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Home / Questions / Ships and Liability Passing in the Night? FACTS Borden, Inc., owned Snow Food Products Div...

Ships and Liability Passing in the Night? FACTS Borden, Inc., owned Snow Food Products Division, a leading producer of clam products. Borden had its own four-vessel fleet as well as

 

Ships and Liability Passing in the Night?

 

FACTS

 

Borden, Inc., owned Snow Food Products Division, a leading producer of clam products. Borden had its own four-vessel fleet as well as independent boats for obtaining clams. Boats delivered the clams to Borden's Cape May plant, where the shell stock was processed into clam meat.

 

In 1978, Borden hired Donald DeMusz to be the captain of the Arlene Snow, one of Borden's four boats. Eventually, Mr. DeMusz was hired as an independent contractor to manage Borden's boats, and Mr. DeMusz formed Sea Labor, Inc., to be the company responsible for the management of those boats. Sea Labor received five cents per bushel of clams harvested by the four boats.

 

At about the same time Mr. DeMusz was hired, Borden began its "Shuck-at-Sea" program, which enabled the fishermen to shuck the clams on the boat, thus allowing the boats to bring back larger amounts of clams, thereby reducing costs and eliminating the need for more plants and facilities. However, the existing boats were not large enough for the shucking equipment.

 

Wayne Booker, a manager for Borden, asked Mr. DeMusz to undertake the Shuck-at-Sea program. Mr. DeMusz submitted a proposal that Mr. Booker and other executives approved. Along with two partners, Mr. DeMusz formed Sea Works, Inc., and for $750,000 purchased the Jessica Lori, a clam-fishing boat with shucking equipment. Mr. DeMusz financed the purchase through a bank loan.

 

An internal company memo from Mr. Booker included the following paragraph along with a description of how Mr. DeMusz's purchase of a boat would save money:

 

[W]e still have a significant mutual interest with DeMuse [sic]. His principal business will still be in chartering the Snow fleet and in captaining Arlene. He needs a dependable customer for the clams that he catches, either shell stock or meat. If we terminate our agreement with him, he would have a hard time making the payments on his boat.

 

Mr. DeMusz drafted a one-page contract, and Mr. Booker approved it with one small change. Mr. DeMusz then formed Sons of Thunder, Inc., with Bill Gifford and Bob Dempsey in order to purchase the second boat. The final contract was entered into on January 15, 1985, and included the following provision:

 

IT IS understood and Agreed to by the parties hereto that Snow Food Products shall purchase shell stock from Sons of Thunder Corp. for a period of one (1) year, at the market rate that is standardized throughout the industry. The term of this contract shall be for a period of one (1) year, after which this contract shall automatically be renewed for a period up to five years. Either party may cancel this contract by giving prior notice of said cancellation in writing Ninety (90) days prior to the effective cancellation date.

 

Sons of Thunder Corp. will offer for sale all shell stock that is landed to Snow Food.

 

In March 1985, Sons of Thunder bought a boat, the Sons of Thunder. The cost to rig and purchase the boat was $588,420.26. Sons of Thunder sought financing from First Jersey National Bank but was unable to obtain a loan until Mr. Booker told the bank representative that Mr. DeMusz had a solid relationship with Borden and that although the contract could be terminated within one year, Borden expected the contract to run for five years. Mr. Booker explained to the representative that the five-year term of the contract would be sufficient to pay back the loan. Ultimately, Mr. DeMusz obtained a $515,000 loan, which he, Mr. Gifford, Mr. Dempsey, and their spouses personally guaranteed. Mr. DeMusz used a personal note to cover the remaining balance.

 

After some preliminary testing, the Sons of Thunder started to operate and to fulfill its contract with Borden. For most weeks, the records show that Borden did not buy the minimum amount specified in the contract. Problems continued and the relationship between Mr. DeMusz and his companies and Borden began to deteriorate. When Borden discovered that a $500,000 accounting error had actually overstated the benefits of the Shuck-at-Sea program, Borden exercised its termination rights under the contracts and notified Mr. DeMusz of termination.

 

Mr. DeMusz and his companies experienced substantial losses as a result of the termination of contracts. Mr. DeMusz filed suit. Borden moved for summary judgment on the grounds that it had properly exercised its termination rights. The jury found for Mr. DeMusz, the court of appeals affirmed, and Borden appealed.

 

JUDICIAL OPINION

 

GARIBALDI, Justice

 

The question whether Borden performed its obligations in good faith appears before the Court. . . .

 

The obligation to perform in good faith exists in every contract, including those contracts that contain express and unambiguous provisions permitting either party to terminate the contract without cause. See United Roasters, Inc. v Colgate-Palmolive Co., 649 F.2d 985 (4th Cir.), cert. denied, 454 U.S. 1054, 102 S.Ct. 599, 70 L.Ed.2d 590 (1981). In United Roasters, United Roasters gave Colgate the right to manufacture and distribute Bambeanos, its roasted soybean snack. The contract governing the relationship allowed Colgate to terminate its performance at any time during the test marketing period so long as it gave United Roasters thirty days' notice. After two years of testing Bambeanos, Colgate announced plans to merge with Riviana Foods, Inc., and in the next five months, it ceased producing Bambeanos, stopped advertising them, sold its entire inventory of raw soybeans and Bambeanos, and transferred its product manager to another project. Eventually, Colgate terminated the contract.

 

Interpreting North Carolina law in the diversity action, the Fourth Circuit concluded that North Carolina had not decided whether there was a good faith limitation on an unconditional right to terminate a contract. The Fourth Circuit did, however, evaluate United Roasters' claim that Colgate violated the covenant of good faith and fair dealing. The panel stated

 

What is wrong with Colgate's conduct in this case is not its failure to communicate a decision to terminate . . . , but its cessation of performance. Clearly it had an obligation of good faith performance up until its right of termination was actually effective. The contract expressly obliged it to use its best efforts in the promotion of Bambeanos. Instead of doing that, it simply ceased performance. . . . Quite simply, it broke its contract when it terminated its performance, which was United Roasters' contractual due.

 

In Bak-A-Lum Corp., supra, 69 N.J. 123 (1976), this Court reached a similar conclusion even though the contract was oral and the parties had not discussed how the contract could be terminated. In that case, Bak A-Lum and Alcoa made an oral agreement, which gave Bak-ALum an exclusive distributorship of aluminum siding and related products manufactured by Alcoa. Alcoa eventually terminated the exclusive part of the agreement by appointing four additional distributors. Even though Alcoa planned on terminating the distributorship, it encouraged Bak-A-Lum to expand its warehouse facilities, which substantially increased its operating costs.

 

Despite acknowledging Alcoa's unconditional right to terminate the contract, the Court upheld the verdict for Bak-A-Lum because it found that Alcoa had breached the implied covenant of good faith and fair dealing by withholding its plans to terminate the contract while encouraging the plaintiff to expand its facilities. As the Court explained: "While the contractual relation of manufacturer and exclusive territorial distributor continued between the parties an obligation of reciprocal good faith dealing persisted between them." The Court found that the implied covenant of good faith and fair dealing required the defendant to give the plaintiff reasonable notice of its termination. Ultimately, the Court concluded that "a reasonable period of notice of termination of the distributorship . . . would have been twenty months."

 

The case most heavily relied on by Borden and the majority at the Appellate Division, Karl's Sales & Service, Inc. v Gimbel Brothers Inc., 249 N.J. Super. 487 (App. Div.), cert. denied 127 N.J. 548 (1991), is distinguishable from this matter. In that case, the Appellate Division stated that where the contractual right to terminate is express and unambiguous, the motive of the terminating party is irrelevant. As stated previously, we agree with that view of the law. However, in Karl's Sales, unlike this case and Bak-A-Lum, there were no allegations of bad faith or dishonesty on the part of the terminating party. Accordingly, Karl's Sales did not address the issue we are concerned with here.

 

Borden knew that Sons of Thunder depended on the income from its contract with Borden to pay back the loan. Yet, Borden continuously breached that con- tract by never buying the required amount of clams from the Sons of Thunder. Furthermore, after Gallant took Booker's place, he told DeMusz that he would not honor the contract with Sons of Thunder. Nicholson also told DeMusz that he did not plan to honor that contract. Borden's failure to honor the contract left Sons of Thunder with insufficient revenue to support its financing for the Sons of Thunder.

 

Borden was also aware that Sons of Thunder was guaranteeing every loan that Sea Work had taken to finance the rerigging and purchasing costs for the [boat]. Thus, Borden knew that the corporations were dependent on each other, and that if one company failed, the other would most likely fail. Borden, how- ever, fulfilled its obligations to Sea Work only for a short time before it began to breach that agreement. Eventually, Borden terminated its contract with Sea Work even though it knew that terminating the contract would leave Sea Work with no market to fish the Jessica Lori.

 

The final issue is whether the jury's assessment of $412,000, approximately one year's worth of additional profits, for the breach of the implied covenant of good faith and fair dealing was a reasonable verdict. Specifically, can a plaintiff recover lost profits for a breach of the implied covenant of good faith and fair dealing? We agree with Judge Humphreys that the jury's award of one year's additional profits "is a reasonable and fair estimate of 'expectation damages.'" Moreover, we agree with the trial court that lost profits are an appropriate remedy when a buyer breaches the implied covenant of good faith and fair dealing.

 

In order to recover for lost profits under [Section 2-708(2)], the plaintiffs must prove the amount of damages with a reasonable degree of certainty, that the wrongful acts of the defendant caused the loss of profit, and that the profits were reasonably within the contemplation of the parties at the time the contract was entered into.

 

The jury's award of $412,000, approximately one year's profit, for the breach of the implied covenant of good faith and fair dealing is reasonable and fair.

 

Affirmed

 

4. What provisions would you suggest be added to a contract such as this in which the relationship is one of contract but also one of dependence?

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