Feld v. Henry S. Levy & Sons, Inc.
37 N.Y.2d 466, 335 N.E.2d 320, 17 U.C.C. Rep. Serv. (West) 365 (1975)
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Rule of Law:
In an exclusive output contract, the seller has an implied obligation to continue production in good faith. A good faith cessation of production is permissible, but a shutdown motivated solely by a desire to avoid losses that are not more than trivial is a breach of contract.
Facts:
- On June 19, 1968, the Crushed Toast Company entered into a one-year, automatically renewing written contract with a wholesale bread baking business (defendant).
- The contract stipulated that the defendant would sell, and Crushed Toast would purchase, 'all bread crumbs produced' by the defendant at its Brooklyn factory.
- The contract allowed either party to cancel by giving at least six months' notice; no such notice was ever served.
- For nearly a year, the defendant produced and sold substantial quantities of bread crumbs to Crushed Toast.
- On or about May 15, 1969, the defendant ceased all production of bread crumbs, claiming the operation was 'very uneconomical'.
- The defendant had indicated to Crushed Toast that it would resume production if the contract price were raised from 6 cents to 7 cents per pound.
- After Crushed Toast refused the price increase, the defendant intentionally dismantled its bread crumb manufacturing equipment.
- Subsequently, the defendant sold the raw materials previously used for bread crumbs to animal food manufacturers.
Procedural Posture:
- Plaintiff, Crushed Toast Company, moved for summary judgment on the issue of liability in the trial court (Special Term).
- Defendant made a counter-request for summary judgment seeking dismissal of the case.
- The Special Term denied both parties' motions for summary judgment.
- Both parties appealed the decision to the intermediate appellate court (the Appellate Division).
- The Appellate Division affirmed the trial court's order in a divided decision.
- Both parties appealed the Appellate Division's order to the state's highest court.
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Issue:
Under UCC § 2-306, may a seller in an exclusive output contract cease production of the contracted goods in good faith if production merely becomes unprofitable?
Opinions:
Majority - Cooke, J.
No, a seller in an exclusive output contract may not cease production in good faith simply because the operation has become unprofitable. Under UCC § 2-306, such contracts impose an obligation of good faith performance, which implies a duty to continue production. While a seller is not required to continue if doing so would lead to bankruptcy or imperil the entire business, merely yielding less profit than expected does not constitute a good faith reason to cease production. Good faith requires continued production until the contract is properly cancelled unless the seller can show that continued performance would result in losses that are 'more than trivial.' Here, the defendant's attempt to raise the price, followed by the dismantling of machinery upon the plaintiff's refusal, raises a question of fact as to whether the cessation was in good faith, making summary judgment inappropriate.
Analysis:
This case clarifies the 'good faith' requirement under UCC § 2-306 for sellers in exclusive output contracts. It establishes that a seller cannot unilaterally cease production merely to escape a deal that has become less profitable than anticipated. The decision sets a standard higher than mere unprofitability but lower than the threat of bankruptcy, requiring a seller to demonstrate that continued production would cause 'more than trivial' losses. This precedent strengthens the reliability of output contracts for buyers while still allowing sellers an exit for legitimate, substantial business reasons, thereby balancing the interests of both parties.
