On appeal from the Superior Court of New Jersey, Law Division, Atlantic County.
Approved for Publication November 1, 1995. As Corrected November 14, 1995.
Before Judges Michels, Keefe and Humphreys. The opinion of the court was delivered by Michels, P.j.a.d. Humphreys, J.A.D. (Dissenting)
The opinion of the court was delivered by: Michels
The opinion of the court was delivered by MICHELS, P.J.A.D.
Defendant Borden, Inc. (Borden) appeals from a portion of a judgment of the Law Division entered on a jury verdict that awarded plaintiff Sons of Thunder, Inc., damages in the amount of $412,000 based on a breach of an implied covenant of good faith and fair dealing in terminating its contract with plaintiff and from a denial of its motion for a judgment notwithstanding the verdict. At issue, is whether an implied covenant of good faith and fair dealing under the facts of this case overrides a contractual right to terminate the subject contract without cause. We hold that it does not and, therefore, reverse the judgment entered in favor of plaintiff.
This appeal involves Borden's Snow Products Division in Cape May, New Jersey. Borden processes quahog clams for resale at its Cape May plant. Quahogs are found in the seabed twenty to forty miles offshore from Cape May in one-hundred to two-hundred feet of water. The quahog is a thick-shelled clam, which is almost impossible to open by hand. Therefore, a steam process is required to "shuck" the clams, that is, to open the shells to remove the meat. Once the meat is removed and processed, it is used to make such products as clam chowder, chopped clams, clam juice, and various sauces.
In the early to mid-1980's, all of those products were manufactured at Borden's plant in Pine Point, Maine. However, the clams utilized in that manufacture were shucked, processed, chilled down, and transported to the Maine plant from Borden's processing plant in Cape May. Before that processing could occur, the clams first had to be harvested and brought to Cape May.
To harvest the clams, Borden maintained a fleet of four boats in Cape May. Additionally, Borden purchased clams from independently owned and operated boats. One of the boats owned by Borden was the Arlene Snow, which was captained by Donald R. DeMusz (DeMusz). In the early 1980's, DeMusz pressed Borden to allow him to take over the management of Borden's fleet of four boats, promising an annual savings to Borden compared to the fees charged by Eric Kirkenberg, who was then managing Borden's fleet. Finally, in May 1983, Borden entered into a charter agreement with DeMusz's corporation, Sea Labor, Inc., to manage and operate Borden's fleet.
Around this time, Borden began to move forward on a long-considered project to shuck clams at sea immediately after harvest. The advantage of shucking clams at sea was that a bigger haul of clam meat could be obtained per boat trip because the weighty and voluminous shells were discarded at sea. A boat, therefore, could stay out at sea longer, collect more clam meat than non-shuck-at-sea boats, and have that clam meat chilled and ready for transport to the Maine plant almost immediately upon docking in Cape May.
By late 1983, Borden had developed equipment to process the clam meat at sea, and was prepared to install the equipment on a boat for testing. At first, Borden attempted to install the equipment on the Arlene Snow. However, the equipment required far more room than was available on the ninety-foot-long Arlene Snow, and Borden began its search for a larger boat. Charles Wayne Booker (Booker), who was Borden's Group Operations Manager in Columbus, Ohio, was in charge of the production and operation of Borden's Snow Food Products processing division. He began negotiations with DeMusz who was working closely with Borden on the shuck-at-sea project. DeMusz proposed that he would purchase a larger boat on which Borden could install the shuck-at-sea equipment. In exchange, Borden would purchase the clams harvested and processed by DeMusz at a set price. Booker saw advantages for Borden in DeMusz's proposal. First, because Borden would not have to purchase a larger boat, there would be an immediate and substantial savings in boat-purchase costs. Second, because the clam shells would be discarded at sea, Borden would avoid the environmental costs associated both with the disposal of the clam shells on land and with the related water treatment expenses incurred in the processing of the clams at the Cape May plant. Finally, Borden would also avoid the cost of drilling a new freshwater well at the Cape May plant, which would be necessary if the clams were processed at the plant and not at sea.
Borden eventually agreed to go ahead with DeMusz's proposal for the shuck-at-sea project. In January 1984, DeMusz and two partners formed Sea Work, Corp. (Sea Work). Sea Work purchased a large boat, the Baroid Bullet, which it renamed the Jessica Lori. After acquiring the Jessica Lori, Sea Work engaged a Texas shipyard to rig the boat for clamming. Borden required that the Jessica Lori be "rigged as a double rig" with two clam dredges, one of which was to be operated from the starboard side and the other from the port side of the boat. Although DeMusz objected to this double-rig arrangement because it occupied too much deck space and required additional crew members, which would increase maintenance costs, Sea Work went ahead with the project and double rigged the Jessica Lori. The total cost of purchasing and rigging the Jessica Lori was $750,000, which Sea Work financed through a bank loan.
On July 11, 1984, Borden and Sea Work entered into an "Equipment Lease" under which Borden agreed to place its shucking equipment on the Jessica Lori in exchange for Sea Work's agreement to sell to Borden the clam meat that was to be harvested and processed at sea over a period of three years at a set price. At the time that the Equipment Lease was executed, both Borden and Sea Work anticipated that Borden's shuck-at-sea processing equipment would be installed on the Jessica Lori, and would be tested and operational by the end of 1984. Unfortunately, Borden's processing equipment did not function properly and required extensive redesign before the equipment could be finally installed. This work was not accomplished until the spring of 1985. In the meantime, Sea Work's Jessica Lori engaged in harvesting quahog clams as an independent supplier, selling them to Borden at the Cape May plant.
Sometime in July or August 1984, DeMusz and Booker began Discussions concerning the possibility of DeMusz acquiring a second large boat. Borden wanted a second large boat under contract to assure a reliable supply of clams during bad weather when smaller boats could not venture out to sea. Additionally, if a second large boat were clamming for even a short period of time, that boat would benefit from any allocation system arising out of a then-anticipated change in the federal clam fishery rules, because any allocation of allowable clam harvest to a particular boat would be based on the boat's harvest history. A large all-weather boat would have a greater catch history. As a result, with a second large boat under contract, Borden could be guaranteed a reliable supply of raw clams even if a federal allocation system were implemented in the future.
Negotiations between DeMusz and Booker extended over the latter half of 1984. Booker reviewed the project with Herbert Southwell, Vice President and Manager of Borden's Grocery Products Division, and arranged for David Rau, Borden's Snow Products Division Accounting Manager, to work with DeMusz to calculate "how many bushels of quahogs a week Mr. DeMusz or his company would need to be able to sell to support the investment in this project." Eventually, Booker and DeMusz arrived at an understanding that DeMusz would purchase a second large boat and that Borden would enter into a contract to purchase a set amount of clams harvested weekly by that boat at a set price. In that manner, Borden would be assured of a dependable supply of clams, and DeMusz would be guaranteed both a purchaser for the clams and a reliable income stream to finance the boat.
On December 20, 1984, Booker sent DeMusz a letter, stating that Borden intended to enter into a quahog supply contract with him to support the purchase of a second large boat. Booker had previously reviewed this letter with Southwell and sent a copy to Borden's legal department. Moreover, Booker was aware that DeMusz would present the letter to a bank in an effort to obtain financing for the purchase and renovation of the second boat. Upon receipt of Borden's letter, DeMusz directed his attorney to form plaintiff corporation.
In late December 1984, DeMusz drafted a one-page contract and sent it to Booker for signature. Booker reviewed the contract with Southwell and received Southwell's permission to sign it. Shortly thereafter, Booker apparently telephoned DeMusz and informed him that the contract was acceptable. On December 26, 1984, DeMusz filed plaintiff's certificate of incorporation with the New Jersey Secretary of State. DeMusz and Robert Dempsey (Dempsey), Borden's plant manager at Cape May, were listed as directors of plaintiff corporation. The stock of plaintiff-corporation was owned equally by DeMusz, Dempsey and a William Gifford (Gifford). In early January 1985, Booker signed the contract on behalf of Borden. Booker then returned the signed document to DeMusz, who, on January 15, 1985, signed it on behalf of plaintiff.
At the time Booker signed the contract, he did not know that Dempsey had an undisclosed one-third interest in the plaintiff-corporation or that Dempsey had previously made a $25,000 loan to DeMusz. According to Booker, the contract between plaintiff and Borden would never have come into existence had he been informed of Dempsey's one-third interest in plaintiff because of Borden's conflict of interest rules. Dempsey, as Borden's manager at the Cape May plant, made the purchases of quahogs from independent boats. Booker testified that "absolutely it would have been a conflict of interest for Mr. Dempsey" to have any interest in plaintiff while at the same time being employed by Borden and that "it would have been a very bad thing for Robert Dempsey to have ownership interest in something that he would be controlling." Thus, there can be no question that Dempsey, as Borden's manager at the Cape May plant and being responsible for the purchase of quahogs from outside boats, violated Borden's conflict of interest rules by having an ownership interest in plaintiff.
It also appears that Booker placed trust in Dempsey and relied upon Dempsey more than any other subordinate regarding the operation of the Cape May plant. Booker testified that Dempsey told him in the presence of DeMusz that "it [the contract] was a good idea." Interestingly, Dempsey testified that plaintiff's "contract was unnecessary for [him] to get the quality clams . . . needed to run the [Cape May] plant." Notwithstanding this, Dempsey admitted that he never made this fact known to Booker before the contract was negotiated and signed.
Finally, and most importantly, Booker testified that in view of Borden's conflict of interest policy that required key managers, such as himself and Dempsey, to annually sign an affirmation that they do not have an undisclosed interest in any firm supplying products to Borden, he would not have signed the contract had he known of Dempsey's one-third interest without bringing it to Mr. Southwell's attention. Southwell testified that he "absolutely" had no knowledge that "Mr. Dempsey had an interest in suppliers providing shell stock to Borden" or that "Mr. Dempsey had made loans to or a loan to Mr. DeMusz." According to Southwell, it "would have been absolutely unacceptable to [him] and [he was] sure that it would have been absolutely unacceptable to [his] superiors at any level" for Borden to enter into an "agreement with a vessel-corporation owning a vessel in which Mr. Dempsey had an interest."
Dempsey admitted that in 1981, 1982 and 1983 he signed Borden's conflict of interest forms which required specific disclosure of any interest he had in any supplier to Borden. Dempsey also admitted signing one such form in 1985, and two in 1986, without disclosing to Borden his one-third interest in plaintiff. In fact, Dempsey signed a conflict of interest form on January 3, 1985, less than two weeks before plaintiff's contract with Borden was signed, and failed to disclose to Borden his interest in plaintiff. Thus, the proofs stand uncontroverted that Dempsey had a one-third interest in plaintiff, a supplier of quahogs to Borden; that notwithstanding Borden's conflict of interest policy, Dempsey did not disclose this conflict of interest to Borden; that neither Booker nor Southwell knew of Dempsey's loan to DeMusz or of Dempsey's ownership interest in plaintiff when the contract was signed; and, most importantly, that the contract would not have been entered into if Borden had known of Dempsey's undisclosed interest in plaintiff.
The full text of the contract prepared by plaintiff reads as follows:
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 Products with Snow Food Products having first right of refusal, but it is agreed upon that Snow Food Products will purchase at least 240 cages of ocean quahogs per week or 7,680 bushels of ocean quahogs, with the exception of annual plant shutdown and unforeseen plant shutdowns.
In accordance with the contract, Borden was to purchase from plaintiff a set quantity of quahogs per week at the market price for a term of one-year. At the end of the one-year period, the contract was to "automatically be renewed" for a five-year period unless one of the parties canceled the contract. The contract could be canceled by either party "by giving prior notice of said cancellation in writing Ninety (90) days prior to the effective cancellation date." Both Booker and DeMusz testified that the initial one-year period of the contract was not to commence until plaintiff presented a boat to Borden that was ready to harvest clams. Thus, the term of the contract was not to begin immediately, but rather was to await DeMusz's procurement and rigging of a second large vessel that could harvest clams.
In March 1985, plaintiff purchased a used, 130-foot oil rig supply boat named the Draco for $35,000. Plaintiff renamed the boat the Sons of Thunder, and placed it in a shipyard in Louisiana to be refabricated and rigged as a single-stern-dredge clamboat. The shipyard apparently went bankrupt, and after a four-month delay, plaintiff engaged another shipyard in Louisiana to prepare the boat. The Sons of Thunder was completed and ready to sail by the end of February 1986, almost one year after plaintiff had purchased the vessel. The cost of refrabicating and rigging the Sons of Thunder was $588,420.26 and plaintiff paid $515,000 of this sum with a bank loan and financed the balance by a personal note from DeMusz to the shipyard. The commitment for the bank loan was obtained by plaintiff in October 1985 and extended by the bank to February 1986. Booker confirmed to the bank's loan officer that Borden had a contract with plaintiff. In February 1986, the Sons of Thunder sailed to Cape May where it underwent sea trials, and in April 1986 the Sons of Thunder began harvesting quahog clams. According to all parties, at this time the one-year period of the contract commenced.
During this time, Sea Work's Jessica Lori, was harvesting clams and Borden was redesigning its shuck-at-sea processing equipment. In April 1985, the redesigned equipment was installed on the Jessica Lori. However, following sea trials, the equipment again proved defective. Borden then spent about five months trying to correct the problems on the Jessica Lori, thus preventing the boat from harvesting clams and meeting the fixed costs that were entailed in the boat's ownership and operation.
In the summer of 1985, DeMusz informed Booker that Sea Work was "out of money" and might be bankrupted unless something was done. According to Booker, Borden recognized that it had to somehow aid DeMusz with "his ongoing overhead expenses while we were basically preventing him from fishing with that boat." Booker and Southwell, therefore, arranged an advance of up to $125,000 from Borden to Sea Work to cover the Jessica Lori's overhead costs. Sea Work was to repay the advance later at the rate of ten cents per pound of clam meat harvested and processed by the Jessica Lori. This agreement was embodied in several separate written acknowledgements executed by DeMusz as president of Sea Work. Booker testified that the $125,000 which was advanced to Sea Work was not to bear interest and that DeMusz was not to be personally liable for the monies advanced. According to Booker, when he and Southwell arranged for the advance, they anticipated that Borden's shuck-at-sea processing equipment would soon be successfully operating on the Jessica Lori. However, Borden's equipment did not function as planned and there was not enough room for it on the double-side-rigged Jessica Lori. Consequently, in September 1985, Borden's equipment was removed so that Borden's engineers could redesign it. The Jessica Lori then harvested clams for Borden until February 1986, when it was decided that a shipyard would be engaged to convert the Jessica Lori from a double-rigged to a single, stern-rigged boat to better accommodate Borden's equipment. In February 1986, Sea Work placed the Jessica Lori in a shipyard in Baltimore, Maryland to make the conversion. The cost of converting the Jessica Lori was about $350,000 and DeMusz, on behalf of Sea Work, attempted to finance this amount through a bank loan. In July of 1986, Sea Work obtained a $150,000 loan to pay for the re-rigging. However, because the bank's loan would only partially cover the Jessica Lori 's re-rigging costs, DeMusz arranged for plaintiff to borrow $200,000, and to loan that amount to Sea Work. This loan was closed in November of 1986. Plaintiff was also required by the bank to guarantee all loans made to Sea Work. Thus, plaintiff effectively guaranteed the more than $750,000 that was then owed by Sea Work for work that had been done on the Jessica Lori. In order to obtain the dual corporate financing for the Jessica Lori 's conversion, the bank also required that there be identity of shareholders in plaintiff and Sea Work. To achieve this, Gifford and Dempsey, two of the three shareholders in plaintiff, bought out two of the other three shareholders in Sea Work. As a result, DeMusz, Gifford, and Dempsey became the sole shareholders of both plaintiff and Sea Work.
The Jessica Lori's conversion to a stern-rigged clamboat was completed by July 1986. Thereafter, the boat satisfactorily underwent sea trials and waited for Borden to finish its refabrication of the shuck-at-sea processing equipment. The equipment was installed on the boat during September and October of 1986. The equipment was tested at sea and performed quite well with no major problems. By November 1986, the Jessica Lori, utilizing Borden's shuck-at-sea processing equipment, was harvesting and processing clam meat for Borden.
In April 1986, as noted previously, plaintiff's Sons of Thunder began harvesting clams for Borden. On or about May 1, 1986, William Gallant (Gallant) took over Booker's position at Borden, after Booker was terminated as a result of a corporate reorganization and downsizing. It soon became apparent to DeMusz that the Sons of Thunder was not being sent on enough trips by Borden to harvest the number of clams agreed upon under the contract. It is undisputed that shortly after Gallant replaced Booker in early May 1986, DeMusz complained to Gallant that Borden was not purchasing the quota of clams allocated to plaintiff under the contract. *fn1 According to DeMusz, Gallant stated that he had been unaware of the contract between plaintiff and Borden, and that he was not going to honor the contract. When DeMusz pointed out that the contract had been approved by Booker and Southwell, Gallant informed DeMusz that Booker was no longer employed by Borden. DeMusz could not understand Gallant's attitude, testifying:
I couldn't understand it. I don't know why he had that attitude, but he just said he wasn't going to honor the contract. I vigorously complained to him trying to reason, I mean the company needed the clams, I couldn't understand why he just took a stand that he didn't want to honor it. It didn't make any sense.
Neither Southwell, who retired in May 1986, nor Robert Culver (Culver), who replaced Southwell in August 1986 and became Gallant's supervisor, increased Borden's utilization of Sons of Thunder. The result was that Borden was not purchasing the 7,680 bushels of clams per week required by the contract. In spite of this, and given Gallant's clear and unambiguous statement to DeMusz in May 1986 that Borden would not honor the contract, DeMusz continued to process the $200,000 loan on behalf of plaintiff to pay off the remainder of the Jessica Lori's re-rigging costs, and closed the loan in November 1986.
In September 1986, Borden acquired Doxsee Seafood Products Corporation, which had a clam processing plant in Lewes, Delaware. Robert Nicholson (Nicholson), Doxsee's Delaware plant manager, became the manager of Borden's plant in Cape May, replacing Dempsey. Dempsey was demoted to the position of boat manager. DeMusz approached Nicholson and told him about the clam-supply contract between Borden and plaintiff. Nicholson contacted Gallant, and thereafter Nicholson informed DeMusz, as had Gallant previously, that Borden would not honor the contract. The situation soon worsened for the Sons of Thunder, which was sent out to harvest clams for Borden only in foul weather.
In mid-November 1986, Dempsey apparently had a conversation with Nicholson, in which Nicholson purportedly stated that he wanted to make money through kickbacks, shorting clam-meat yields, or changing cages. Dempsey told Nicholson that he was a part-owner of the Sons of Thunder and that he would have nothing to do with such illegal schemes. As a result of Dempsey's revealing his ownership interest in plaintiff, Borden began an investigation to determine whether Dempsey had violated Borden's conflict-of-interest policy by failing to disclose his ownership interest in plaintiff. During the course of that investigation, Borden also learned of Dempsey's one-third interest in Sea Work, which owned the Jessica Lori and was also supplying clam meat to Borden. As a result of the investigation, Dempsey was terminated by Borden on February 25, 1987.
A day or two after Dempsey was terminated, DeMusz contacted Gallant and told him about Nicholson's reputation for demanding kickbacks from independent boat operators. Gallant apparently disbelieved DeMusz and informed Nicholson of DeMusz's allegations. Nicholson denied the allegations and then reprimanded DeMusz for informing on him. Over the next two months, Borden purchased fewer and fewer clams from the Sons of Thunder, and plaintiff began to fall behind in meeting the boat's expenses.
On May 8, 1987, Borden gave plaintiff ninety-days written notice that it was terminating the contract. The termination letter read: "This letter is to advise you that effective ninety (90) days from the date of receipt of this letter, Borden terminates the Purchase Agreement dated January 15, 1985 by and between Snow Food Products, division of Borden, Inc. and Sons of Thunder Corp." According to Culver, the contract was terminated because Borden saw no need "to maintain that type of relationship with the boat [Sons of Thunder] because of the clams, that we really didn't need to get the clams from that specific boat," and also because the plant manager was terminated for a conflict of interest in that he had an ownership interest in the boat. Furthermore, Culver testified that "from a relationship standpoint, it [DeMusz] wasn't really someone who I felt that Borden really needed to be doing any business with unless it was absolutely necessary. And in this case, it was not absolutely necessary." On the same day that Borden terminated plaintiff's contract, it also gave notice of termination of the Sea Work contract involving the Jessica Lori. Within two weeks, Borden removed the clam-dredging cages from the Sons of Thunder.
Gallant approached DeMusz and proposed that Sea Work's Jessica Lori could continue to harvest clams for Borden if DeMusz were the sole owner of the vessel. In or about June 1987, DeMusz purchased Gifford's and Dempsey's stock in Sea Work and Gifford and Dempsey purchased DeMusz's stock in plaintiff. Gifford and Dempsey, who now were the sole stockholders of plaintiff, attempted to find a processor in New Jersey for any clams that Sons of Thunder could harvest. Unable to do so, they moved the boat to Chincoteague, Virginia, where they supplied clams to a small processor. DeMusz, who was now the sole stockholder of Sea Work, decided to remove Borden's shuck-at-sea processing equipment from the Jessica Lori to eliminate the rental fees for that equipment.
Gallant again approached DeMusz about signing a personal note for the $125,000 advance made by Borden to Sea Work, and on July 28, 1987, even though Borden had terminated the contract with plaintiff and Sea Work, DeMusz signed a personal guarantee. Thereafter, Gallant told Nicholson that the Jessica Lori had "first priority" over the other independent boats that supplied clams to Borden. According to DeMusz, Nicholson demanded a fifteen-cents-per-bushel kickback on all clams harvested by the Jessica Lori and supplied to Borden. DeMusz paid. However, the Jessica Lori 's overhead was simply too large to be supported without a supply contract. DeMusz, therefore, moved the Jessica Lori to Virginia and later to New Bedford, Massachusetts, but met with no success at either location. In September 1987, Borden fired Nicholson for soliciting and receiving kickbacks from clam supply boats. In October 1988, DeMusz gave up his stock ownership interest in Sea Work and the Jessica Lori.
Plaintiff thereafter instituted this breach of contract action against Borden. Plaintiff claimed that Borden breached both the express terms of the January 15, 1985 contract and the implied covenant of good faith and fair dealing. Plaintiff sought damages of (1) $150,000 for Borden's failure to purchase the quahog clams in the minimum quantity at the market price in accordance with the contract; (2) $950,000 for Borden's failure to purchase quahogs for the period from April 7, 1986 until the Sons of Thunder was sold in December 1989; and (3) $800,000 for the diminished market value of Sons of Thunder.
At the Conclusion of the proofs, the trial court submitted the case to the jury on both theories advanced by plaintiff, to wit, that Borden breached its obligations to purchase a set quantity of quahog clams and to pay the market price for those clams in accordance with the express terms of the contract of January 15, 1985 and that Borden breached its implied covenant of good faith and fair dealing by terminating the contract by its letter of May 8, 1987. Plaintiff claimed that the contract was for a one-year period during which either party could give a ninety-day notice of termination and that, thereafter, if notice was not given, the contract was to extend for five years. Borden, on the other hand, claimed that it had the right to terminate the contract on ninety-days written notice at any time. The trial court, finding that the termination provision of the contract was ambiguous, submitted the issues to the jury, instructing the jury to determine whether Borden breached the express terms of the contract as well as the implied covenant of good faith and fair dealing in terminating the contract.
The trial court instructed the jury as to the damage elements: first, damages for the period from April 7, 1986, when the Sons of Thunder commenced fishing for Borden until August 8, 1987, when the contract was terminated, based on Borden's failure to purchase the minimum quantity of quahog clams at the market price in accordance with the contract; second, damages for lost sales to Borden for the full five-year period of the contract; and third, damages for the loss of its federal quahog allocation based on catch history. Plaintiff contended that it was foreseeable when the parties entered into the contract on January 15, 1985, that there was going to be a quahog allocation based on a vessel's catch history, and that because of Borden's breach of the contract, the catch history of the Sons of Thunder would be low and a higher allocation would be lost, with resultant damages.
At the Conclusion of the charge, the trial court submitted the following interrogatories which the jury answered:
1.(a) Do you find that between April 7, 1986 and August 8, 1987 defendant, Borden, Inc., breached the Contract with plaintiff, Sons of Thunder, Inc., by not purchasing the minimum quantity of quahogs specified in the Contract, 7,680 bushels per week, and/or by not paying the market price for such quahogs?
If your answer to question #1(a) is "No", proceed directly to question #2; if your answer is "Yes", proceed to answer question #1(b).
1.(b) What do you find to be the amount of damages, if any, incurred by plaintiff, Sons of Thunder, Inc., as a result of this (these) breach(es) of contract?
2. Do you find that defendant, Borden, Inc., breached the Contract with plaintiff, Sons of Thunder, Inc., by terminating the Contract by its letter of May 8, 1987?
3. Do you find that defendant, Borden, Inc., breached its obligation of good faith and fair dealing to plaintiff, Sons of Thunder, Inc., in terminating the Contract by its letter of May 8, 1987?
If you have answered "No" to BOTH questions #2 and #3, cease your deliberations and advise the jury attendant that you have reached your verdict; if you have answered "Yes" to question #2 and/or #3, proceed to answer question #4.
4. What sum of money, if any, expressed in a lump sum, will adequately and justly compensate the plaintiff, Sons of Thunder, Inc., for: a) Damages as a result of lost sales to Borden, Inc., if any
b) Damages as a result of lost sales to other processors, if any
5. Do you find that it was foreseeable on January 15, 1985, that the Federal Government would institute a quahog allocation system based upon a vessel's catch history and that plaintiff would suffer a loss of quahog allocation in the event of a breach by Borden, Inc., of the January 15, 1985 Contract?
6. If you have answered "No" to question #5, cease your deliberations and advise the jury attendant that you have reached a verdict; if you have answered "Yes" to question #5, proceed to answer question #6.
Set forth the lost quahog allocation damages, if any, incurred by plaintiff, Sons of Thunder, Inc.,
During deliberations, the jury asked the following question: "Your Honor, if we were to award money for lost profits from sales, can we also award damages based on breach of good faith and fair dealing for the same time period?" The trial court found that the jury was actually inquiring as to whether it could award damages for the period after the ninety days following the termination letter of May 7, 1987, that is, after August 7, 1987. The trial court concluded, therefore, with the concurrence of all counsel, that the jury's question in effect involved the construction of Interrogatory No. 4, and, instructed the jury that damages could be awarded in answer to Interrogatory No. 4 for a separate period of time after August 8, 1987. The trial court specifically instructed the jury in answering its question as follows:
With respect to your request, and you're talking about during that ninety-day time period? Any and all losses up to August 8th, 1987, which would be that ninety-day time period, would be answered in 1-B, and the lost sales in 4-A and B would be after August 8th of 1987. Okay? These lost sales are after the August 8th because number 1-A and 1-B simply talk about all the way up to August 8th, '87, which is the end of the ninety-day time period; that puts one category. And then the balance of that is everything that plaintiff is claiming after August 8th, '87. . . .
Thereafter, as appears from the verdict form, the jury found, by a five-one vote, that between August 7, 1986 and August 8, 1987, Borden breached its contract with plaintiff by not purchasing the minimum quantity of quahogs and by not paying the market price for such quahogs as required by the contract and, by an unanimous vote, awarded plaintiff damages for that period in the sum of $326,292. The jury also found, by a five-one vote, that Borden did not breach its contract with plaintiff by terminating the contract by its letter of May 8, 1987. Notwithstanding this finding, the jury further found, by a unanimous vote, that Borden had breached its implied obligation of good faith and fair dealing to plaintiff in terminating the contract by its letter of May 8, 1987 and, by a five-one vote, awarded plaintiff damages for lost sales to Borden (after August 7, 1987) in the amount of $412,000. Finally, the jury found, by a five-one vote, that it was not foreseeable on January 15, 1985 that the federal government would institute a quahog allocation system based upon a vessel's catch history and that plaintiff would suffer a loss of quahog allocation in the event of a breach by Borden of the January 15, 1985 contract. Borden's motion for a judgment of no cause for action notwithstanding the liability verdict that awarded plaintiff $412,000 based on a theory of breach of an implied covenant of good faith and fair dealing was denied. Borden appealed and plaintiff cross-appealed.
While this matter was pending on appeal, plaintiff and Borden entered into a stipulation pursuant to which Borden agreed, among other things, to immediately satisfy the $326,292 judgment in favor of plaintiff based on Borden's failure to purchase the minimum number of quahog clams at the market price in accordance with the contract prior to its termination on August 8, 1987 and plaintiff agreed to withdraw its cross-appeal. Thus, the only issues remaining on this appeal relate to the jury's verdict of liability and the damage award of $412,000 based on the jury's finding that Borden breached the covenant of good faith and fair dealing to plaintiff in terminating the contract by its letter of May 8, 1987.
Borden seeks a reversal of the portion of the judgment that awarded plaintiff $412,000 in damages, contending that (1) an implied convenant of good faith and fair dealing cannot override an express contract right to terminate a contract, particularly, where, as here, the jury expressly found that Borden did not breach its contract with plaintiff by terminating it as of August 8, 1987, and (2) the $412,000 damage award cannot be sustained because plaintiff cannot recover more than the value of the contract prior to its termination on August 8, 1987.
The polestar of contract construction is to discover the intention of the parties as revealed by the language used by them. Jacobs v. Great Pacific Century Corp., 104 N.J. 580, 582, 518 A.2d 223 (1986); Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N.J. 293, 301, 96 A.2d 652 (1953); Casriel v. King, 2 N.J. 45, 50, 65 A.2d 514 (1949). To this end, the language used must be interpreted "'in accord with Justice and common sense.'" Krosnowski v. Krosnowski, 22 N.J. 376, 387, 126 A.2d 182 (1956) (citation omitted). As our Supreme Court noted in Tessmar v. Grosner, 23 N.J. 193, 201, 128 A.2d 467 (1957):
In the quest for the common intention of the parties to a contract the court must consider the relations of the parties, the attendant circumstances, and the objects they were trying to attain. An agreement must be construed in the context of the circumstances under which it was entered into and it must be accorded a rational meaning in keeping with the express general purpose. Cameron v. International, etc., Union No. 384. 118 N.J. Eq. 11, 176 A. 692 (E. & A. 1935); Mantell v. International Plastic Harmonica Corp., 141 N.J. Eq. 379, 55 A.2d 250 (E. & A. 1947); Heuer v. Rubin, 1 N.J. 251, 62 A.2d 812 (1949); Casriel v. King, 2 N.J. 45, 65 A.2d 514 (1949); Owens v. Press Publishing Co., 20 N.J. 537, 543, 120 A.2d 442 (1956).
See also Jacobs, supra, 104 N.J. at 582; Anthony L. Petters Diner, Inc. v. Stellakis, 202 N.J. Super. 11, 28, 493 A.2d 1261 (App. Div. 1985); Bruenn v. Switlik, 185 N.J. Super. 97, 105, 447 A.2d 583 (App. Div.), certif. denied, 91 N.J. 536 (1982); Ins. Co. of State of Penna. v. Palmieri, 81 N.J. Super. 170, 179, 195 A.2d 205 (App. Div. 1963), certif. denied, 41 N.J. 389 (1964); Union County U-Drive It v. Blomeley, 48 N.J. Super. 252, 256, 137 A.2d 428 (App. Div. 1958).
Also, where an ambiguity appears in a written agreement, the writing is to be strictly construed against the party preparing it. See In re Miller, 90 N.J. 210, 221, 447 A.2d 549 (1982); Liqui-Box Corp. v. Estate of Elkman, 238 N.J. Super. 588, 599, 570 A.2d 472 (App. Div. 1990). This rule of construction is somewhat tempered by the principle that although "a contractual provision should generally be construed narrowly against the drafter, [citation omitted], the construction should be sensible and in conformity with the expressed intent of the parties." Broadway Maintenance Corp. v. Rutgers, 90 N.J. 253, 271, 447 A.2d 906 (1982). In this regard,
Even where the intention is doubtful or obscure, the most fair and reasonable construction, imputing the least hardship on either of the contracting parties, should be adopted [citation omitted], so that neither will have an unfair or unreasonable advantage over the other. [ Tessmar, supra, 23 N.J at 201.]
However, "where the terms of a contract are clear and unambiguous there is no room for interpretation or construction" and the courts must enforce those terms as written. Levison v. Weintraub, 215 N.J. Super. 273, 276, 521 A.2d 909 (App. Div.), certif. denied, 107 N.J. 650 (1987). See also Kampf v. Franklin Life Ins. Co., 33 N.J. 36, 43, 161 A.2d 717 (1960). The court has no right "to rewrite the contract merely because one might conclude that it might well have been functionally desirable to draft it differently." Brick Tp. Mun. Util. Auth. v. Diversified R.B. & T., 171 N.J. Super. 397, 402, 409 A.2d 806 (App. Div. 1979). Nor may the courts remake a contract better than the parties they themselves have seen fit to enter into, or to alter it for the benefit of one party to the detriment of the other. James v. Federal Insurance Co., 5 N.J. 21, 24, 73 A.2d 720 (1950).
Viewed in light of these settled principles, and the jury's specific finding that Borden did not breach its contract with plaintiff by terminating the contract by its letter of May 8, 1987, the $412,000 judgment in favor of plaintiff based on the theory that Borden breached its obligation of good faith and fair dealing cannot stand. When the jury found that Borden did not breach the contract by terminating the contract by its letter of May 8, 1987, the jury's inquiry should have ended. The trial court erred in failing to so instruct the jury.
Furthermore, the right of Borden to terminate the contract on ninety-days notice in accordance with its express terms cannot be overridden or eliminated by an implied covenant of good faith and fair dealing. We recognize the underlying contract law principle that "there is an implied covenant that neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract; in other words, in every contract there exists an implied covenant of good faith and fair dealing." 5 Williston on Contracts § 670 (Jaeger, 3rd ed. 1961). See also 2 Restatement(Second) of Contracts § 205 (1981). In fact, our Supreme Court has explicitly held that such a covenant is implied in every contract, Onderdonk v. Presbyterian Homes of N.J., 85 N.J. 171, 182, 425 A.2d 1057 (1981), and that the covenant applies to the parties' performances and their enforcement of the contract. Pickett v. Lloyd's, 131 N.J. 457, 467, 621 A.2d 445 (1993). Similarly, N.J.S.A. 12A:1-203 of the Uniform Commercial Code (U.C.C.), expressly provides that "every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement." Further, the U.C.C. defines "good faith" as "honesty in fact in the conduct or transaction concerned." N.J.S.A. 12A:1-201(19).
However, an implied covenant of good faith and fair dealing cannot override or eliminate a party's right to terminate a contract in accordance with its express provisions. The reason for this is readily apparent; an implied obligation of good faith and fair dealing does not and cannot "alter the terms of a written contract." Rudbart v. North Jersey District Water Supply Comm'n, 127 N.J. 344, 366, 605 A.2d 681, cert. denied, 506 U.S. , 113 S. Ct. 203, 121 L. Ed. 2d 145 (1992); Glenfed Financial v. Penick Corp., 276 N.J. Super. 163, 175, 647 A.2d 852 (App. Div. 1994), certif. denied, 139 N.J. 442 (1995). Consequently, an implied covenant should not have been invoked to bar Borden from exercising its right to terminate the contact on ninety-days notice. Certainly such a covenant cannot be implied in the circumstances of this case to compel Borden to purchase quahog clams from plaintiff for the entire five-year term of the contract, or until plaintiff paid off its loan on the Sons of Thunder and its guarantee of Sea Work's loans on the Jessica Lori.
Persuasive authority that has considered this issue both under common law principles and under the U.C.C. have reached similar Conclusions. For example, in Karl's Sales & Serv. v. Gimbel Bros., 249 N.J. Super. 487, 592 A.2d 647 (App. Div.), certif. denied, 127 N.J. 548 (1991), we refused to find that an implied covenant barred Gimbel Brothers, Inc. (Gimbel) from terminating its business entity without incurring liability to Karl's Sales & Service, Inc. (Karl's). There, Karl's, an appliance - department store licensee, sued Gimbel, a department store licensor, after Gimbel elected to close six department stores. As part of the closures, Gimbel terminated its leases with Karl's pursuant to an express and unambiguous provision in the lease agreements, which allowed lease termination if a store were closed. The trial court entered judgment in favor of Karl's, implicitly concluding that there was an implied covenant that Gimbel would continue in business. We reversed, holding that Gimbel had an absolute right under the subject leases to close the stores and that there was no legal or factual basis to imply a good faith covenant that Gimbel would continue in business. In reaching this Conclusion, we emphasized:
The law is clear that where the right to terminate a contract is absolute under the wording in an agreement, the motive of a party in terminating such an agreement is irrelevant to the question of whether the termination is effective. Triangle Min. Co. v. Stauffer Chemical Co., 753 F.2d 734, 740 (9th Cir. 1985); Blalock Machinery v. Iowa Mfg. Co., 576 F. Supp., 774, 777-78 (N.D.Ga. 1983); Augusta Medical Complex, Inc. v. Blue Cross of Kansas, Inc., 227 Kan. 469, 608 P.2d 890, 896 (1980) (citing to Zaidan v. Borg-Warner Corporation, 228 F. Supp. 669, 671 (E.D. Pa. 1964), aff'd, 341 F.2d 391 (3rd Cir. 1965); Kraus v. General Motors Corporation, 120 F.2d 109 (2nd Cir. 1941)). See Smith v. Price's Creameries, 98 N.M. 541, 650 P.2d 825, 830 (1982). Therefore, Gimbel could close any or all of its stores for any reason. Here, Gimbel closed the six stores covered by the licensing agreements and gave Karl's the notice required by the agreements. Gimbel cannot legally be held liable to Karl's for any claimed damages ensuing out of the license terminations. [Id. at 495.]
In Custom Com. Eng. v. E.F. Johnson Co., 269 N.J. Super. 531, 542, 636 A.2d 80 (App. Div. 1993), we again recognized that where "the right 'to terminate a contract is absolute under the wording in an agreement, the motive of a party in terminating such an agreement, is irrelevant to the question of whether the termination is effective.'" (citation omitted). This holding is consistent with the generally accepted principle that "when a party has the right to terminate a contract, no money damages can be recovered on the ground that the termination was made in bad faith." 1 Ronald Anderson, Uniform Commercial Code, § 1-203:11 (3rd Ed. 1981).
Similarly, in Blalock Machinery v. Iowa Mfg. Co., 576 F. Supp. 774, 777-78 (N.D. Ga. 1983), the Federal District Court rejected a plaintiff's claim that a defendant's motion for summary judgment should be denied where plaintiff argued both that genuine issues of material fact existed as to whether or not the termination of the contract was made in good faith and that every contract or duty within the U.C.C. imposes an obligation of good faith in its performance or enforcement. The Federal District court stated:
The court recognizes that the good faith obligation of the UCC has been adopted by Iowa, see Iowa Code Ann. § 554.1203, and is applicable to distributorship contracts, however, the parties have not cited and the court has not found any cases applying Iowa law that hold that the good faith obligation overrides the express terms of the contract. In the absence of any authority, the court, in agreement with the Fifth Circuit in Corenswet, is not persuaded that the section 1-203 good faith obligation can be used to override or strike express contract terms. Corenswet, supra, at 138. In other words, the court declines to conclude that the UCC prohibits arbitrary termination of distributorship contracts. The express terms of the contract state that either party may terminate the contract at any time. There is no specific language in the termination clause which states that such termination may only be made with cause. Absent such language, it is logically inferred and may be concluded that either party may terminate the contract at any time without cause, and the court believes the parties to have "understood" the termination clause to mean such. Therefore, given the express terms of the contract, the motives of the defendant in terminating the plaintiff are irrelevant. See Augusta Medical Complex v. Blue Cross, supra.
The court believes the statement in Corenswet regarding the termination of contracts without cause and the lack of good faith to be applicable to the instant case:
The question these cases present is whether public policy forbids enforcement of a contract clause permitting unilateral termination without cause. Since a termination without cause will almost always be characterizable as a "bad faith" termination, focus on the terminating party's state of mind will always result in the invalidation of unrestricted termination clauses. We seriously doubt, however, that public policy frowns on any and all contract clauses permitting termination without cause. Such clauses can have the salutary relief of permitting parties to end a soured relationship without consequent litigation.
594 F.2d at 138. Furthermore, given the fact that either party had the power to unilaterally terminate the contract without cause, it cannot be said that the plaintiff could not have done the same as the defendant and terminated the contract for whatever reason or for no reason.
The court in Corenswet concluded that "the Code does not ipso facto bar unilateral arbitrary terminations of distributorship agreements, and that Iowa's adoption of the Code therefore left undisturbed the law reflected" in the decision of ...