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Convenience Store Leasing and Management v. Annapurna Marketing

Court of Appeals of Wisconsin, District II

July 24, 2019

Convenience Store Leasing and Management, Plaintiff,
v.
Annapurna Marketing, Buddi Sebedi and Basudev Adhikari, Defendants-Respondents. Bulk Petroleum Corporation, Plaintiff-Appellant,

          APPEAL from a judgment of the circuit court for Sheboygan County No. 2015CV656: L. EDWARD STENGEL, Judge.

          Before Neubauer, C.J., Gundrum and Hagedorn, JJ.

          HAGEDORN, J.

         ¶1 This case concerns whether frustration of purpose relieved a party of duties under a contract (as the circuit court held), and whether stipulated damages in that contract were an unreasonable and unenforceable penalty. We reverse.

         BACKGROUND

         ¶2 Annapurna Marketing (AP Marketing) is a real estate holding company created by friends and business partners Buddi Sebedi and Basudev Adhikari to operate gas stations. Bulk Petroleum Corporation is a real estate and petroleum marketing company. In 2003, Bulk purchased a gas station in Sheboygan that is at the center of this dispute. The station ceased operating sometime in 2008 or 2009.

         ¶3 In June 2012, AP Marketing and Bulk executed two agreements- the first, a land contract to purchase the subject gas station, [1] and the second, a fuel supply agreement (FSA) designed (unsurprisingly) to supply fuel for the station. The FSA, which was personally guaranteed by Sebedi and Adhikari, is the disputed contract on appeal.

         ¶4 Under the FSA, AP Marketing was required to purchase "all fuel at the Premises" from Bulk. The minimum purchase amount was 15, 000 gallons per month, or 180, 000 gallons per year. The price per gallon would be 1.5 cents above "the Branded Supplier rack price"-essentially, the per-gallon cost to Bulk plus 1.5 cents. The FSA required Bulk to select a "Branded Supplier"-defined as "a major brand fuel marketer, or any unbranded fuel supplier with credit card processing and related marketing capabilities"-to supply fuel to the station. AP Marketing in turn agreed, without any other evident contractual limitation, that "any Branded Supplier selected … by [Bulk] is acceptable." (Emphasis added.) AP Marketing also agreed through the FSA to submit to certain branding requirements that might be imposed by a branded supplier, including compliance "with the image standards set by Branded Supplier." If AP Marketing failed to meet the minimum gallon purchase requirement, the FSA included a stipulated damages provision, which obligated AP Marketing (and again, guaranteed by Sebedi and Adhikari) to pay ten cents per gallon on the shortfall. However, this provision did not apply if the failure to purchase the minimum quantity was due to Bulk's failure to deliver fuel.

         ¶5 The FSA was supposed to go into effect just ten days after it was signed. But complications arose almost immediately. AP Marketing incurred a number of expenses related to preparing the previously closed station for operation-including obtaining permits for the fuel tanks and tank insurance, replacing the ceiling tiles, fixing problems with the plumbing system, and replacing underground pipes. Replacing the pipes alone cost approximately $35, 000-$36, 000. Bulk also had difficulty securing a branded supplier.

         ¶6 Five and one-half months after the FSA was signed, Bulk entered into an agreement with U.S. Oil to supply fuel under the ExxonMobil brand. Like every other supplier contacted by Bulk, U.S. Oil required that AP Marketing update the façade of the station and move the bathroom doors from the exterior to the interior before selling its fuel. The agreement with U.S. Oil required Bulk to purchase a minimum of 480, 000 gallons per year, far more than the 180, 000 gallon minimum AP Marketing was required to purchase under the FSA. But Bulk's brand manager explained that he thought the quantity was "a very easy number to hit on a station at this location branded properly."

         ¶7 The Defendants ultimately decided that the cost to meet U.S. Oil's branding requirements-specifically, the cost of relocating the bathroom entrances-was too steep. By their own admission, they walked away from the land contract and the FSA, without making any payments under the land contract and never having purchased any fuel under the FSA.

         ¶8 Bulk responded by filing this action, asserting breach of the land contract against AP Marketing and breach of the FSA against AP Marketing, as well as Sebedi and Adhikari based on their personal guarantees. The claims went to a bench trial. The circuit court ultimately concluded that AP Marketing breached the land contract and ordered judgment for $200, 000, a determination not before us on appeal.

         ¶9 On the FSA claim, the circuit court entertained posttrial briefing. AP Marketing, Sebedi, and Adhikari made three arguments. First, they could not be liable for damages under the FSA because Bulk failed to secure a branded supplier who would brand the station without modification-a condition precedent, they insisted, to AP Marketing's obligation to purchase fuel. Second, AP Marketing's performance under the FSA was excused by frustration of purpose. And third, Bulk failed to prove the lost profits it sought as damages. The circuit court agreed with the second argument, concluding that the structural modifications required by U.S. Oil frustrated the principal purpose of the FSA, which "was to open the station and to sell fuel at a profit." The court explained that the requirements placed on AP Marketing by U.S. Oil to make significant alterations to the premises was the frustrating event. It was a basic assumption, the court reasoned, that the Defendants could "open the station without significant alterations and significant … expense."

         ¶10 Although it was unnecessary to decide (as the court itself recognized), the court additionally opined that if damages were to be due for breach of the FSA, the stipulated damages provision was an unenforceable penalty.[2] It reasoned that Bulk's actual damages were easily calculable-namely, the 1.5 cent per gallon profit margin under the FSA. The much higher ten cents per gallon figure prescribed by the stipulated damages provision was therefore an unenforceable penalty.

         ¶11 Bulk appeals, and we reverse.

         DISCUSSION

         ¶12 The main question before us is whether the circuit court correctly concluded AP Marketing's performance under the FSA was excused under the doctrine of frustration of purpose. We also address the circuit court's conclusion that the stipulated damages provision was an unenforceable penalty.

         A. Frustration of Purpose

         ¶13 The parties profess to disagree over the standard of review, but at the end of the day, they appear to be in heated agreement. Whether a contract's purpose has been frustrated is best characterized as involving both factual and legal determinations. We review facts found with deference and legal questions independently. See Wassenaar v. Panos, 111 Wis.2d 518, 525, 331 N.W.2d 357 (1983). The ultimate question of whether a contract's purpose has been frustrated is generally a question of law. See Chicago, Milwaukee, St. Paul & Pac. R.R. Co. v. Chicago & N.W. Transp. Co., 82 Wis.2d 514, 516, 526-28, 263 N.W.2d 189');">263 N.W.2d 189 (1978) (describing the issue as "whether, under the facts described below," the contract's purpose "was frustrated" and reviewing that question without deference to the circuit court's decision); Wm. Beaudoin & Sons, Inc. v. Milwaukee Cty., 63 Wis.2d 441, 446-49, 217 N.W.2d 373 (1974) (rejecting the circuit court's "conclusion of law" that the purpose of a contractual term has been substantially frustrated while deferring to the circuit court's findings of fact).[3] We see no relevant and disputed issues of fact in this case; the issues presented here are ripe for our independent review.

         ¶14 Frustration of purpose is a defense to enforcement of a contract; if the elements are met, then a party's obligations under the contract are excused. See Chicago, Milwaukee, 82 Wis.2d at 522-24; Ryan v. Sheppard, 2010 WI.App. 105, ¶13, 328 Wis.2d 533, 789 N.W.2d 616. The doctrine of frustration is "given a narrow construction" and "applied sparingly." 17A Am. Jur. 2d Contracts ยง 641 (2016). This is so because it renders null the explicit terms of the contract and is counter to the strong impulse in the law to enforce ...


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