How to Avoid HEATED Endings to Business Relationships

Withdrawing from a long-standing business relationship can result in litigation and, sometimes, liability for the withdrawing party. This is true even when the withdrawing party has no contractual obligation to continue doing business. A recent case, Huy Fong Foods, Inc. v. Underwood Ranches, LP, Case No. B303096, is one example. The longstanding relationship between a supplier and purchaser of the jalapeño peppers used in the popular spicy condiment Sriracha devolved into over 5 years of litigation and liability of tens of millions of dollars imposed on the purchaser. The case teaches that the courts will not look kindly on one party in a longstanding relationship deceiving the other into believing their contract will be renewed when they secretly know it will not.

For 28 years, Huy Fong Foods (Huy Fong) produced Sriracha with jalapeño peppers it purchased almost exclusively from Underwood Ranches (Underwood). Huy Fong’s business grew considerably over this period, and its demand for peppers grew in kind. Huy Fong relied on Underwood to fill this demand. It even encouraged Underwood to grow its pepper farming operations and continually assured Underwood of their continued business relationship. All the while, however, Huy Fong was quietly preparing to replace Underwood with less costly growers.

In 2016, Huy Fong pulled the trigger on its plan and declined to renew its purchase agreement with Underwood for the 2017 season. Since by this time Underwood’s operations were devoted solely to providing peppers to Huy Fong, it had nothing to plant on its almost two-thousand acre ranch. It consequently lost millions of dollars. Underwood filed suit against Huy Fong for breach of contract, promissory estoppel, and fraud. A jury unanimously found for Underwood, awarding it tens of millions of dollars in compensatory and punitive damages.

On appeal, Huy Fong argued that the trial court had essentially implied a sweeping, freestanding duty to disclose any intention to discontinue a contractual relationship. The Second District Court of Appeal disagreed. The Court of Appeal emphasized that there was a close and longstanding business relationship between Huy Fong and Underwood and that Huy Fong had continually assured Underwood of their continued business relationship—while at the same time secretly planning to terminate its relationship with Underwood. In other words, Huy Fong had actively concealed its intent not to renew the contract to Underwood’s great detriment. Such conduct gave rise to actionable claims for fraudulent concealment and affirmative misrepresentation.

Companies that are planning not to renew a contract with a vendor, supplier, or other business “partner” must be careful how they end their relationship. Companies may be obligated to disclose their intent not to renew contracts if they have made statements during the relationship suggesting their desire to continue beyond the current contract term. Contracting parties may wish to reduce the possibility of liability by, for example, inserting provisions saying that the parties agree that they will not rely on stray statements during the contract term regarding whether the contract will be renewed. Regardless, if there is a risk that the break-up of a longstanding business relationship will turn heated, you should seek legal advice on how best to avoid liability.