When a Good Relationship Turn Bad: Suing a Supplier

photo-suing-supplier-300x199No business is an island. Without trusted suppliers businesses would close shop. What happens when that trust is breached and you’re left holding the bag? If disagreements can’t be worked out and your company is facing or may face a serious loss as a result you may want to consider legal action against a supplier or former supplier.

Huy Fong Foods Inc., based in Irwindale, makes the Sriracha brand hot sauce from chiles (which are peppers). Without chiles there is no Sriracha but that hasn’t stopped the company from suing its chile supplier, Underwood Ranches, based in Camarillo, according to NBC4. Underwood’s website describes the company’s history and its current business including, “Today the farm grows red jalapeños for Huy Fong Foods…”The two companies have had a relationship for thirty years.

Underwood is being sued for breach of production agreement, breach of contract and civil theft. The complaint alleges,

• Underwood refuses to return $1.4 million in pre-payments and is illegally keeping $7 million worth of Huy Fong equipment.
• Huy Fong has paid Underwood a guaranteed fee plus the costs associated with harvesting chile peppers.
• Starting in 2008, Huy Fong paid Underwood annual pre-payments and would make up the difference after the actual cost was calculated.
• Huy Fong paid more than $190 million to Underwood over the years and made “substantial” annual pre-payments to Underwood starting in February of each year.
• The plaintiff paid any balance owed Underwood until 2016, when it overpaid Underwood $1.4 million, which it has refused to return.
• The terms of the payment agreements changed every year.
• Parts of the agreements were written, other parts of the arrangement were agreed to verbally, or were based on the companies’ past practices.
• Huy Fong has “demanded” that Underwood permit it to take back its equipment, but Underwood has refused to do so. Huy Fong claims Underwood is holding its equipment “hostage,” severely impacting the company’s ability to complete this year’s chile harvest, greatly increasing its costs.

For a contract to be legally enforceable there must be,

• Both parties agree (there’s a “meeting of the minds”),
• There’s a valid offer and acceptance,
• There’s adequate consideration (both sides exchange something valuable),
• Both sides have capacity to agree (they’re old enough and have enough mental capacity), and
• The subject of the contract is legal (a contract to work together to violate a party’s patent rights, supply illegal drugs or murder someone wouldn’t be enforceable by the courts).

To have a valid breach of contract lawsuit a party would have to show the contract is valid, the defendant breached the agreement (or expressed an intent to breach it) and the plaintiff suffered, or will suffer, damages. If a judge or jury agrees with the plaintiff it could be awarded damages (the financial harm due to the breach) and specific performance (an order the defendant comply with the contract).

When it comes to contracts, get it in writing. They are the easiest to enforce in court, though they need not be in writing to be enforceable (with some exceptions). Many contracts, like in this case, could be created orally or by the parties’ actions. But with a written contract the parties are forced to think about what they want and are willing to do before they commit to a written document. It’s also easier to establish a breach of a contract when the parties’ responsibilities are spelled out in writing.

If a relationship with your supplier has broken down to the point you think legal action may be an option, or you want to discuss how to commit your relationship with a supplier with a written contract, contact our office so we can talk about your situation, how contract law may apply and how we can help.