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Under Indiana law, a contract must impose mutual obligations on the parties in order to be enforceable. If both parties to the agreement are not bound, neither is bound, and consideration is lacking. Obligations that give rise to consideration can take the form of legal benefits or legal detriments. Furthermore, the obligations on both parties must be reasonably definite and certain; they cannot be illusory promises that, by their terms, make performance entirely optional. That said, so long as a contract imposes definite obligations on both parties, courts do not question whether the value of consideration is adequate.
BRC produces rubber-based products for the automotive industry. Continental is a supplier of carbon black, a raw material that is a key ingredient in rubber products. On January 1, 2010, BRC and Continental entered into a five-year agreement (the "Agreement"). Under its terms, Continental "agree[d] to sell to [BRC] approximately 1.8 million pounds of prime [carbon] black annually ... to be taken in approximately equal monthly quantities." The Agreement set out baseline prices for three different grades of carbon black (N339, N550, and N762) and stated that those prices were "to remain firm throughout the term." In return, Continental obtained the right to review and meet any better offers that BRC received during the term/
In 2010, Continental shipped 2.6 million pounds of carbon black to BRC. Shipments continued regularly into mid-2011, with Continental providing more than one million pounds by the spring of 2011. However, in March 2011, demand for carbon black began to exceed Continental's ability to produce it. In April 2011, Continental notified all of its buyers that the N762 grade of carbon black would be unavailable in May due to plant outages and lack of inventory. BRC nonetheless placed an order for 360,000 pounds of carbon black, including N762, for delivery in the coming weeks. In mid-April 2011, a Continental sales representative emailed BRC's Vice President of Purchasing seeking to increase the baseline prices of carbon black by $.02 per pound. BRC rejected this request, citing the "firm" prices set out in the Agreement. In late April, the same Continental representative informed BRC that Continental might withhold shipments from BRC. Given Continental's limited inventory and obligations to other customers, it neither confirmed BRC's last order nor shipped the requested carbon black. BRC's counsel then sent a letter to Continental, dated May 16, 2011, demanding immediate shipment of the unfulfilled order and immediate assurance that Continental would uphold its end of the bargain in the future. Continental responded that it did "not have N762 available at the moment.” As a result, on May 18, 2011, BRC purchased one railcar's worth of N762 from another supplier at a higher price than set forth in the Agreement.
Two days later, Continental offered to ship BRC multiple railcars of carbon black at price increases up to $.06 per pound. When BRC refused to pay higher prices, a Continental Director suggested that BRC "call another supplier." Within hours, counsel for both parties conferred and Continental's attorney sent an email to BRC stating that Continental would "continue producing and shipping timely at the contract prices, and would not cut off supply to BRC." Later that same day, BRC sought further confirmation as to when Continental would fulfill BRC's outstanding order. Continental responded, "we will ship one car next week and do the best we can re future orders based on our intent to supply 1.8 million lbs." BRC requested a status update three days later, and Continental gave a similar response. On the next business day, BRC again inquired about the status of its order, and Continental said that it would ship one railcar of carbon black the following day. At this point, Continental emphasized that the Agreement required it to supply only 1.8 million pounds per year—or approximately 150,000 pounds per month—and that it already had shipped 1.2 million pounds that year—or approximately 300,000 pounds per month. Continental shipped one railcar of carbon black to BRC the next day. Within a week, Continental emailed BRC seeking to increase the baseline prices again and to accelerate the payment terms in the Agreement. On June 2, 2011, BRC filed this lawsuit, alleging breach of the Agreement, among others. The district court applied Indiana law and concluded that the Agreement is a requirements contract. After discovery and another motion for summary judgment on the question of liability filed by BRC, the court again ruled in BRC's favor; it found that Continental had repudiated the Agreement by refusing to supply all of BRC's requirements and by failing to provide assurances of continued performance. On appeal, the appellate court remanded the proceedings back to the district court for further proceedings. On remand, the district court granted summary judgment to continental, holding that BRC’s claims fail as a matter of law because they are "premised entirely on the Supply Agreement being a requirements contract." The court went on to adopt Continental's characterization of the Agreement as an unenforceable "buyer's option," or "open offer to sell."
Did the district court err in holding that the Agreement is unenforceable for lack of mutuality and consideration?
Here, the Agreement imposes sufficiently definite obligations on both parties. Continental is obligated to make available "approximately 1.8 million pounds of prime [carbon] black annually ... to be taken in approximately equal monthly quantities," at the baseline prices set out "firm[ly]" in the Agreement. In return, BRC has accepted a legal detriment under the "Meet or Release" provision, which is "naturally read as a 'right of first refusal,' meaning if BRC sought to buy carbon black from another seller at a lower price, Continental had to be given the chance to meet that price." As noted by the appellate court in the previous appeal, BRC is not obligated to purchase any carbon black from Continental; BRC can purchase it at higher prices from other suppliers or it can produce its own. However, BRC is prohibited from purchasing carbon black from other suppliers on better terms than the Agreement unless Continental reviews the offer and decides not to match it.
Under Indiana law, a right of first refusal to sell can support mutuality of obligation. The Indiana Court of Appeals has described a right of first refusal as "a 'valuable contractual right' in which the right-holder may 'preempt' a third-party offer for a protected interest." Furthermore, the value of a right of first refusal is not undermined by its conditional nature. Therefore, the right that Continental acquired through the "Meet or Release" provision is not legally diminished as a result of its limited application to only those offers that are "better" than the terms of the Agreement. It is not the court’s place to question the value of this consideration.
On the other side of the bargain, Continental has promised to make available to BRC approximately 1.8 million pounds of carbon black per year at the stated prices. Contrary to Continental's argument, mutuality of obligation does not require that "the seller ... be required to sell and the buyer ... be required to buy." It is clear under Indiana law that "the doctrine of mutuality of obligation does not require that every duty within an agreement be based upon a corresponding obligation." Therefore, BRC's obligation under the Agreement need not mirror that of Continental; it is not the case that the seller be required to sell and the buyer be required to buy. Because the Agreement imposes a definite obligation on both parties, there is mutuality and consideration.