Sons of Thunder v. Borden
666 A.2d 549, 285 N.J. Super. 27, 29 U.C.C. Rep. Serv. 2d (West) 33 (1995)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
An implied covenant of good faith and fair dealing does not override or eliminate an express contractual right to terminate a contract without cause, particularly when the termination is not actively concealed and a legitimate business reason exists.
Facts:
- Borden, Inc. (Borden) processed quahog clams and purchased them from independent boats, one of which was captained by Donald R. DeMusz (DeMusz), who also managed Borden's fleet.
- Borden sought to develop 'shuck-at-sea' equipment for clam processing on boats but lacked a suitable vessel; DeMusz proposed acquiring a larger boat, and Borden would purchase the clams harvested.
- In January 1984, DeMusz and partners formed Sea Work, Corp., which purchased and rigged the Jessica Lori for clamming for $750,000, financed by a bank loan.
- In July 1984, Borden and Sea Work entered an 'Equipment Lease' for Borden to install its shucking equipment on the Jessica Lori; however, Borden's equipment proved defective and caused significant delays for Sea Work.
- In late 1984, DeMusz drafted a one-page contract for plaintiff Sons of Thunder, Inc. (formed by DeMusz, Robert Dempsey, and William Gifford) for Borden to purchase 7,680 bushels of quahogs weekly for one year, automatically renewable for five years, with a 90-day cancellation notice by either party.
- Borden's manager, Charles Wayne Booker, signed the Sons of Thunder contract in January 1985, unaware that Robert Dempsey, Borden's Cape May plant manager, held an undisclosed one-third ownership interest in Sons of Thunder, violating Borden's conflict-of-interest policy.
- In March 1985, Sons of Thunder purchased the Draco (renamed Sons of Thunder) for $35,000 and spent $588,420.26 to refabricate and rig it as a clamboat, largely financed by a bank loan, with Borden representatives assuring the bank of a solid business relationship.
- In April 1986, the Sons of Thunder began harvesting clams for Borden, commencing the contract's one-year term; shortly thereafter, Borden's new manager, William Gallant, informed DeMusz that Borden would not honor the contract's minimum purchase quantity.
- Borden eventually learned of Dempsey's undisclosed ownership interest in Sons of Thunder and Sea Work, leading to Dempsey's termination in February 1987.
- On May 8, 1987, Borden gave Sons of Thunder 90 days' written notice of termination of the contract, citing a lack of need for clams from that specific boat and Dempsey's conflict of interest; Borden removed the clam-dredging cages from the Sons of Thunder within two weeks of the termination notice.
Procedural Posture:
- Sons of Thunder, Inc. (plaintiff) instituted a breach of contract action against Borden, Inc. (defendant) in the Law Division (trial court), claiming breach of express terms and breach of the implied covenant of good faith and fair dealing.
- The trial court submitted the case to the jury, finding the termination provision ambiguous, and instructed the jury to determine if Borden breached the express terms and/or the implied covenant of good faith and fair dealing in terminating the contract.
- The jury found Borden breached the contract by not purchasing the minimum quantity of quahogs between April 7, 1986, and August 8, 1987, awarding $326,292 in damages.
- The jury found Borden did not breach the contract by terminating it on May 8, 1987.
- The jury found Borden did breach its implied obligation of good faith and fair dealing in terminating the contract on May 8, 1987, awarding $412,000 in damages for lost sales after August 7, 1987.
- The trial court denied Borden's motion for a judgment notwithstanding the verdict regarding the $412,000 award for breach of the implied covenant.
- Borden appealed to the Superior Court of New Jersey, Appellate Division, and Sons of Thunder cross-appealed, but later withdrew its cross-appeal and settled the $326,292 judgment.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does an implied covenant of good faith and fair dealing override a contractual right to terminate a contract without cause, thereby compelling a party to continue performance beyond the express termination period, or can it be breached by the manner of termination?
Opinions:
Majority - Michels, P.J.A.D.
No, an implied covenant of good faith and fair dealing does not override a contractual right to terminate a contract without cause. The court held that the primary goal of contract construction is to ascertain the parties' intention from the language used, and where contract terms are clear and unambiguous, they must be enforced as written, without courts rewriting them. While an implied covenant of good faith and fair dealing is recognized in every contract in New Jersey, it applies to the parties' performance and enforcement of the contract, but it cannot alter or eliminate the express terms of a written agreement. Citing precedents like Karl's Sales & Serv. v. Gimbel Bros. and Corenswet, Inc. v. Amana Refrigeration, Inc., the court emphasized that if a contract grants an absolute right to terminate, the terminating party's motive is generally irrelevant to the termination's effectiveness. The contract in question allowed either party to terminate with 90-days notice without specifying cause, and to imply a covenant preventing termination until DeMusz's loans were repaid would contravene these plain terms. Furthermore, Borden had a legitimate business reason to terminate the contract: its manager, Robert Dempsey, had an undisclosed ownership interest in Sons of Thunder, which violated Borden's conflict-of-interest policy and would have prevented the contract from being formed initially. The court distinguished Bak-A-Lum Corp. v. Alcoa Building Prod. by noting that Borden did not actively conceal its decision to not honor the contract; rather, Borden's new manager openly informed DeMusz in May 1986 that Borden would not honor the minimum purchase quantity, long before DeMusz secured a significant loan in November 1986 for the Jessica Lori's re-rigging. Therefore, DeMusz had no reasonable basis to believe Borden would refrain from terminating the contract.
Dissenting - Humphreys, J.A.D.
Yes, an implied covenant of good faith and fair dealing can limit or qualify a party's right to terminate a contract, especially when the termination is oppressive, frustrates reasonable expectations, and causes substantial losses. The dissenting judge argued that the majority improperly engaged in appellate fact-finding, asserting that the evidence, when viewed in the light most favorable to Sons of Thunder, overwhelmingly supported the jury's verdict of a breach of good faith. The dissent highlighted the unequal bargaining power between Borden, a large corporation, and DeMusz, an unsophisticated fisherman, and that Borden had assured DeMusz's bank of a 'solid' and 'ongoing' business relationship, enabling him to incur over a million dollars in debt for the 'shuck-at-sea' joint venture. The termination clause in the contract did not explicitly state 'without cause,' and testimony from both DeMusz and Borden's former manager, Booker, suggested termination was intended only for 'good cause' or 'serious business reasons.' Borden's subsequent actions—refusing to honor the contract, breaching its terms, making improper charges, extorting a personal promissory note from DeMusz, and terminating the contract after inducing DeMusz to incur massive debts—constituted egregious misconduct and a clear breach of its fiduciary duty within what the parties themselves characterized as a 'joint venture.' Citing Bak-A-Lum Corp., the dissent argued that the implied covenant prevents a party from selfishly withholding information or acting in a manner that seriously impairs the other party's enterprise, particularly when substantial investment is made in reliance. Borden's conduct was the antithesis of cooperation, depriving DeMusz of the reasonable expectations and fruits of the contract, and causing his financial ruin. The jury's finding of a breach of good faith, based on Borden's entire course of conduct, should be upheld as a reasonable factual determination.
Analysis:
This case clarifies the limits of the implied covenant of good faith and fair dealing in New Jersey contract law, particularly concerning express termination clauses. The majority's decision reinforces the principle that courts will uphold clear, unambiguous contractual terms, even if one party faces hardship due to the other's exercise of an explicit termination right. It suggests that for a bad faith termination claim to succeed against an express 'at-will' termination clause, there must be evidence of active, deceptive concealment or inducement to incur reliance costs while secretly planning termination, rather than mere non-compliance or a termination based on a legitimate internal policy like a conflict of interest. This decision emphasizes the importance of precise contract drafting and places a high burden on parties seeking to use an implied covenant to circumvent unambiguous express terms, thereby potentially limiting the scope of 'fairness' arguments in situations with clear contractual rights.
