Failure to incorporate asset list into contract left employer without remedy on breach claim
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Wednesday, February 21, 2018

Failure to incorporate asset list into contract left employer without remedy on breach claim

By Nicole D. Prysby, J.D.

Because the parties had an unambiguous asset purchase agreement which did not include an inventory list, the employer-buyer could not demonstrate a breach of contract claim against the employee-seller, held the Eighth Circuit Court of Appeals. The agreement provided that the employer purchased all inventory the employee owned at the time of sale. Although the employee had provided an inventory list months before executing the agreement, the employer did not verify the inventory list and was aware that the employee continued to sell inventory in the interim. Consequently, the employer could not prove a difference between what it bargained for and what it received. And although the employment contract between the parties was ambiguous, the employer’s interpretation was not unreasonable, and the contract should be interpreted by the trier of fact (Qwinstar v. Anthony, February 16, 2018, Shepherd, B.).

Background. The employer, a seller and repairer of IBM machines, agreed to purchase a competitor and employ its owner for a term of five years. The competitor had provided an inventory list showing $4.7 million in parts. No one independently verified the inventory list or value. The competitor’s owner agreed to sell his interest for $50,000 and a five-year employment contract at $200,000 per year. The parties then signed an asset purchase agreement and an employment contract.

After about a year, the employee notified the employer that the parts inventory was getting low. The employer determined that $1 million in parts had been sold from the facility since the asset purchase agreement was signed and demanded that the employee account for the remaining parts. Shortly thereafter, the employer terminated the employment and sued the employee, asserting that it did not receive the inventory bargained for in the sale. The employee counterclaimed, asserting that the employer breached the employment contract by not paying him for the full five years. The district court granted summary judgment for the employee and denied the employer’s summary judgment request.

Inventory agreement. The inventory agreement signed by the parties stated that the employee conveyed all of his interests in the assets he owned. The employer argued that the employee breached the contract because there was a difference of millions of dollars between the inventory list and the inventory actually delivered. The employee argued that the inventory list was made some months before the agreement was signed and that the employer knew he continued to sell parts in the interim. Therefore, he asserted, the employer could not prove a breach, because it could not prove what it purchased under the contract and how that differed from what it received.

The court agreed with the employee, finding that the inventory agreement was unambiguous. It provided that the employee would sell his interest in all inventory, and stated that the agreement was the entire agreement between the parties. In other words, the employee agreed to sell all inventory he had at the time the agreement was executed. And because the agreement was unambiguous, the parol evidence rule prevented the court from considering the parts described in the inventory list. Had the parties wished to make the inventory list part of the contract, they easily could have incorporated it by reference. Because they did not do so, and there was no independent verification of the inventory, there was no evidence that the employee failed to deliver the inventory he possessed at the time the agreement was signed.

Employment contract. The employee argued that the employer breached the employment contract by failing to pay him for the full five years. The court found that the employment contract was ambiguous. The contract stated that if the employment was terminated, the employer owed the employee nothing. But if the employment agreement was terminated under Section 4, the full five years’ salary was owed. The employer argued that the only situation that would terminate the agreement was the employee’s death or disability, as described in Section 4(b).

The district court had found the agreement to be ambiguous and determined that it should be construed against the employer as the drafter of the agreement. But the Eighth Circuit found that other rules of construction should be considered. The court noted that the clauses only make sense using the employer’s reasoning. If the termination of either the employment or the employment agreement resulted in the employer owing the full five years’ salary, then the first clause made no sense because that situation would never occur. But reading the second clause as an exception to the first harmonizes the apparent conflict. The court also reviewed prior versions of the contract, which provided further evidence that the employer’s interpretation might be correct. Therefore, the court determined that although the contract was ambiguous it was not necessarily the case that the employer should lose on that claim. Summary judgment for the employee on this point was reversed so that the trier of fact could interpret the contract.

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