In the
United States Court of Appeals
For the Seventh Circuit
No. 09-3272
Q UALITY O IL, INCORPORATED ,
Plaintiff-Appellee,
v.
K ELLEY P ARTNERS, INCORPORATED ,
d/b/a The Oil Works-Elgin &
The Oil Works-Batavia, Incorporated,
Defendant-Appellant.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 08-cv-05006—Susan E. Cox, Magistrate Judge.
A RGUED JANUARY 13, 2011—D ECIDED S EPTEMBER 19, 2011
Before R IPPLE, E VANS , and S YKES, Circuit Judges.
S YKES, Circuit Judge. In a loan-and-supply contract,
Quality Oil, Inc., agreed to provide Kelley Partners, Inc.,
with a $150,000 loan that would be gradually forgiven
Circuit Judge Terence T. Evans died on August 10, 2011, and
did not participate in the decision of this case, which is being
resolved by a quorum of the panel under 28 U.S.C. § 46(d).
2 No. 09-3272
over five years as Kelley Partners purchased specified
quantities of motor-oil products from Quality Oil. Kelley
Partners stopped buying products from Quality Oil
after only two years, so Quality Oil sued for breach of
contract. Quality Oil won on summary judgment, and
Kelley Partners appealed.
The dispute focuses on the meaning of a handwritten
notation the parties added to the typewritten contract.
Kelley Partners interprets the handwritten provision to
release it from all obligations after five years regardless
of how much product it purchased from Quality Oil.
This interpretation reads the handwritten provision in
isolation and is commercially nonsensical. We affirm.
I. Background
On July 1, 2003, Quality Oil, an Indiana auto-lubricants
distributor for Exxon Mobil Corp., and Kelley Partners,
an independent operator of automotive quick-lube
facilities in Illinois, entered into a “Product Payback
Loan and Supply Agreement.” Under the Agreement,
which by its terms is governed by Indiana law, Quality
Oil agreed to loan Kelley Partners $150,000 “at no cost,”
and Kelley Partners in turn agreed to purchase its motor-
oil requirements from Quality Oil.1 Specifically, in Para-
graph 4 of the Agreement, Kelley Partners agreed to
1
Although the Agreement specified a loan amount of
$150,000, Quality Oil contends, and Kelley Partners does not
dispute, that the actual amount it loaned to Kelley Partners
was $150,500.
No. 09-3272 3
purchase from Quality Oil . . . at least eighty-five
percent (85%) of [Kelley Partners’] requirements
of motor oils during the term of this Agreement.
[Kelley Partners] further agrees to purchase not
less than two hundred twenty-five thousand
(225,000) gallons of Mobil motor oil and 225,000
Mobil branded filters within 60 months from the
date hereof.
Immediately following this language in the typewritten
contract is the handwritten notation that is central to
Kelley Partners’ appeal. It states as follows: “This Supply
Agreement will terminate after 225,000 gallons and
225,000 filters of Exxon/Mobil is purchased or 60 months,
whichever comes first.” The president of Kelley Partners
and owner/general manager of Quality Oil initialed
this handwritten provision and signed the Agreement
in two places.
Paragraph 6 of the Agreement provides for a “Premature
Termination Penalty.” Under this provision, if Kelley
Partners “chooses to prematurely terminate this Agree-
ment (i.e. before [Kelley Partners] purchases 225,000
gallons under Paragraph 4), Quality Oil reserves the
right to bill [Kelley Partners] . . . for the unamortized
portion of the loan’s value as provided on Exhibit A.”
Exhibit A explains how the Premature Termination
Penalty was to be calculated:
The unamortized val[u]e of the loan will be cal-
culated using 60 months as the term.
$150,000 ÷ 60 months = $2,500.00 [per] month
4 No. 09-3272
Any premature penalty will be figured by multi-
plying the remaining months left on contract times
$2,500.00.
i.e. 36 months left on contract x $2,500.00 = $90,000
Finally, Paragraph 7 of the Agreement, entitled “Assign-
ment and Delegation,” explains Kelley Partners’ obliga-
tions if it sold its business:
[Kelley Partners] agrees that its rights and duties
provided hereunder shall not be assigned or
delegated without the prior written consent of
Quality Oil, said consent not to be unreasonably
withheld. This Agreement shall be binding and inure
to the successors of either party. If [Kelley Partners]
transfers any location prior to completing the pur-
chases required under Paragraph 4, the transferee(s)
must continue to purchase the products from
Quality Oil until the required purchases have been
made. If said transferee(s) does not comply with the
foregoing, [Kelley Partners] may be liable [for the
premature termination penalty] . . . if [Kelley Partners]
does not meet the requirements of Paragraph 4
with [Kelley Partners’] remaining locations[].
In July 2005, two years after entering into the Agree-
ment, Kelley Partners made its last purchase of motor-
oil products from Quality Oil. Up to that time Kelley
Partners had purchased only 55,296 gallons of oil
No. 09-3272 5
and 61,551 filters.2 That month Kelley Partners sold its
business without assigning its obligations under the
Agreement to its purchaser. On learning of the sale,
Quality Oil invoiced Kelley Partners for the unamortized
portion of the loan pursuant to the Premature Termina-
tion Penalty provision. Kelley Partners refused to pay.
Quality Oil sued for breach of contract in Indiana state
court. Following a bench trial, the trial court determined
that Kelley Partners had breached the Agreement. Kelley
Partners appealed, and the Indiana Court of Appeals
vacated the judgment and dismissed the case for lack
of personal jurisdiction over Kelley Partners. Quality Oil
then refiled its breach-of-contract claim in the Northern
District of Illinois based on the diversity jurisdiction.
See 28 U.S.C. § 1332. The parties consented to proceed
before a magistrate judge, see 28 U.S.C. § 636(c)(1),
and Quality Oil moved for summary judgment. The
magistrate judge granted the motion and entered judg-
ment for Quality Oil in the amount of the Premature
Termination Penalty, plus prejudgment interest. See
Olcott Int’l & Co., Inc. v. Micro Data Base Sys., 793 N.E.2d
1063, 1078 (Ind. Ct. App. 2003) (authorizing prejudg-
ment interest on a breach of contract claim “if the
amount of the claim rests upon a simple calculation
and the terms of the contract make such a claim ascer-
tainable”).
2
See Quality Oil’s Local Rule 56.1 Statement of Facts at ¶ 13
and Exhibit A at 5.
6 No. 09-3272
II. Discussion
This case requires us to interpret a written contract,
which is a question of law subject to de novo review. Int’l
Prod. Specialists, Inc. v. Schwing Am., Inc., 580 F.3d 587,
594-95 (7th Cir. 2009). Kelley Partners argues that the
literal terms of the handwritten provision—that the
“Agreement will terminate after 225,000 gallons and
225,000 filters of Exxon/Mobil is purchased or 60 months,
whichever comes first”—negates the language that
appears earlier in Paragraph 4, which obligates it to
purchase 85% of its supply requirements from Quality
Oil. In essence Kelley Partners argues that the hand-
written provision relieves it of any liability under the
Agreement after 60 months—that is, after July 1,
2008—regardless of the amount of product it purchased
from Quality Oil.
Quality Oil maintains that Kelley Partners waived this
argument by not making it in the district court. That’s not
quite true. In its brief in response to Quality Oil’s
summary-judgment motion, Kelley Partners asserted
that the Agreement “terminated by its own terms on
or about July 1, 2008.” Although this argument was not
well-developed, the magistrate judge specifically ad-
dressed and rejected it. The judge explained that Kelley
Partners’ reading of the handwritten provision would
“render ineffective” the other provisions in the Agree-
ment and did not make sense in light of the Agreement
“as a whole.” We take this as evidence that the effect of
the handwritten provision—which is the only issue
No. 09-3272 7
raised on appeal—was sufficiently preserved for review.3
We therefore proceed to the merits.
To support its interpretation of the handwritten provi-
sion, Kelley Partners relies first on Section 26-1-3.1-114
of the Indiana Code. That provision, which governs
negotiable instruments, states as follows: “If an instru-
ment contains contradictory terms, typewritten terms
prevail over printed terms, handwritten terms prevail
over both, and words prevail over numbers.” But the
Agreement is not a negotiable instrument.4 This section
3
The magistrate judge rejected other arguments raised by
Kelley Partners and also entered summary judgment for
Quality Oil on Kelley Partners’ counterclaim. These deter-
minations are not challenged on appeal.
4
Section 26-1-3.1-104(a) defines “negotiable instrument” as
an unconditional promise or order to pay a fixed amount
of money, with or without interest or other charges de-
scribed in the promise or order, if it:
(1) Is payable to bearer or to order at the time it
is issued or first comes into possession of a holder;
(2) Is payable on demand or at a definite time; and
(3) Does not state any other undertaking or instruction
by the person promising or ordering payment to do
any act in addition to the payment of money, but the
promise or order may contain:
(A) An undertaking or power to give, maintain, or
protect collateral to secure payment;
(continued...)
8 No. 09-3272
of the Indiana Code is therefore inapplicable.
Kelley Partners also cites an Illinois case, Perry v. Estate
of Carpenter, 918 N.E.2d 1156, 1163 (Ill. App. Ct. 2009),
for the proposition that “[g]enerally, where there is a
conflict in a contract between handwritten and typed or
printed terms, the handwritten terms will be deemed
controlling.” The Agreement, however, is governed by
Indiana law, and in any event, Perry is distinguishable.
The handwritten notation at issue in Perry did not alter
the basic purpose of the agreement, which was for the
sale of real estate. Id. at 1159. The parties’ contract
included a typewritten term providing for an increase
in the buyer’s earnest money, which was followed by a
line for the parties to insert a date by which this condi-
tion was to be performed. But the date line was crossed
out by hand, and because of this handwritten strike-
through, the Illinois Appellate Court held that the
buyer was not required to increase his earnest money.
Id. at 1163.
The priority that Perry and the Indiana Code give to
handwritten terms in a contract makes sense when it
comes to discrete contractual provisions that do not
alter the gist of the contract. Here, in contrast, Kelley
Partners’ interpretation of the handwritten provision
4
(...continued)
(B) An authorization or power to the holder to con-
fess judgment or realize on or dispose of collateral; or
(C) A waiver of the benefit of any law intended
for the advantage or protection of an obligor.
No. 09-3272 9
destroys the fundamental bargain of this contract:
Kelley Partners could retain the $150,000 loan it received
from Quality Oil and let 60 months elapse without pur-
chasing any of its supply requirements from Quality Oil.
This reading violates a basic principle of contract inter-
pretation that contractual provisions are not to be read
in isolation. Under Indiana law “phrases [in a contract]
cannot be read exclusive of other contractual provisions;
rather, the parties’ intentions must be determined by
reading the contract in its entirety and attempting to
construe contractual provisions so as to harmonize the
agreement.” Johnson v. Dawson, 856 N.E.2d 769, 773 (Ind.
App. Ct. 2006). Kelley Partners has made no effort
to explain how its interpretation of the handwritten
provision could be consistent with the contract as a whole.
To be sure, in Johnson, on which Quality Oil heavily
relies, the Indiana Court of Appeals was addressing a
dispute over an ambiguous contract provision; the lan-
guage of the handwritten provision at issue here is ad-
mittedly not facially ambiguous. In relevant part it states
that “[t]his Supply Agreement . . . terminate[s] after . . . 60
months,” and a terminated contract releases parties
from their obligations. As the magistrate judge noted,
“when read[] . . . alone, the handwritten . . . portion of
the Supply Agreement seems to indicate that Kelley
Partners can wait sixty months and allow the Supply
Agreement to expire.”
Still, the principle that a contract must be interpreted
as a whole applies even where the language in the con-
tested contract provision is unambiguous. Beanstalk Grp.
10 No. 09-3272
v. AM Gen. Corp., 283 F.3d 856, 859-60 (7th Cir. 2002)
(applying Indiana law). In Beanstalk we noted the estab-
lished doctrine that “written contracts are usually en-
forced in accordance with the ordinary meaning of the
language used in them.” Id. at 859. We characterized this
as a “strong presumption” designed to prevent “the
deal that [the contracting parties] thought they had
graven in stone by using clear language” from being
upended in litigation. Id. But we also observed that
the plain-meaning presumption is rebuttable and can
be overcome by other equally venerable principles of
contract interpretation; we identified two that operate
to mediate strict linguistic literalism by taking account
of contractual context. Id. at 859-60. The first is that
“a contract will not be interpreted literally if doing so
would produce absurd results, in the sense of results
that the parties, presumed to be rational persons
pursuing rational ends, are very unlikely to have agreed
to seek.” Id. at 860; see also BKCAP, LLC v. CAPTEC Fran-
chise Trust 2000-1, 572 F.3d 353, 359 (7th Cir. 2009); Utica
Mut. Ins. Co. v. Vigo Coal Co., 393 F.3d 707, 711 (7th Cir.
2004). The second is the one we have already
mentioned: “[A] contract must be interpreted as a
whole. . . . Sentences are not isolated units of meaning,
but take meaning from other sentences in the same docu-
ment.” Beanstalk, 283 F.3d at 860 (citations omitted).
In Beanstalk we applied these principles to a contract
also governed by Indiana law. Beanstalk Group, a broker
of intellectual-property licenses, had a contract with AM
General, the manufacturer of Hummer motor vehicles,
to help AM General sell licenses to the Hummer trade-
No. 09-3272 11
mark. The contract provided that Beanstalk would
receive a 35% share of gross receipts on any “arrange-
ment, whether in the form of a license or otherwise,
granting merchandising or other rights in” the Hummer
trademark. Id. at 858 (quotation marks omitted). AM
General later entered into a complex $235-million joint
venture with General Motors for the design and manu-
facture of Hummer vehicles. Beanstalk contended that
this transaction fell within the literal terms of its con-
tract because the joint venture “grant[ed] GM merchan-
dising . . . rights” in the Hummer trademark. Id. at 859.
Beanstalk sued, claiming that AM General owed it 35%
of the value of the trademark in its joint venture with
GM. Id.
We held that Beanstalk Group’s position was commer-
cially “nonsensical” because Beanstalk was “in the busi-
ness of merchandising trademarks” and its agreement
with AM General concerned only the marketing of
licenses in the Hummer trademark, not the manufacture
of Hummer motor vehicles themselves. We gave an
example of the kind of transaction Beanstalk’s agree-
ment with AM General would cover: “If, while the . . .
agreement was in effect, a toy company wanted to make
a toy Hummer, Beanstalk was authorized to grant the
toy company a license in exchange for a fee that it
would split 35/65 with AM General.” Id. at 860. The
joint venture between AM General and GM was “not
that kind of arrangement”; instead, it “essentially trans-
ferred the Hummer [manufacturing] business to” GM.
Id. at 860-61. We applied the principle of contract inter-
pretation that “ ‘[i]f literalness is sheer absurdity, we are
12 No. 09-3272
to seek some other meaning whereby reason will be
instilled and absurdity avoided.’ ” Id. at 860 (quoting
Outlet Embroidery Co. v. Derwent Mills, 172 N.E. 462, 463
(N.Y. 1930) (Cardozo, C.J.)). We held that Beanstalk’s
interpretation of the contract reflected “[a] blinkered
literalism, a closing of one’s eyes to the obvious,” and
produced “nonsensical results.” Id.
The same is true of Kelley Partners’ interpretation of
the contract at issue here. It would make no commer-
cial sense for Quality Oil to forgive its loan to Kelley
Partners after five years regardless of how much motor-
oil product Kelley Partners purchased. This was a loan
and supply contract, after all. Under Paragraph 4 of the
Agreement, Kelley Partners bound itself to purchase
at least 85% of its motor-oil needs from Quality Oil during
the term of the Agreement. Paragraph 6 and Exhibit A
imposed a Premature Termination Penalty on any early
termination, and Paragraph 7 required that if Kelley
Partners sold its business, it was to assign its obligations
to its successor or remain liable under the Agreement.
Reading the contract as a whole and harmonizing all of
its provisions shows that Kelley Partners’ literal inter-
pretation of the handwritten provision is commercially
absurd.
Perhaps recognizing as much, at oral argument
Kelley Partners shifted its focus, asserting that Quality
Oil unreasonably withheld its consent to the assignment
of Kelley Partners’ obligations under the Agreement,
contrary to the requirements of Paragraph 7. Kelley
Partners never raised this argument in its briefs; it is
No. 09-3272 13
therefore waived. Valentine v. City of Chicago, 452 F.3d 670,
680 (7th Cir. 2006) (arguments raised for the first time
at oral argument are waived). Waiver aside, it’s a
baseless, last-ditch argument. At oral argument counsel
conceded that Kelley Partners never asked for Quality
Oil’s consent to assign the contract when it sold its busi-
ness. Consent never sought cannot be unreasonably
withheld.
Accordingly, the magistrate judge properly entered
summary judgment for Quality Oil. Kelley Partners
breached the Agreement when it ceased purchasing
from Quality Oil after two years without meeting
the 225,000-gallon and 225,000-filter requirements or
assigning its obligations to its purchaser. Kelley
Partners was therefore on the hook to Quality Oil for
the Premature Termination Penalty as provided in the
Agreement.
A FFIRMED.
9-19-11