Caseflicks

New York Court of Appeals • 1975

Feld v. Henry S. Levy & Sons, Inc.

37 N.Y.2d 466 | 335 N.E.2d 320 | 373 N.Y.S.2d 102 | 1975 N.Y. LEXIS 2047

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Takeaway

In short, this case holds that an output seller may stop production only in good faith: it cannot abandon a minor product line merely to avoid an unprofitable contract when the parties agreed on a cancellation mechanism.

Background

Plaintiff, who operated the Crushed Toast Company, contracted with defendant wholesale baker to buy all bread crumbs produced at defendant's Brooklyn factory. The contract began on June 19, 1968, renewed automatically each year, and permitted either party to cancel only by giving six months' notice by certified mail. Neither party gave notice. Plaintiff also supplied the required performance bond and a continuation certificate for the renewal term.

Bread crumbs were a separately manufactured product: defendant processed stale or imperfect loaves through grinders and a toasting drum, then bagged the finished crumbs. Defendant sold plaintiff more than 250 tons of crumbs, but stopped production around May 15, 1969. It asserted that the operation was uneconomical, yet took no steps to find more economical equipment. After plaintiff refused defendant's request to raise the contract price from six to seven cents per pound, defendant intentionally disabled and later dismantled the crumb-making equipment, converted the space to a computer room, and sold the former crumb inputs to animal-food manufacturers.

Special Term denied plaintiff's motion for summary judgment on liability and denied defendant's cross-motion to dismiss. The Appellate Division affirmed by a divided court. Both parties appealed to the New York Court of Appeals.

Issues

Issue #1

Whether an output contract required defendant to continue manufacturing bread crumbs throughout the contract term, rather than merely sell plaintiff whatever crumbs it chose to produce.

Holding

Yes, subject to the good-faith limits governing output and exclusive-dealing contracts. Defendant could not simply discontinue this portion of its business to avoid the contract; absent cancellation, it had to continue production in good faith unless continued production caused more than trivial losses or genuinely imperiled the business.

Reasoning

Under UCC section 2-306, an output term means the seller's actual good-faith output. Such contracts are neither indefinite nor lacking in mutuality because the party controlling quantity must operate in good faith and in accordance with commercial standards of fair dealing. A good-faith cessation of production ordinarily ends an output seller's future delivery duty.

This agreement was also an exclusive-dealing arrangement. UCC section 2-306(2) therefore implied a duty on defendant to use best efforts to supply the goods, while the Code's good-faith obligation required reasonable diligence in carrying out the bargain. The commercial context and the parties' intent had to be read into the written terms.

The court distinguished a seller's good-faith shutdown of its entire primary business from the discontinuance of one product line. Defendant remained in the bread-baking business; it stopped only producing crumbs. Because the contract expressly allowed either side to end the relationship on six months' notice, defendant could not bypass that agreed protection merely because crumb production became less desirable or less profitable.

A genuine threat of bankruptcy or to the survival of defendant's overall business could justify ending crumb production. But lower-than-expected profits would not. Where crumbs were only one facet of defendant's enterprise, good faith generally required continued production until effective cancellation, even if production yielded no profit; before cancellation, cessation could be justified only if the resulting losses were more than trivial.

Issue #2

Whether the record established, as a matter of law, that defendant stopped producing bread crumbs in good faith.

Holding

No. Material fact questions concerning defendant's motives and the actual economic consequences of continued production precluded summary judgment for either party.

Reasoning

Defendant's assertion that production was 'uneconomical' or 'economically not feasible' was conclusory and did not establish good faith as a matter of law. Economic feasibility is too imprecise a standard without evidence showing the actual financial effect of continued performance.

The circumstances permitted competing inferences about defendant's motive. It dismantled the crumb machinery only after plaintiff refused to accept a higher price, and it then sold the same raw materials to animal-food manufacturers. Those facts could suggest an effort to escape an unfavorable price term rather than a good-faith business decision compelled by serious losses.

The record contained no component cost figures, profit-and-loss data for the crumb operation, or information about the returns from the animal-food sales. Without that evidence, the court could not determine whether continued crumb production would have produced more than trivial losses or whether defendant acted in good faith. The Appellate Division therefore properly affirmed the denial of both summary-judgment motions.