Consumers International, Inc. v. Sysco Corporation

Court of Appeals of Arizona, Division 1, Department B
951 P.2d 897 (1997)

ELI5:

Rule of Law:

The implied covenant of good faith and fair dealing inherent in every contract does not create a duty to terminate a commercial agreement only for good cause when the contract contains an explicit, bargained-for clause allowing for termination without cause by either party.

Facts:

On October 1, 1993, Consumers International, Inc. (CI) and Sysco Corporation entered into a written 'Master Distribution Agreement.'
The agreement designated Sysco as the supplier for at least 80% of specific food service products that CI distributed to its retail customers.
Paragraph 9(c) of the agreement explicitly allowed either party to terminate the contract without cause upon providing sixty days' prior written notice to the other party.
The agreement also contained separate clauses, 9(a) and 9(b), that permitted termination for specific causes, such as a breach of the agreement or material deterioration of CI's financial position.
CI was represented by legal counsel during the negotiation of the agreement and was aware of the no-cause termination provision.
While negotiating with Sysco, CI was also in negotiations with another potential supplier, Kraft.
On December 13, 1993, approximately two and a half months into the agreement, Sysco sent a letter to CI providing sixty days' notice of termination pursuant to Paragraph 9(c).

Procedural Posture:

Consumers International, Inc. (CI) filed a lawsuit against Sysco Corporation in an Arizona trial court, alleging wrongful termination of their contract.
Sysco filed a motion for summary judgment on the wrongful termination claim.
The trial court granted Sysco's motion for summary judgment, finding that the contract's termination clause was clear and enforceable.
After the parties stipulated to remaining issues, a final judgment was entered, and the action was dismissed.
CI, as the appellant, appealed the final judgment to the intermediate court of appeals, with Sysco as the appellee.

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Issue:

Does the implied covenant of good faith and fair dealing require that an explicit termination-at-will clause in a commercial distribution agreement be interpreted to require good cause for termination?

Opinions:

Majority - Voss, Judge

No, the implied covenant of good faith and fair dealing does not override an express contract term allowing for termination without cause. The court reasoned that freedom of contract is a paramount public policy, and courts should not interfere with agreements entered into freely by sophisticated parties. Citing Wagenseller, the court distinguished the duty of good faith, which prevents a party from injuring the other's right to receive the agreement's benefits, from a non-existent duty to terminate only for good cause. The termination was not for a 'bad cause' that violates public policy (e.g., discrimination). Furthermore, the contract's structure supported this interpretation, as it contained separate, distinct clauses for termination 'for cause' and termination 'without cause,' and reading a good cause requirement into the latter would render it superfluous. CI's 'reasonable expectations' argument also failed because this was a negotiated agreement between counseled, sophisticated parties who were aware of the clause, not a contract of adhesion with hidden boilerplate terms.

Analysis:

This decision reinforces the principle of freedom of contract, particularly for sophisticated commercial parties, by upholding the validity of unambiguous termination-at-will clauses. It clarifies that the implied covenant of good faith and fair dealing serves as a gap-filler and a prohibition on 'bad cause' terminations, but it cannot be used to rewrite or contradict an express, bargained-for term. The ruling provides certainty to businesses that such clauses will be enforced as written, protecting their ability to manage commercial relationships flexibly without judicial imposition of a 'good cause' standard where none was negotiated.

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