Gerard Tank & Steel, Inc. v. Airgas USA, LLC

Filing 14

MEMORANDUM AND ORDER granting in part and denying in part 8 Motion to Dismiss for Failure to State a Claim. Count I is dismissed. Count II remains pending. Signed by Chief District Judge Julie A Robinson on 10/26/2017. (cv)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

GERARD TANK & STEEL, INC.,
Plaintiffs,
Case No. 17-2259-JAR

v.
AIRGAS USA, LLC,
Defendant.

MEMORANDUM AND ORDER
Plaintiff filed this action seeking two declarations regarding an agreement it entered into
with Defendant: 1) it is void for lack of mutuality of obligation because the Price Changes
provision gave Defendant the unilateral right to escape performance under the Agreement at any
time (Count I); and 2) it is terminable at will because Plaintiff never saw or knew about
paragraph 2, which stated that the term of the Agreement shall be for seven years and shall be
renewable for successive seven-year terms unless terminated upon not less than twelve months’
written notice (Count II). Before the Court is Defendant’s Motion to Dismiss (Doc. 8). The
motion is fully briefed and the Court is prepared to rule. For the reasons stated below, the Court
grants dismissal of Count I, but denies the motion as to Count II.
I.

Factual Background
The following facts are alleged in the First Amended Complaint (“FAC”) and assumed to

be true for purposes of deciding this motion.
The parties entered into a Product Sales Agreement on September 19, 2003, where
Plaintiff agreed to purchase its requirements of certain gases from Defendant. The Agreement
signed and agreed to by Plaintiff consisted of: 1) a Bulk Gases Rider (“Rider”) specifying the

1

estimated monthly volume of oxygen to be purchased by Plaintiff, and 2) a page that contained
enumerated paragraphs 11–21 and the signature blocks (“Page Two”). According to Plaintiff,
the Agreement did not contain a termination provision, making it terminable at will by either
party.
On December 8, 2016, in-house counsel for Defendant wrote a letter to Matheson TriGas, Inc. (“Matheson”), another wholesale gas supplier, alleging that Plaintiff had been making
certain purchases from Matheson that were in violation of the Agreement.1 In that letter,
Defendant claimed the Agreement had automatically renewed for a seven-year term on
September 19, 2010, and, because notice of termination had not been provided, would renew
automatically for another seven-year term on September 19, 2017, and remain in effect at least
through September 18, 2024.2 Defendant took this position by asserting that there was another
page to the Agreement, which contained the first enumerated ten paragraphs (“Page One”).
Paragraph 2 of Page One states:
Term: The initial term of this Agreement shall be for seven (7) years and shall
commence upon the later of the date of first delivery of Product by Seller
hereunder; or the date signed by Seller hereinbelow; or, in the event Buyer is
contractually bound and prohibited from entering into this Agreement by any
prior agreement, then upon the earliest expiration or earlier termination of such
prior agreement, and thereafter shall automatically renew for successive seven (7)
year terms unless terminated upon not less than twelve (12) months’ written
notice by either party: (a) at the end of the initial term, or; (b) any renewal term,
as the case may be. If Seller relocates or provides additional Equipment to meet
Buyer’s gas requirements, then a new initial term shall be effective upon the date
of first delivery of such Product utilizing the relocated, replacement or additional
equipment.3

1

Doc. 5, ¶ 11 at 3.

2

Id. ¶ 12.

3

Id. ¶ 14.

2

Plaintiff alleges that it has never seen or had any knowledge of Page One or the provisions
therein.
Despite Plaintiff’s attempt to terminate the Agreement on mutually agreeable terms,
Defendant refuses to consent to termination of the Agreement.4 The parties disagree as to
whether the terms and conditions on Page One is a part of the Agreement.
II.

Legal Standards
Defendant moves to dismiss Counts I and II of the FAC for failure to state a claim under

Fed. R. Civ. P. 12(b)(6). To survive a Rule 12(b)(6) motion to dismiss, “a complaint must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its
face.’”5 “A claim has facial plausibility when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”6
“Under this standard, ‘the complaint must give the court reason to believe that this plaintiff has a
reasonable likelihood of mustering factual support for these claims.’”7 Although the Court
assumes the complaint’s factual allegations are true, it need not accept mere legal conclusions as
true.8 “Threadbare recitals of the elements of a cause of action, supported by mere conclusory
statements” are not enough to state a claim for relief.9
III.

Analysis
Because this is a diversity case, the Court “appl[ies] the substantive law of the forum

4

Id. ¶ 15.

5

Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570

6

Id. (citing Twombly, 550 U.S. at 556).

(2007)).
7

Carter v. United States, 667 F. Supp. 2d 1259, 1262 (D. Kan. 2009) (quoting Ridge at Red Hawk, LLC v.
Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007)).
8

Id. at 1263.

9

Iqbal, 556 U.S. at 678.

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state, including its choice of law rules.”10 Here, Kansas is the forum state. Both parties’ briefs
rely on Kansas law. Because the parties have made the deliberate choice to rely on Kansas law,
the Court applies Kansas law throughout this Memorandum and Order.
A. Count I – Declaration that the Agreement is void for lack of mutuality of
obligation
In Count I, Plaintiff seeks a declaration that the Agreement is void for lack of mutuality
of obligation because the Price Changes provision gave Defendant the unilateral right to escape
performance at any time by raising prices at a level it knows Plaintiff will not accept. As a
result, Plaintiff argues there is no fixed price that binds Defendant to the requirements and
obligations of the Agreement, rendering the Agreement void for lack of mutuality of obligation.
Defendant argues that the Price Changes provision does not void the Agreement because it
allows the parties to account for changes in market prices. Defendant contends that similar
provisions have been upheld as valid in other contexts. Defendant also argues that a unilateral
termination provision does not void an otherwise valid contract. Finally, Defendant argues the
duty of good faith and fair dealing eliminates any risk of unfairness arising from this provision.
“The interpretation of a gas purchase contract is subject to the same rules governing all
contracts.”11 If the language of the contract is clear, unambiguous, and can be carried out as
written, the Court must give effect to the contractual language without resort to rules of
construction or extrinsic evidence to determine the contract’s meaning.12 Whether an ambiguity
exists in a written instrument is a question of law for the Court.13

10

Pepsi–Cola Bottling Co. of Pittsburg, Inc. v. PepsiCo, Inc., 431 F.3d 1241, 1255 (10th Cir. 2005)
(citations omitted).
11

Rupe v. Triton Oil & Gas Corp., 806 F. Supp. 1495, 1500 (D. Kan. 1992).

12

Godfrey v. Chandley, 811 P.2d 1248, 1250–51 (Kan. 1991).

13

Kennedy & Mitchell, Inc. v. Anadarko Prod. Co., 754 P.2d 803, 806 (Kan. 1988).

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The Price Changes provision states:
PRICE CHANGES: In the event that Seller increases the price for a specific
Product sold under this Agreement, such increase shall become effective fifteen
(15) days after written notice is given to Buyer. If within fifteen (15) days of
receiving such notice, the Buyer furnishes Seller with a copy of a bona fide firm
written offer to sell such Product of the same quantities, of the same quality under
similar circumstances at prices lower than such revised prices, Seller shall have
fifteen (15) days within which to, at Seller’s option, either meet the lower price or
revert to the Seller’s price in effect before the price increase. If the Seller does
not exercise its option to so adjust the price, the Buyer may terminate this
Agreement by giving the Seller thirty (30) days’ written notice of such
termination. If Seller does agree to meet such lower price, or revert to Seller’s
price in effect before the price increase, Seller shall have the right, at its option, to
extend the term of this Agreement for the period of the initial contract term
provided in this Agreement or term of competitive written offer. Buyer’s rights
regarding the terms of this Article shall not apply to any price increase arising as a
result in whole or part, of compliance by Seller, or its suppliers with Federal,
state, or municipal taxes, or government agency required audits or other
regulations.14
The above provision is similar to a “market-out clause,” which is commonly found in gas
purchase contracts.15 Market-out clauses allow the buyer to unilaterally reduce the price if
market conditions dictate, leaving the seller with the option of accepting the reduction or
canceling the contract. In Kennedy & Mitchell, the Kansas Supreme Court found the market-out
clause unambiguous and gave the buyer the unilateral right to determine that price of gas was
“uneconomical and unacceptable” and propose a lower price.16
Here, the provision at issue grants the seller, rather than the buyer, the right to change the
price. Even though this provision grants Defendant the unilateral right to increase prices, “the
rule of law in Kansas is that where parties have carried on negotiations, and have subsequently
entered into an agreement in writing with respect to the subject matter covered by such

14

Doc. 5-1 at 2.

15

Kennedy & Mitchell Inc., 754 P.2d at 806.

16

Id. at 807.

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negotiations, the written agreement constitutes the contract between them and determines their
rights”17 A contracting party is bound by an agreement unless he pleads and offers evidence the
contract was entered into through fraud, undue influence, or mutual mistake.18 While Plaintiff
alleges that Defendant did not exhibit good faith and fair dealing, Plaintiff makes no allegation of
fraud or undue influence by Defendant. Thus, the Court finds the above provision valid.
Defendant may increase the price, but Plaintiff may counter with a bona fide firm written offer
and may terminate the Agreement if Defendant does not exercise its option to adjust the price.
The Price Changes provision is supported by mutual obligation.
B. Count II – Declaration that the Agreement is Terminable at Will
In Count II, Plaintiff seeks a declaration that the Agreement is terminable at will because
Plaintiff never saw or had any knowledge of Page One, which contained the termination
provision. Plaintiff contends that because the parties’ Agreement did not specify the term or
duration of the Agreement, it is terminable at will pursuant to K.S.A. 84-2-309. Defendant
argues that Plaintiff cannot plead ignorance of Page One to invalidate the termination procedures
outlined therein because Plaintiff had ample notice that the Agreement was incomplete.
Defendant contends the following facts put Plaintiff on notice that it had an incomplete copy of
the Agreement: 1) Page Two starts with paragraph 11, had no title, and did not contain any
defined terms; and 2) Paragraph 17 referenced extending the term of the Agreement for the
initial contract term, yet there was no provision on Page Two that specifies the term of the
Agreement. And even if Plaintiff had no notice that the Agreement was incomplete, Defendant
argues that ignorance of a contract’s content is not a proper ground for avoiding its terms.

17

Id.

18

Albers v. Nelson, 809 P.2d 1194, 1197 (Kan. 1991).

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Under Kansas law, a party to a contract has a duty to learn the contents of a written
contract before signing it.19 This duty includes a duty to secure a reading and explanation of the
contract.20 A party’s negligent failure to do so estops the party from avoiding the terms of the
contract on the grounds of ignorance of its contents.21 “Courts applying the common law of
other jurisdictions have . . . uniformly found that a signatory to a contract who is on notice that
his copy of the contract is incomplete and signs it anyway is bound by the full contract.”22
Here, Plaintiff is not arguing that it should be excused from compliance with a contract
term because it did not read it. Rather, Plaintiff is contending that it was never presented with
Page One in the first place. While the fact that Page Two starts with Paragraph 11 suggests that
the Agreement before Plaintiff was incomplete, whether that is sufficient notice cannot be
determined on a motion to dismiss.23 The Rider contained the initial term of the Agreement,
prices, and other terms which may account for the first eleven enumerated paragraphs. This
Court accepts as true the factual allegations in Plaintiff’s FAC and draws all reasonable
inferences in favor of Plaintiff in resolving the motion to dismiss. Accordingly, the Court finds
Plaintiff has alleged a plausible claim that the parties entered into an Agreement that did not
contain a termination provision.
19

Rosenbaum v. Tex. Energies, Inc., 736 P.2d 888, 891 (Kan. 1987).

20

Id. at 892.

21

Id.

22

Uyeshiro v. Irongate Azrep BW LLC, No. CV 13-00043, 2013 WL 12204348, at *6–7 (D. Haw. Sept. 13,
2013) (collecting cases).
23

See Dominici v. Between the Bridges Marina, 375 F. Supp. 2d 62, 70 n.4 (D. Conn. 2005) (denying
motion to dismiss plaintiff’s complaint where plaintiff alleged that he did not receive notice of the clause at issue
due to a missing page in the contract because further factual development was necessary to determine, inter alia,
whether the physical characteristics of the contract reasonably communicated the existence of the clause, and the
circumstances surrounding the signing of the contract permitted the plaintiff to become meaningfully informed of
the contractual terms at stake); Tangorre v. Mako’s Inc., No. 01-4430, 2003 WL 470577, at *11 (S.D.N.Y. Jan. 6,
2003) (declining to hold that plaintiff is bound by provisions on a page of the contract plaintiff contends it was never
presented with, because there exists a dispute of fact regarding whether plaintiff ever saw the page of the contract at
issue).

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IV.

Conclusion
After accepting as true all well-pleaded factual allegations and drawing all reasonable

inferences in Plaintiff’s favor, Defendant’s motion to dismiss is granted in part and denied in
part. Because the Price Changes provision is supported by mutual obligation, the Agreement is
not void. Count I is therefore dismissed. Count II survives dismissal because the notice issue
requires further factual development.
IT IS THEREFORE ORDERED that Defendant’s Motion to Dismiss (Doc. 8) is
GRANTED IN PART AND DENIED IN PART. Count I is dismissed. Count II remains
pending.
Dated: October 26, 2017
S/ Julie A. Robinson
JULIE A. ROBINSON
UNITED STATES DISTRICT JUDGE

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