauds prevents recovery on these facts.
You can read the court’s full opinion here. It includes determinations about the promissory estoppel and unjust enrichment which the court rejected as well as a determination that the UCC’s requirement of good faith and fair dealing did not require notice of the license surrender and that the surrender was not a breach or a termination since the parties did sale on invoice and had a cash on delivery arrangement.
In addressing the issue of license surrender requiring notice to the wholesaler, the court found:
Under the facts presented at trial, notice of license surrender was not required. The parties established a new payment procedure requiring cash-on-delivery. Therefore, there was no agreement for successive performances of unlimited duration. The Court finds that the change to the parties’ course of business repudiates successive performances that would require reasonable notification under UCC Section 2-309. Therefore, the Court finds that the surrender of Star’s Delaware supplier license was neither breach nor termination.
In addressing the issue of promissory estoppel the court found:
Considering the evidence at trial, the Court finds that WCW failed to produce any evidence that Star agreed that WCW would be Star’s exclusive Delaware wholesaler for an indefinite period of time. [WCW’s owner’s] subjective expectations are insufficient to establish that Star made a promise. Therefore, WCW’s promissory estoppel claim must fail.