## Facts

- Mid-Continent Systems, Inc. operated a truckers’ credit card program and franchised truck stops to accept the card.
- In 1971, James Patton and R.L. Hildebrand (and their related companies) entered a franchise agreement granting them an exclusive territory along Interstate 94 in Indiana and Michigan.
- The contract allowed Mid-Continent to add franchisees within the territory only if it notified Patton and Hildebrand that additional coverage was needed and gave them the “first opportunity” to provide that coverage.
- In 1974, Mid-Continent franchised Truck-O-Mat, a truck stop located west of Patton’s and Hildebrand’s locations near the Illinois border.
- Patton and Hildebrand complained by at least 1976 that Truck-O-Mat was inside their exclusive territory; the contract’s territorial description was ambiguous.
- In 1980, Mid-Continent wrote to Patton stating additional coverage was required and suggested a response within 15 days and a plan within 30 days.
- Patton replied about two months later, stating he was working with a real estate broker to address coverage needs but sought clarification about Mid-Continent’s position on the Truck-O-Mat dispute.
- Without resolving the Truck-O-Mat dispute and without further notice rejecting plaintiffs’ efforts as untimely, Mid-Continent franchised a Truckstops of America facility in Gary, Indiana.
- Plaintiffs sued for breach of contract in federal court under diversity jurisdiction; a jury awarded substantial compensatory damages and $2,250,000 in punitive damages, later reduced by the district court to $100,000.

## Issues

1. Whether Mid-Continent was entitled to judgment as a matter of law on breach, given the ambiguous territorial description and the “first opportunity” clause.
2. Whether parol evidence was admissible to correct the written territorial description based on mutual mistake.
3. Whether the jury’s compensatory damages awards were supported by reliable evidence rather than speculative projections of lost profits.
4. Whether Indiana law permitted punitive damages for this breach based on proof of fraud, malice, gross negligence, or oppression.

## Decision

- The court affirmed the liability finding that Mid-Continent breached the franchise agreement.
- The court held the territorial description was ambiguous, making it a fact question for the jury whether Truck-O-Mat fell within plaintiffs’ territory.
- The court held parol evidence could be used to correct the contract based on mutual mistake regarding the intended territorial coverage.
- The court held the jury could find Mid-Continent breached the “first opportunity” provision by not providing a reasonable chance to meet coverage demands, especially given the unresolved Truck-O-Mat dispute.
- The court vacated punitive damages, concluding the evidence did not meet Indiana’s standard for punitive damages in a contract action.
- The court remanded for a new trial on compensatory damages because the awards rested on speculative and methodologically flawed calculations.

## Legal Principles

- Ambiguity in a contract term that controls the parties’ rights may create a jury question, defeating a directed verdict on liability.
- The parol evidence rule does not bar reformation or correction of a writing to reflect the parties’ actual agreement when the writing contains a mutual mistake.
- A contractual “first opportunity” or similar notice-and-cure mechanism requires a reasonable opportunity to perform before the counterparty may engage a substitute performer.
- Under Indiana law, punitive damages are generally unavailable for breach of contract unless the breach is accompanied by conduct amounting to fraud, malice, gross negligence, or oppression.
- Deliberate breach alone does not justify punitive damages; punitive damages may be reserved for exceptional, wrongful conduct, not for mistakes tied to contract ambiguity.

## Conclusion

The Seventh Circuit upheld the jury’s determination that Mid-Continent breached the franchise agreement through actions taken under an ambiguous territorial grant and by failing to provide a reasonable first opportunity to address coverage needs, but it rejected punitive damages under Indiana law and ordered a new trial on compensatory damages due to speculative proof.


Patton v. Mid-Continent Sys., Inc., 841 F.2d 742 (7th Cir. 1988)