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Seventh Circuit Affirms Ruling that Distributor Breached Agreement by Failing to Secure Government Contract, but that Force Majeure Excused the Breach

The Seventh Circuit Court of Appeals affirmed an Indiana federal court’s decision strictly interpreting a distribution contract according to its terms and limiting the application of the duty of good faith and fair dealing implied into such contracts by the Indiana Commercial Code. Acheron Med. Supply, LLC v. Cook Med. Inc., 958 F.3d 637 (7th Cir. 2020). Cook, a manufacturer of medical devices and products, contracted with Acheron, a distributor experienced in selling to the Veterans Administration and Department of Defense, to serve as Cook’s distributor to those entities. The contract required Acheron to obtain a Federal Supply Schedule for VA sales. The VA requested an audit of Cook’s sales records to confirm the reasonableness of Acheron’s prices before issuing an FSS, but Cook refused. Cook also refused to deactivate its DoD Distribution and Pricing Agreement, thereby preventing Acheron from selling Cook products to the DoD. Nevertheless, a Cook executive told Acheron the contract remained in place before Cook terminated it for Acheron’s failure to secure an FSS. When the parties sued each other for breach, the district court found Cook was not obligated to submit to the VA audit or deactivate its Pricing Agreement. It also found that Acheron’s breach in failing to obtain an FSS was excused by the contract’s force majeure provision. Each party appealed, to no avail.

The Seventh Circuit rejected Acheron’s appeal based on Indiana contract law providing that unambiguous contracts are enforced as written. The contract did not require Cook to submit to the VA audit or deactivate its Pricing Agreement. Similarly, the implied duty of good faith and fair dealing could not be used to create obligations not present in the contract. Further, Acheron obtained the contract based on its government contracting experience and “should have known better” than to agree to a contract omitting such requirements. The court then held that Cook could not recover damages for Acheron’s failure to obtain an FSS because of the contract’s force majeure clause, which excused defaults caused by an act of the government or agency. Because the VA’s denial of Acheron’s FSS application was outside of the parties’ anticipation and Acheron’s control, it qualified as a force majeure event. In the remainder of its decision, the court held that Cook had no obligation to eliminate the force majeure event by submitting to the VA’s audit. No federal regulations that could be incorporated into the contract by implication required Cook, a manufacturer, to submit to the VA audit. And Acheron could not argue that Cook prevented its performance, because Acheron’s obtaining an FSS was not a condition precedent to Cook’s performance, but an integral part of the agreement. Thus, the appellate court affirmed the lower court’s decision.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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