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Leary v. Pepperidge Farm, Inc.

A-6620-05T1 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS; INTERPRETATION — When the parties disagree as to the meaning of a word in a contract, the Court has the obligation to explain why it rejects a party’s interpretation as unreasonable and should cite authority or trade custom support for its ruling.

Two distributors had separate consignment agreements with a biscuit company. Each agreement included a detailed description of their exclusive service territory. There were three stores in a shopping center. One distributor began servicing the first two stores, but the biscuit company assigned the third store to the other distributor who thought that the first two should have been assigned to him as well because it believed that its consignment agreement clearly indicated that these stores were part of its route. The first distributor also claimed that its consignment agreement included these stores as a part of its route and complained to the biscuit company that it unfairly assigned the third store to the other distributor in violation of their contract. Both distributors applied conflicting definitions for the contractual term “fronting” (which was found in each of the two agreements) to support their respective contentions that the stores should have been assigned to them. After the agreements were executed, but many years before either party sued the other, the biscuit company recognized that there were several disputes relating the term “fronting” and issued several clarifying memos. There was no indication as to whether the first distributor ever received a copy of the memos. In support of its contention that all parties intended the first two stores to be part of is store, the first distributor pointed out that it started servicing these stores from when they opened just as the biscuit company assigned them to him. It also pointed out that the company added the two stores into its handheld inventory-tracking system. The biscuit company acknowledged it had originally made such a determination, but said that had done so in error. The second distributor did not challenge the assignment of the first two stores for two years claiming it did not do so out of deference to its own longstanding relationship with the biscuit company. The first distributor sued for a declaration of its exclusive right to service the third store and for injunctive relief. The second distributor responded by suing both the first distributor and the biscuit company for damages.

The Law Division dismissed the first distributor’s claims and granted the second distributor the exclusive right to service the first two stores. It ruled that the agreements governing the first distributor’s routes were unambiguous and excluded these two stores. It held that the definition of “fronting” had only one reasonable interpretation, namely the biscuit company and other distributor’s interpretation that any customer’s building located on a thoroughfare also be “facing” that thoroughfare. Using this interpretation, the first distributor had no right to service any of the three stores. Additionally, the Court found that the history of dealings between the parties indicated that they intended to define the term “fronting” in such a manner as to exclude the right of the first distributor to service the three stores. The first distributor appealed.

The Appellate Division reversed the lower court’s ruling. It held that a contract language was ambiguous because the lower court ignored alternative interpretations for the term “fronting.” The Court found that New Jersey case law agreed with the first distributor’s interpretation which typically used “fronting” to indicate that a lot is adjacent to a road, with no regard to the orientation of the building on that lot. It stated that if “fronting” instead referred to a building’s orientation, a corner lot could never be described as “fronting” on both adjacent streets. The Court was disturbed that the lower court declared the term “fronting” to mean “facing,” without explaining why the actual contract language was not equally susceptible of the typical case law usage that the first distributor asserted. It ruled that the lower court erred because it did not state why the first distributor’s alternative interpretation was unreasonable, and did not cite any authority or trade custom as support for its ruling. It also indicated that the lower court failed to attempt to consider the authority lending support to the first distributor’s interpretation and ignored the absence of New Jersey authority supporting the biscuit company’s interpretation. Moreover, in the instant case, it found that the biscuit company freely modified its methodology to account for situations after the consignment agreements were executed (when another store was subsequently constructed between the road and a store that had been assigned to a distributor) because the original agreement did not address such a situation. This led the Court to believe that the original agreements did not define “fronting” as clearly as the biscuit company and second distributor had claimed. Finally, the Court ruled that the absence of documentary evidence defining the biscuit company’s “fronting” methodology prior to the execution of the agreement with the first distributor, together with the absence of the first distributor’s subsequent written assent to it, created a material dispute about whether the biscuit company was imposing restrictions unilaterally in violation of the contract. In furtherance of this conclusion, it held that the lower court should not have disregarded the material, non-hearsay evidence that the biscuit company had affirmatively assigned the first two stores to the first distributor contrary to the fronting methodology that it was urging the lower court to apply. Thus, it remanded the case to the lower court to allow a jury to attempt to determine the meaning of the ambiguous provision using parol evidence.

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