Feld v. Henry S. Levy & Sons, Inc.
37 N.Y.2d 466 (1975)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under an output contract governed by UCC § 2-306, a seller's good faith cessation of production requires more than a mere claim of unprofitability; cessation is only justified if continued production would result in losses that are more than trivial or would imperil the seller's entire business.
Facts:
- Crushed Toast Company (plaintiff) and a wholesale bread baking business (defendant) entered into a written agreement for the defendant to sell all bread crumbs it produced to the plaintiff.
- The contract was for a one-year term, commencing June 19, 1968, with a provision for automatic annual renewal.
- The agreement permitted either party to cancel by providing at least six months' written notice.
- For nearly a year, the defendant produced and sold a substantial quantity of bread crumbs to the plaintiff.
- Around May 15, 1969, the defendant ceased all production of bread crumbs, citing the operation as 'very uneconomical.'
- The defendant had indicated to the plaintiff that it would resume production if the contract price was raised from 6 cents to 7 cents per pound.
- After ceasing production, the defendant intentionally dismantled its bread crumb manufacturing machinery and began selling the raw materials to animal food manufacturers.
Procedural Posture:
- The plaintiff, Crushed Toast Company, moved for summary judgment on the issue of liability in the trial court (Special Term).
- The defendant made a counter-request for summary judgment to dismiss the case.
- The Special Term denied both parties' motions for summary judgment.
- Both parties appealed the trial court's decision to the intermediate appellate court (the Appellate Division).
- The Appellate Division affirmed the trial court's order in a divided decision.
- Both parties then appealed the Appellate Division's order to the New York Court of Appeals (the state's highest court).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Under UCC § 2-306, may a seller in an output contract cease production of the contracted goods for the sole reason that the operation has become 'uneconomical,' without breaching the duty of good faith owed to the buyer?
Opinions:
Majority - Cooke, J.
No. A seller in an output contract may not cease production for the sole reason that the operation has become 'uneconomical,' as this alone does not satisfy the duty of good faith. UCC § 2-306 imposes an obligation of good faith performance on output contracts, which implies a duty to continue production. While a good faith cessation of production is permissible, the seller's motivation is subject to close scrutiny. A desire for greater profits or disappointment with expected returns is insufficient to justify cessation. The court reasoned that good faith would permit cessation only in cases of bankruptcy, genuine imperilment of the seller's entire business, or if continued losses from that specific product line were 'more than trivial.' The defendant's conclusory claim of being 'uneconomical,' combined with its attempt to negotiate a higher price and subsequent dismantling of machinery, creates a triable issue of fact as to whether it acted in good faith.
Analysis:
This decision significantly clarifies the 'good faith' requirement for sellers under UCC § 2-306 output contracts. It establishes that a seller cannot arbitrarily cease production merely because a contract becomes less profitable than anticipated. By setting a standard that requires losses to be 'more than trivial' or a threat to the entire business, the court protects the buyer's reasonable expectations of a continued supply. This precedent requires lower courts to conduct a factual inquiry into the seller's financial justification and motives, preventing sellers from using 'unprofitability' as a pretext to escape a binding agreement.
Unlock the full brief for Feld v. Henry S. Levy & Sons, Inc.