G.M. Abodeely Ins. Agency, Inc. v. Commerce Ins. Co.

41 Mass. App. Ct. 274, 669 N.E.2d 787 (1996)

Facts: Commerce (D) wrote to Abodeely (P), advising it that its agency contract was cancelled. Commerce stated the reason for the cancellation was the “failure to report coverages bound in accordance with the agency agreement, and acceptance of business which does not conform to our underwriting criterial.” Abodeely claimed that this claim was false and stated that the true reason for the cancellation was Commerce’s desire to eliminate Abodeely as a competitor of its wholly-owned subsidiary, and brought this action for breach of contract. Abodeely had a history of reporting binders late (it was required to mail a complete report of each binder … on the day of its execution and not later than its effective date). Further, Abodeely issued a binder on property that was destroyed by a fire on 10/4/89 and Abodeely did not report this until 10/5/89.

At trial, the disputed centered around whether Abodeely’s history of late reporting of binders was peculiar to it or a tolerated practice also engaged in by other agents of Commerce and whether the most recently destroyed property was, consistent with commerce’s underwriting guidelines, located “in a safe area, relatively free from crime . . . .”

Finally, Article VII of the contract between the parties contained termination provisions, none of which allowed a unilateral right to terminate at will; there were conditions on each of the terms allowing termination. Further, paragraph (b) of Article VII provided that “It is the intention of both parties to this contract to make a genuine attempt to resolve any differences that may precipitate a termination of this Agreement.”

Disposition Below: The jury found that there had been no material breach of the agency contract and awarded damages to Abodeely. Commerce appeals on the theory that paragraph (b) allows it to terminate the contract on the basis of “any differences” between the parties that they were unable to resolve.

Issue: Could Commerce cancel the agency contract “at will” or, as the trial jury was instructed, was a material breach required before Commerce could cancel the contract without liability?

Held: Neither paragraph (b) not the law provides that a party’s attempt to resolve any differences arising out of the performance of a contract excuses that party from further performance of its contractual obligations. As put to the jury, Commerce’s cancellation of the contract could be excused only by Abodeely’s material breach.

Rationale: This court reasoned that a material breach by one party excuses the other party from further performance. But to read paragraph (b) as simply giving a right to cancel the contract for a material breach would be to render the provision mere surplusage a material breach of the contract by one party would excuse the other from further performance irrespective of paragraph (b) and as a matter of law. Thus, the trial judge reasoned that paragraph (b) must be read as a limitation upon the right to be excused, as a matter of law, from any further obligation under the contract on account of a material breach. Paragraph (b) obligates the parties genuinely to attempt a resolution before exercising the right to refuse further performance.

Rules:

• A contract is to be construed to give reasonable effect to each of its provisions. Every phrase and clause must be presumed to have been designedly employed, and must be given meaning and effect, whenever practicable, when construed with all the other phraseology contained in the instrument, which must be considered as a workable and harmonious means for carrying out and effectuating the intent of the parties.
• A contract that “reserves to the parties an explicit power to terminate the contract without cause on written notice is a classic terminable at will employment contract. (This rule did not apply in this case).
• Cancellation v. Termination—acknowledges that there was, in fact, a contract in place at one time. The effect of cancellation is that the executory obligations are terminated. Cancellation is not a right based on the terms of the contract. It is made possible by the common law and there must be a material breach. Termination, on the other hand, is a right provided by the terms of the contract.