424 Part 3 Business Sales, Contracts, and Competition CASE 12.4 Hawkins v Globe Life Insurance Hawk 105 F. Supp. 3d 430 (D. N.J. 2015) © iStockPhoto.com/Photoevent Marijuana Possession, Life Insurance, and Unconscionability FACTS r $1 Buys Up to $50,000 In late August 2011, Natasha Hawkins (plaintiff) applied for a second life insurance policy on her 19-year-old son, Khalil Wallace, from Globe Life Insurance Company. After Globe received Ms. Hawkins’s enrollment form and premium payment but before Globe formally approved the policy, Khalil was murdered. Globe refused to pay the policy proceeds, and Ms. Hawkins filed suit. r $1 Buys $50,000—Direct by Mail JUDICIAL OPINION SCHNEIDER, Magistrate Judge Globe mailed plaintiff an advertisement for life insurance protection. The materials included these materials: Pamphlet 1 r First-day coverage r No waiting period r Buy direct by mail r Choose $5,000, $10,000, $20,000, $30,000 or $50,000 coverage r $1.00 for $50,000 r No medical exam—just answer a few health questions Pamphlet 2 r Start a Life Insurance Policy for Only $1 Letter r No Waiting Period (2x) r Buy Direct by Mail (2x) r $1.00 Starts Up To $50,000 Life Insurance Coverage r Globe gives you life insurance coverage that costs only $1.00 to start! r There’s no medical exam . . . just answer a few Yes/No health questions r You buy directly through the mail r Answer A Few Yes/No Health Questions (2x) Enrollment Form/Application r No waiting period. r You can choose from $5,000, $10,000, $20,000, $30,000 or even $50,000 life insurance coverage r There is no medical exam—just a few Yes/No health questions. Globe’s enrollment form contains Question 2.b. This question asks whether in the past three years Khalil “had or been treated for . . . drug or alcohol abuse.” [P]laintiff was aware her son was previously arrested and charged with multiple drug offenses. [S]ubsequent to one of Khalil’s arrests, plaintiff arranged for Khalil to attend a few counseling sessions with a general therapist. However, plaintiff denied any knowledge of what her son discussed with his therapist. She also denied any knowledge that her son used drugs. Plaintiff testified that despite her son’s troubled past she did not believe he abused drugs. She noted that her son was an athlete and never showed symptoms of drug abuse. After plaintiff mailed the enrollment form, Khalil was charged on September 2, 2011 with possession of marijuana. Plaintiff learned about this arrest within a few days but did not inform Globe. [P]laintiff’s application was subject to a “Quality Assurance” (QA) follow-up call. Globe attempted to telephone plaintiff 21 times and sent two letters to verify the truth of the statements on her enrollment form. On September 20, 2011, plaintiff’s son disappeared into a van with unidentified individuals. On September 22, 2011 plaintiff was informed that her son was last seen two days prior and that his cell phone was found in Philadelphia. The same day plaintiff filed a missing persons report with the state police. Despite these events, plaintiff testified she was not concerned for her son’s safety following his disappearance because he would often be away from home for periods of more than two weeks at a time. Additionally, plaintiff testified that when she filed the missing persons report the police believed her son had run off to avoid charges from his recent arrest. On September 28, 2011, plaintiff called Globe to complete the QA. During the call, . . . [t]he Globe CONTINUED Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Chapter 12 representative asked plaintiff whether the proposed insured had a history of drug or alcohol abuse. Plaintiff again denied any knowledge that her son had a history of drug or alcohol abuse or treatment and affirmed that her answers were true to the best of her knowledge. Following the QA call, Globe formally approved plaintiff’s policy on October 1, 2011. On October 6, 2011, six days after the policy was issued, Khalil Wallace’s body was found. The cause of death was determined to be multiple gunshot wounds inflicted on September 20, 2011, the day Khalil went missing. Plaintiff called Globe to report her son’s death on October 24, 2011 and submitted her claim for payment on February 6, 2012. On February 21, 2012 Globe advised it was investigating the claim. Following an exchange of letters between Globe and plaintiff, on July 6, 2012, Globe advised that it was voiding its policy because plaintiff misrepresented material facts during the application process. Plaintiff argues the solicitation materials she received from Globe along with the fact that she answered “No” to all of the health-related questions led her to believe that she received interim coverage when Globe received her application materials on September 9, 2011. Recognizing that the language of insurance contracts is often the result of technical semantic constructions and unequal bargaining power, New Jersey courts interpret insurance policies to give effect to the reasonable expectations of an objectively reasonable policyholder. As a result, courts resolve ambiguities in insurance contracts against the insurer. The Court finds Globe’s promotional documents are ambiguous and should be interpreted to meet the reasonable expectations of an objectively reasonable applicant. Globe’s pamphlet expressly states that Globe is offering “First-day coverage”. [T]he statement is easily read to indicate that interim coverage begins immediately. Directly underneath “First-day coverage” are the representations that applicants can “Buy direct by mail” with “No waiting period.” These statements read together indicate that an applicant can submit an application by mail and receive immediate interim coverage. The pamphlet further states that if the applicant’s responses to the application show good health, coverage begins after the application is approved. Here, plaintiff answered “No” to all of the health-related questions in the application. Thus, it was her reasonable belief that since she answered that the insured was in “good health,” interim coverage applied. The large and bolded font emphasize that plaintiff was reasonable in expecting interim coverage even before her policy was formally approved. The body of Globe’s letter also states that $1.00 “starts” up Contracts and Sales: Performance, Remedies, and Collection 425 “coverage”. Although the letter later states in non-bolded text that the policy will be mailed once the application is “approved,” Globe still fails to qualify what that entails. Further, even if a reasonable applicant understood that “approval” included an underwriting process, it does not eliminate the impression that interim coverage exists while the application is processed. Globe’s letter also states that “Your FULL protection starts the first day your policy is issued. There is no waiting period.” These sentences create ambiguity because Globe states that full protection starts when the policy is issued, but simultaneously promises no waiting period. Thus, the impression is created that policy issuance and coverage is immediate. Globe would have a better argument if instead of its ambiguous language it would have stated, “Your coverage starts only IF your policy is approved by Globe after receipt and review of your completed application”, and if it omitted the promise of “first-day coverage” and “no waiting period.” Globe’s font sizes and text locations further plaintiff’s impression that she received interim coverage. Representations concerning immediate coverage such as “$1.00 Starts Up to $50,000 Life Insurance Coverage” and “No waiting period” appear in bold and large font while the “approval” language, which Globe emphasizes in support of its argument, appears in the authorization in much smaller font. New Jersey courts “depart from the literal text and interpret [a policy] in accordance with the insured’s understanding, even when that understanding contradicts the insurer’s intent, if the text appears overly technical or contains hidden pitfalls, cannot be understood without employing subtle or legalistic distinctions, is obscured by fine print, or requires strenuous study to comprehend.” Besides the ambiguity in Globe’s solicitation materials there was another good reason for plaintiff to objectively believe she had interim coverage. This belief is supported by considerable New Jersey precedent. . . . “[T]he very acceptance of the premium in advance tends naturally towards the understanding of immediate coverage though it be temporary and terminable.” Globe received plaintiff’s application materials on September 9, 2011 and deposited the premium check on September 12, 2011. For the reasons described above, this initiated interim coverage on Khalil’s life as of September 9 or 12, 2011. Accordingly, plaintiff had interim coverage when Khalil died on September 20, 2011. The law draws a distinction between misrepresentations made in response to an insurance company’s objective and subjective questions. If the question is objective, even an innocent misrepresentation CONTINUED Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 426 Part 3 Business Sales, Contracts, and Competition can warrant rescission and constitutes equitable fraud. Courts are more lenient when the question is subjective. The application question at issue: “In the past 3 years, has the Proposed Insured had or been treated for . . . drug or alcohol abuse[?]” Plaintiff answered this question “No.” Globe asserts that because plaintiff was aware that her son was arrested for drug-related crimes and attended general therapy she should have answered the question in the affirmative. The Court disagrees. The problem with Globe’s argument is that it did not ask the right question. Globe did not ask if Khalil was ever arrested. Nor did it ask if Khalil ever possessed or distributed drugs, or was accused of same. Globe’s question only asks if Khalil had or was treated for drug abuse. Globe has failed to point to any evidence that this occurred. [T]he Court finds that Globe has not satisfied its burden of showing that plaintiff misrepresented any answers on her application. Relatedly, plaintiff did not have a duty to inform Globe about her son’s September 2, 2011 arrest for marijuana possession. Again, Globe never inquired whether the insured had a criminal history on the insurance application. Additionally, that fact that Khalil’s arrest is not material is evidenced by the fact that Globe did not ask plaintiff any questions during the September 28, 2011 QA call which would have required her to inform Globe about the arrest. Globe’s motion for summary judgment is denied. CASE QUESTIONS 1. What were the problems with Globe’s marketing materials? 2. Develop a timeline for the events from the time of the policy mailer. Why are Khalil’s arrest and previous counseling not required to be disclosed? 3. Describe how Globe should have asked its questions. Ethical Issues Althou ough Ms. Hawkins was not legally required to make the disclosures about her son, what w were her ethical obligations? Why is Globe’s conduct considered unconscionable? 12-2 Contract Performance Once parties have contracted, they have the obligation of performance. The following subsections cover when performance is due, what constitutes performance, and when performance is excused. 12-2a When Performance Is Due Performance is due according to the times provided in the contract. In some contracts, however, prescribed events must occur before performance is required. These events are called conditions. Conditions precedent are events that give rise to performance. Suppose that Zelda has agreed to buy Scott’s house and that their contract provides that Zelda does not have to pay until she is able to obtain a reasonable loan to finance the purchase. This financing clause is a Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 412 Part 3 Business Sales, Contracts, and Competition Age Capacity Age capacity requires that both parties be at least the age of majority. In most states, that age is 18. Contracts entered into by minors (sometimes called infants) are voidable. A voidable contract of a minor allows the minor to choose not to honor the contract, in which case the other party to the contract will have no remedy. But some exceptions apply to the minors’ contracts rules. Some statutes make certain contracts of minors enforceable; for example, student loan agreements are enforceable against minors, as are agreements to enter the military. Minors’ contracts for such necessities as food and clothing are still voidable, but courts do hold minors liable for the reasonable value of those necessities. Yale Diagnostic Radiology v Estate of Fountain (Case 12.1) deals with an issue of a minor’s liability under a contract. CASE 12.1 Yale Diagnostic Radiology v Estate of Fountain Esta 838 A.2d 179 (Conn. 2003) © iStockPhoto.com/Photoevent Shooting for Payment from a Minor FACTS JUDICIAL OPINION In March 1996, Harun Fountain was shot in the back of the head at point-blank range by a playmate. As a result of his injuries, including the loss of his right eye, Fountain required extensive lifesaving medical services from a variety of medical services providers, including Yale Diagnostic Radiology (plaintiff). The expenses at Yale totaled $17,694. Yale billed Vernetta Turner-Tucker (Tucker), Fountain’s mother, but the bill went unpaid and, in 1999, Yale obtained a judgment against her. In January 2001, all of Tucker’s debts were discharged in bankruptcy, including the Yale judgment. There was no reference to Fountain’s father throughout the cases. Tucker filed suit against the boy who shot Fountain. However, Fountain succumbed to his injuries, passing away before the case was settled. The settlement on the tort case was placed into probate court as part of Fountain’s estate. Tucker was the administrator of Fountain’s estate. When the settlement was deposited, Yale asked the probate court for payment of its $17,694 judgment from the estate. The probate court denied the motion, reasoning that parents are liable for medical services rendered to their minor children and that a parent’s refusal or inability to pay for those services does not render the minor child liable. The probate court held that Yale could not get payment from the estate. Yale appealed to the trial court, and the trial court held for Yale. Tucker and the estate (defendants) appealed. BORDEN, Justice Connecticut has long recognized the common-law rule that a minor child’s contracts are voidable. Under this rule, a minor may, upon reaching majority, choose either to ratify or to avoid contractual obligations entered into during his minority. The traditional reasoning behind this rule is based on the well-established common-law principles that the law should protect children from the detrimental consequences of their youthful and improvident acts, and that children should be able to emerge into adulthood unencumbered by financial obligations incurred during the course of their minority. The rule is further supported by a policy of protecting children from unscrupulous individuals seeking to profit from their youth and inexperience. The rule that a minor’s contracts are voidable, however, is not absolute. An exception to this rule, eponymously known as the doctrine of necessaries, is that a minor may not avoid a contract for goods or services necessary for his health and sustenance. Such contracts are binding even if entered into during minority, and a minor, upon reaching majority, may not, as a matter of law, disaffirm them. The parties do not dispute the fact that the medical services rendered to Fountain were necessaries; rather, their dispute centers on whether Connecticut recognizes the doctrine of necessaries. CONTINUED Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 Chapter 12 . . . [W]e conclude that Connecticut recognizes the doctrine of necessaries. We further conclude that, pursuant to the doctrine, the defendants are liable for payment to the plaintiff for the services rendered to Fountain. Courts in other jurisdictions that have held that minors may be liable pursuant to the doctrine of necessaries for medical services have done so by applying varying legal theories. For example, some courts have held minors liable only if the creditor can show that the minor was not living with or being supported by his or her parents at the time the contract arose or the services were rendered. Still other courts have held minors liable after determining that the goods or services rendered were necessaries, and the minor’s parent or guardian was unwilling or unable to pay for them. See Schmidt v Prince George’s Hospital, 366 Md. 535, 555, 784 A.2d 1112 (2001) (minor’s father’s use of insurance proceeds to buy minor car sufficient for finding that father was unwilling to pay minor’s medical expenses). Still other courts have reasoned that the minor’s ever present secondary liability for payment for medical services rendered to him gives rise to an implied-in-law contract. . . . when a medical service provider renders necessary medical care to an injured minor, two contracts arise: the primary contract between the provider and the minor’s parents; and an impliedin-law contract between the provider and the minor himself. The primary contract between the provider and the parents is based on the parents’ duty to pay for their children’s necessary expenses, under both common law and statute. Such contracts, where not express, may be implied in fact and generally arise both from the parties’ conduct and their reasonable expectations. The primacy of this contract means that the provider of necessaries must make all reasonable efforts to collect from the parents before resorting to the secondary, implied-in-law contract with the minor. The present case illustrates the inequity that would arise if no implied in law contract arose between Fountain and the plaintiff. Fountain was shot in the head at close range and required emergency medical care. Under such circumstances, a medical services provider cannot stop to consider how the bills will be paid or by whom. Although the plaintiff undoubtedly presumed that Fountain’s parent would pay for his care and was obligated to make reasonable efforts to collect from Tucker Contracts and Sales: Performance, Remedies, and Collection before seeking payment from Fountain, the direct benefit of the services, nonetheless, was conferred upon Fountain. Having received the benefit of necessary services, Fountain should be liable for payment for those necessaries in the event that his parents do not pay. Fountain received, through a settlement with the boy who caused his injuries, funds that were calculated, at least in part, on the costs of the medical services provided to him by the plaintiff in the wake of those injuries. This fact further supports a determination of an implied-in-law contract under the circumstances of the case. Nothing in either the language or the purpose of [Connecticut’s statutes on minors] indicates an intent on the part of the legislature to absolve minors of their secondary common-law liability for necessaries. To the contrary, the purposes behind the statutory rule that parents are primarily liable and the common-law rule, pursuant to the doctrine of necessaries, that a minor is secondarily liable, when read together, serve to encourage payment on contracts for necessaries. Those purposes are (1) to reinforce parents’ obligation to support their children, and (2) to provide a mechanism for collection by creditors when, nonetheless, the parents either refuse or are unable to discharge that obligation. The undisputed facts show that Tucker had four years to pay the plaintiff’s bill for the services rendered to Fountain. She did not pay that bill even when the plaintiff pursued a collection action against her. These facts are sufficient to show that Tucker was unwilling or unable to pay for Fountain’s necessary medical services. The fact that Tucker may be supplying other necessaries, such as food and shelter, does not undermine the claim that she has not made payment for this necessary medical service, which was already provided by the plaintiff to Fountain. The judgment is affirmed. CASE QUESTIONS 1. Describe the series of events that led to Yale requesting that the minor pay for the medical services. 2. What public policy issues and concerns result from this decision? 3. What benefits does the decision provide? Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 413 Part 3 Business Sales, Contracts, and Competition Ethical Issues When Graduates Renege on Jobs When en a student accepts a job offer, there is a cont ntract. However, there is an increasing proble lem with students accepting employment offers o and then backing out at the last minute te. Calling it “looking out for their best interest rests,” students are telling recruiters that the they have received better offers and are no longer interested. Students also offering ng this explanation: “If the company has to downsize, they would cut me loose, so I have h the same right if my economic condit itions change.” Some students believe that u up until the time they report for work that they have only a job offer. The business press is not helpful in dissuading this view. For example, the Wall Street Journal included this advice in a boxed feature, “How to Back Out of a Job Offer—Gracefully,” in “‘Thanks, but No Thanks,’ for the Job, Grads Say” (Wall Street Journal, July 15, 2015, p. B1). One does not back out of a job offer— one reneges on a contract. And, technically, there would be damages for the company, such as the costs of trying to recruit a replacement for that position at a late date. Apart from the legal issues, there are ethical issues. One student said, “I can either make the firm I’m working with a little upset, or pass it up and always wonder, ‘what if?’” That statement shows an analysis model focused internally. List all the stakeholders in a student’s decision to renege. List the possible consequences of reneging. Sons of Thunder, Inc. v Borden, Inc. (Case 12.5) deals with the issue of business needs changing and whether performance can be excused. It is a case that some experts have labeled a landmark one in terms of imposing a duty of good faith in performance. It also contains issues of performance and termination of a contract. CASE 12.5 Sons of Thunder, Inc. v Borden, Inc. 690 A.2d 575 (N.J. 1997) © iStockPhoto.com/Photoevent Ships and Liability Passing in the Night? FACTS Borden, Inc., owned Snow Food Products Division, a leading producer of clam products. Borden had its own four-vessel fleet as well as independent boats for obtaining clams. Boats delivered the clams to Borden’s Cape May plant, where the shell stock was processed into clam meat. In 1978, Borden hired Donald DeMusz to be the captain of the Arlene Snow, one of Borden’s four boats. Eventually, Mr. DeMusz was hired as an independent contractor to manage Borden’s boats, and Mr. DeMusz formed Sea Labor, Inc., to be the company responsible for the management of those boats. Sea Labor received five cents per bushel of clams harvested by the four boats. At about the same time Mr. DeMusz was hired, Borden began its “Shuck-at-Sea” program, which enabled the fishermen to shuck the clams on the boat, thus allowing the boats to bring back larger amounts of clams, thereby reducing costs and eliminating the need for more plants and facilities. However, the existing boats were not large enough for the shucking equipment. Wayne Booker, a manager for Borden, asked Mr. DeMusz to undertake the Shuck-at-Sea program. Mr. DeMusz submitted a proposal that Mr. Booker and CONTINUED Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 © iStockPhoto.com/dane_mark 430 Chapter 12 other executives approved. Along with two partners, Mr. DeMusz formed Sea Works, Inc., and for $750,000 purchased the Jessica Lori, a clam-fishing boat with shucking equipment. Mr. DeMusz financed the purchase through a bank loan. An internal company memo from Mr. Booker included the following paragraph along with a description of how Mr. DeMusz’s purchase of a boat would save money: [W]e still have a significant mutual interest with DeMuse [sic]. His principal business will still be in chartering the Snow fleet and in captaining Arlene. He needs a dependable customer for the clams that he catches, either shell stock or meat. If we terminate our agreement with him, he would have a hard time making the payments on his boat. Mr. DeMusz drafted a one-page contract, and Mr. Booker approved it with one small change. Mr. DeMusz then formed Sons of Thunder, Inc., with Bill Gifford and Bob Dempsey in order to purchase the second boat. The final contract was entered into on January 15, 1985, and included the following provision: IT IS understood and Agreed to by the parties hereto that Snow Food Products shall purchase shell stock from Sons of Thunder Corp. for a period of one (1) year, at the market rate that is standardized throughout the industry. The term of this contract shall be for a period of one (1) year, after which this contract shall automatically be renewed for a period up to five years. Either party may cancel this contract by giving prior notice of said cancellation in writing Ninety (90) days prior to the effective cancellation date. Sons of Thunder Corp. will offer for sale all shell stock that is landed to Snow Food. In March 1985, Sons of Thunder bought a boat, the Sons of Thunder. The cost to rig and purchase the boat was $588,420.26. Sons of Thunder sought financing from First Jersey National Bank but was unable to obtain a loan until Mr. Booker told the bank representative that Mr. DeMusz had a solid relationship with Borden and that although the contract could be terminated within one year, Borden expected the contract to run for five years. Mr. Booker explained to the representative that the five-year term of the contract would be sufficient to pay back the loan. Ultimately, Mr. DeMusz obtained a $515,000 loan, which he, Mr. Gifford, Mr. Dempsey, and their spouses personally guaranteed. Mr. DeMusz used a personal note to cover the remaining balance. After some preliminary testing, the Sons of Thunder started to operate and to fulfill its contract with Borden. For most weeks, the records show that Borden did not Contracts and Sales: Performance, Remedies, and Collection 431 buy the minimum amount specified in the contract. Problems continued and the relationship between Mr. DeMusz and his companies and Borden began to deteriorate. When Borden discovered that a $500,000 accounting error had actually overstated the benefits of the Shuck-at-Sea program, Borden exercised its termination rights under the contracts and notified Mr. DeMusz of termination. Mr. DeMusz and his companies experienced substantial losses as a result of the termination of contracts. Mr. DeMusz filed suit. Borden moved for summary judgment on the grounds that it had properly exercised its termination rights. The jury found for Mr. DeMusz, the court of appeals affirmed, and Borden appealed. JUDICIAL OPINION GARIBALDI, Justice The question whether Borden performed its obligations in good faith appears before the Court. . . . The obligation to perform in good faith exists in every contract, including those contracts that contain express and unambiguous provisions permitting either party to terminate the contract without cause. See United Roasters, Inc. v Colgate-Palmolive Co., 649 F.2d 985 (4th Cir.), cert. denied, 454 U.S. 1054, 102 S.Ct. 599, 70 L.Ed.2d 590 (1981). In United Roasters, United Roasters gave Colgate the right to manufacture and distribute Bambeanos, its roasted soybean snack. The contract governing the relationship allowed Colgate to terminate its performance at any time during the test marketing period so long as it gave United Roasters thirty days’ notice. After two years of testing Bambeanos, Colgate announced plans to merge with Riviana Foods, Inc., and in the next five months, it ceased producing Bambeanos, stopped advertising them, sold its entire inventory of raw soybeans and Bambeanos, and transferred its product manager to another project. Eventually, Colgate terminated the contract. Interpreting North Carolina law in the diversity action, the Fourth Circuit concluded that North Carolina had not decided whether there was a good faith limitation on an unconditional right to terminate a contract. The Fourth Circuit did, however, evaluate United Roasters’ claim that Colgate violated the covenant of good faith and fair dealing. The panel stated What is wrong with Colgate’s conduct in this case is not its failure to communicate a decision to terminate . . . , but its cessation of performance. Clearly it had an obligation of good faith performance up until its right of termination was actually effective. The contract expressly obliged it to use its best efforts in the promotion of Bambeanos. Instead of doing that, it simply CONTINUED Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203 432 Part 3 Business Sales, Contracts, and Competition ceased performance. . . . Quite simply, it broke its contract when it terminated its performance, which was United Roasters’ contractual due. In Bak-A-Lum Corp., supra, 69 N.J. 123 (1976), this Court reached a similar conclusion even though the contract was oral and the parties had not discussed how the contract could be terminated. In that case, BakA-Lum and Alcoa made an oral agreement, which gave Bak-ALum an exclusive distributorship of aluminum siding and related products manufactured by Alcoa. Alcoa eventually terminated the exclusive part of the agreement by appointing four additional distributors. Even though Alcoa planned on terminating the distributorship, it encouraged Bak-A-Lum to expand its warehouse facilities, which substantially increased its operating costs. Despite acknowledging Alcoa’s unconditional right to terminate the contract, the Court upheld the verdict for Bak-A-Lum because it found that Alcoa had breached the implied covenant of good faith and fair dealing by withholding its plans to terminate the contract while encouraging the plaintiff to expand its facilities. As the Court explained: “While the contractual relation of manufacturer and exclusive territorial distributor continued between the parties an obligation of reciprocal good faith dealing persisted between them.” The Court found that the implied covenant of good faith and fair dealing required the defendant to give the plaintiff reasonable notice of its termination. Ultimately, the Court concluded that “a reasonable period of notice of termination of the distributorship . . . would have been twenty months.” The case most heavily relied on by Borden and the majority at the Appellate Division, Karl’s Sales & Service, Inc. v Gimbel Brothers Inc., 249 N.J. Super. 487 (App. Div.), cert. denied 127 N.J. 548 (1991), is distinguishable from this matter. In that case, the Appellate Division stated that where the contractual right to terminate is express and unambiguous, the motive of the terminating party is irrelevant. As stated previously, we agree with that view of the law. However, in Karl’s Sales, unlike this case and Bak-A-Lum, there were no allegations of bad faith or dishonesty on the part of the terminating party. Accordingly, Karl’s Sales did not address the issue we are concerned with here. Borden knew that Sons of Thunder depended on the income from its contract with Borden to pay back the loan. Yet, Borden continuously breached that contract by never buying the required amount of clams from the Sons of Thunder. Furthermore, after Gallant took Booker’s place, he told DeMusz that he would not honor the contract with Sons of Thunder. Nicholson also told DeMusz that he did not plan to honor that contract. Borden’s failure to honor the contract left Sons of Thunder with insufficient revenue to support its financing for the Sons of Thunder. Borden was also aware that Sons of Thunder was guaranteeing every loan that Sea Work had taken to finance the rerigging and purchasing costs for the [boat]. Thus, Borden knew that the corporations were dependent on each other, and that if one company failed, the other would most likely fail. Borden, however, fulfilled its obligations to Sea Work only for a short time before it began to breach that agreement. Eventually, Borden terminated its contract with Sea Work even though it knew that terminating the contract would leave Sea Work with no market to fish the Jessica Lori. The final issue is whether the jury’s assessment of $412,000, approximately one year’s worth of additional profits, for the breach of the implied covenant of good faith and fair dealing was a reasonable verdict. Specifically, can a plaintiff recover lost profits for a breach of the implied covenant of good faith and fair dealing? We agree with Judge Humphreys that the jury’s award of one year’s additional profits “is a reasonable and fair estimate of ‘expectation damages.’” Moreover, we agree with the trial court that lost profits are an appropriate remedy when a buyer breaches the implied covenant of good faith and fair dealing. In order to recover for lost profits under [Section 2-708(2)], the plaintiffs must prove the amount of damages with a reasonable degree of certainty, that the wrongful acts of the defendant caused the loss of profit, and that the profits were reasonably within the contemplation of the parties at the time the contract was entered into. The jury’s award of $412,000, approximately one year’s profit, for the breach of the implied covenant of good faith and fair dealing is reasonable and fair. Affirmed CASE QUESTIONS 1. Were all the DeMusz corporations completely dependent on Borden? 2. What impact does “good faith” have on termination of a contract? 3. What are the damages when there is a lack of good faith in the termination of a contract? 4. What provisions would you suggest be added to a contract such as this in which the relationship is one of contract but also one of dependence? Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
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