Where’s my Sriracha? The Spicy Consequences of Breaching Oral Contracts

SAMARA SPILER—Oral contracts stemming from long-standing business practices centered on custom and trust are as valid as contracts memorialized in ink. When such an oral contract is breached, there are significant consequences—not just for your kitchen but also for business relationships and supply chains.

Huy Fong Foods (“Huy Fong”), the manufacturer of the wildly popular green-capped sriracha, has faced existential obstacles in the last couple of years in the wake of a unanimous jury verdict that Huy Fong breached its contract with its chili pepper supplier, Underwood Ranches (“Underwood”). Huy Fong was found to have intentionally misrepresented and concealed information from Underwood, breaching their contract with Underwood and duties to their nearly exclusive supplier.

Historically, David Tran, Huy Fong’s owner, would prepay Underwood for the estimated costs of growing and harvesting the chilis. The agreement was “partly oral, partly written, and partly established by the parties’ practice,” court records show. For the first ten years, the parties executed written agreements specifying the price per pound and volume to be supplied; thereafter, as Huy Fong grew in worth and popularity, the parties dealt with each other more informally via oral agreements.

Because of Tran’s suggestion, encouragement, and promise of longevity in their relationship, Underwood invested millions of dollars in acquiring additional farming acres in two California counties. Once Tran told Underwood, “you grow it, I’ll sell it,” Underwood took on significant expenditures to meet Huy Fong’s needs. It took a year or more to prepare the ground for growing peppers, and many leases extended into the 2020s, 2030s, and beyond. By 2016, Huy Fong (and its projected future business) accounted for approximately 80 percent of Underwood’s revenue.

Following a disagreement regarding the quantity of crops to be planted, Tran refused to provide Underwood with the prepayments needed to finance the crops and made multiple attempts to hire a long-term, trusted employee out from Underwood’s nose. When Huy Fong suddenly terminated the relationship without notice in 2016, Underwood lost 80 percent of its revenue and was forced to lay off 50 percent of its employees. After nearly thirty years of collaboration, by January 2017, the relationship between Huy Fong and Underwood had soured to the point where the partnership became futile.

Here, there was far more than an implied promise based on vague reassurances of good feelings between the parties. Huy Fong expressly told Underwood numerous times that Huy Fong would purchase all the peppers Underwood could produce; these promises were made in the context of Huy Fong’s insistence that Underwood obtain more land. The jury reasonably concluded that Huy Fong had no intention of keeping those promises when they were made. Evidence showed that Tran had long planned to cut Huy Fong’s ties to Underwood.

The Los Angeles County Superior Court jury granted $13.32 million to Underwood for financial losses sustained, as well as $10 million in punitive damages, ultimately severing the partnership between Huy Fong and Underwood.

Since that costly loss, Huy Fong now receives its chilis from smaller, less equipped growers in California, New Mexico, and Mexico. At the heart of the Huy Fong operation stands the red jalapeño pepper, a water-intensive crop that now relies on the Colorado River for irrigation and sustenance. Unfortunately, Colorado has reached unprecedented low levels over recent years, mainly due to insufficient rainfall and reduced snow runoff. The once-bright-red chilis are depleted, and most sprouts do not develop past a lackluster green color. Many experts attribute the ongoing drought to a worsening climate crisis, which shows no sign of relenting.

Huy Fong continues to be held back by shortages of red jalapeños, but with the 2021 lawsuit in the background, it begs the question: Is the drought and climate change explanation enough for Huy Fong’s shortage, or can restaurant owners and fanatics of Huy Fong’s sriracha impart some blame on Tran’s inability to rebuild his supply chain in the wake of Huy Fong’s $23 million defeat?

Though we cannot ignore the undeniable effects of climate change on the red jalapeño pepper’s abundance, especially given recent droughts, I’d argue that public issues with suppliers and a tainted business image have just as much to do with seeing eye-watering prices on eBay and settling for bland, off-brand hot sauces in your pantry.

Craig Underwood, owner and farmer at Underwood, has stated that he would have been able to keep up with the pepper demand, with ample water supply, if he were still the company’s supplier. Underwood knew how to maintain consistency among the crops while providing a high yield for manufacturing; he was also highly skilled in farming to resist disease and drought. Now, with scattered producers across North America, Huy Fong’s supply is inconsistent, unpredictable, and ineffective at producing a high yield.

This is a cautionary tale about maintaining contractual duties, particularly in a long-standing, dependent, and informal relationship. Even after thirty fruitful years with Underwood, Huy Fong’s breach of the oral contract sent their supply chain into disarray for the foreseeable future, perhaps permanently altering the balance of Tran’s hot sauce empire. We will never know for sure; however, had Huy Fong maintained its contractual duties to Underwood, it is possible that this sriracha shortage would have never occurred.

When will you consistently see your beloved Huy Fong sriracha again? For that answer, perhaps you should look to Mother Nature. Drought or not, until Tran can restore his pepper supply back to its original Underwood glory, the future of the elusive green-capped sriracha will likely remain unpredictable.