U.S. District Court Finds Settlement Agreement Ambiguous, No Fiduciary Relationship, Negligent Misrepresentation Claim Not Barred By Economic Loss Doctrine

| Aug 6, 2013 | Firm News

Rhode Island’s federal district has found several ambiguities in the parties’ prior settlement agreement and denied in part cross-motions for summary judgment based on that agreement.  The Court found the parties did not have a fiduciary relationship to each other.  It also found that under Rhode Island law the “economic loss” doctrine did not bar a claim for negligent misrepresentation.

The defendant manufactures plastic film products.  Plaintiff purchases plastic film products and resells them.  The parties had a business relationship in which defendant sold “second grade quality materials” to plaintiff.  There was an earlier lawsuit between the parties that resulted in the subject settlement agreement (the “Agreement”) in 2007.  The agreement required defendant to sell certain “agreed materials” exclusively to plaintiff.  The Agreement defined the agreed materials as “scrap plastic, other scrap, second quality materials, downgraded materials, recyclable materials not reused internally and aged films.”  Those terms in the definition were not further defined.

Plaintiff received a 12 percent commission on all sales it generated.  It was to use its best efforts to maximize pricing.  The parties had the right to audit each other but did not define scope of the audit.  The Agreement also includes a disclaimer and integration clause.

Almost immediately, the parties had disagreements over what materials defendant was required to sell to plaintiff, what prices plaintiff should charge for defendant’s products, whether plaintiff could charge its customers for transportation costs, and the scope of an audit that plaintiff could perform of defendant.  The subject lawsuit ensued with the parties alleging multiple claims against each other for breach of contract, breach of fiduciary duty, tortious interference with contract, breach of duty of good faith dealing, negligent misrepresentation, and specific performance, among others.

After substantial discovery, the parties cross-moved for summary judgment.  The Court said settlement agreements are treated as contracts.  Whether a contract is ambiguous is a question of law to be determined by reading the contract as a whole and giving words their plain, ordinary and usual meaning.  A contract is ambiguous when it is susceptible of more than one interpretation.  If the contract is ambiguous then summary judgment is inappropriate.

The Court reviewed the parties’ conflicting interpretations of the terms “agreed materials,” particularly “aged film.”  Plaintiff argued for a broad interpretation of the terms.  Defendant said it only applies to materials it cannot sell directly to its own customers or cannot recycle itself.  Defendant also argued that the terms should be understood in light of the parties’ prior business dealings.  Plantiff argued the Court should interpret the term in light of the parties’ negotiation of the agreement.  The Court commented that “aged film” appeared to be an industry term of art but there was apparently no evidence before the Court as to an industry understanding.  The Court said that given the lack of clarity of the Agreement and the conflicting extrinsic evidence, the definition of “agreed materials” was ambiguous and would have to be resolved at trial.

Similarly, the Court found the Agreement was ambiguous as to the scope of the audit that the parties could perform of each other.  The Court denied the parties’ motions on that issue.

The parties presented conflicting extrinsic evidence as to whether plaintiff could separately charge its customers for transportation costs.  It denied the parties’ motion on that issue.

Under Rhode Island law, every contract contains an implied covenant of good faith dealing so the contractual objectives can be reached.  The duty does not expand the parties’ rights or obligations under the contract.  The Court said there was no independent tort based on a breach of the duty.  The core question is whether a party’s conduct is free from unreasonable or arbitrary conduct.  Because these parties had differing interpretations as to the contract the Court could not determine whether there had been a breach of the duty of good faith and fair dealings.

The Court held that parties in a business relationship do not have a fiduciary relationship unless, for example, they are partners or one party “rightfully reposes trust and confidence in another.”  The Court said there was no partnership between plaintiff and defendant.  In addition, there were no facts indicating that plaintiff had reposed trust and confidence in defendant.  It granted defendant’s summary judgment motion on this claim.

The Court denied defendant’s motion on plaintiff’s negligent misrepresentation claim for two reasons.  It said that while a disclaimer or integration clause can exclude such claims, it cannot be a “general, all-encompassing” or “boilerplate” disclaimer or integration clause.  The clauses must specifically mention negligent misrepresentation.  The Court also said Rhode Island’s “economic loss” doctrine does not bar claims for negligent misrepresentation because negligent misrepresentation is “a type of the tort of deceit not of mere negligence.”

The Court granted plaintiff’s motion to dismiss defendant’s claim for specific performance.  It said such a claim is only available when adequate compensation cannot be achieved through money damages.  Because defendant had failed to should why monetary damages were inadequate, its specific performance claim was deficient.

T.G. Plastics Trading Co. Inc. v. Toray Plastics (America), Inc., C.A. No. 09-336-M, slip op., (D.R.I. Aug. 2, 2013).

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