On appeal from the Superior Court, Appellate Division, whose opinion is reported at 285 N.J. Super. 27 (1995).
The opinion of the Court was delivered by Garibaldi, J. Chief Justice Poritz and Justices Handler, Pollock, O'hern, Stein and Coleman join in Justice GARIBALDI's opinion.
The opinion of the court was delivered by: Garibaldi
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
Sons of Thunder, Inc. v. Borden, Inc. (A-37-96)
Argued December 2, 1996 -- Decided March 11, 1997
GARIBALDI, J., writing for a unanimous Court.
This appeal concerns a breach of contract action.
The facts in this case and the interrelationship of the parties are somewhat involved. In 1978, Borden, Inc. (Borden), a leading producer of clam products, hired Donald DeMusz to be the captain of one of its four boats that it used to harvest clams. Several years later, Borden began to implement a long-considered project that would enable the fishermen to shuck the clams on the boat and thereby provide a bigger haul of clams per boat trip. DeMusz discussed the project with a Borden executive, Wayne Booker and proposed to purchase a large boat, to rig it to Borden's specifications, and to use it in conjunction with Borden for the "Shuck-at-Sea" project. The proposal was approved and DeMusz formed Sea Work, Inc. with two partners to implement his proposal. Thereafter, Sea Work and Borden entered into an "equipment lease," which allowed Borden to place its shucking equipment on the Jessica Lori, the boat purchased by Sea Work, in exchange for Sea Work offering to Borden all the clam meat shucked by theJessica Lori at fifty cents per pound.
Shortly after entering into the equipment lease, Booker and DeMusz began negotiations about DeMusz purchasing a second boat that could provide clams to Borden. Booker, on behalf of Borden, and DeMusz entered into an oral agreement, which gave DeMusz a long-term supply contract for the second boat. After the oral agreement was reduced to writing, DeMusz, along with two other partners, formed Sons of Thunder, Inc. to buy the second boat. The contract, which is the focus of this appeal, provided for a term of one year, after which the contract would automatically be renewed for a period of up to five years. The contract further allowed either party to cancel the contract by giving prior notice in writing ninety days prior to the effective cancellation date. Sons of Thunder sought financing to purchase a boat, but was unable to obtain a loan until Booker intervened in the negotiations, telling the bank that DeMusz had a solid relationship with Borden and that Borden expected the contract to run for five years, which would allow DeMusz to repay the loan. Although a boat was eventually purchased and operational, the records showed that, for most weeks, Borden did not purchase the minimum amount of clams that had been specified in the contract.
During the time that DeMusz and Borden were negotiating about the contract with Sons of Thunder, the parties discovered that Borden's equipment would not work on the Jessica Lori, eventually requiring DeMusz to obtain additional financing to rerig the boat. Around the time that the reconfigured equipment was being installed on the Jessica Lori, Borden had some changes in its corporate structure that had a major impact on DeMusz's contracts. Booker had left Borden and been replaced by Gallant, who refused to honor the contract with the Sons of Thunder. In addition, after the Jessica Lori was finally properly rigged and operational, Borden acquired Doxee, a Delaware seafood company, along with its fishing boats, and brought in an new plant manager, who also refused to purchase from the Sons of Thunder and the Jessica Lori. Furthermore, when DeMusz tried to sell the clam meat to other suppliers, Borden charged Sea Work a rental fee for using the shucking equipment.
On May 8, 1987, Borden sent both Sea Work and Sons of Thunder letters, notifying them that it was terminating the contracts. Both letters complied with the time limitations of the two contracts. After the contracts were terminated, no markets existed for the two boats. Borden, nevertheless, told DeMusz that it would continue to buy shell stock from the Jessica Lori only if DeMusz were the sole owner of the boat. Although DeMusz became the sole owner of the Jessica Lori, the new plant manager refused to follow instructions to purchase from DeMusz until DeMusz paid him a kickback. Eventually, DeMusz sold the Jessica Lori because of extreme financial difficulties. He was left financially devastated.
In April 1990, Sons of Thunder, now owned only by DeMusz's two partners, filed suit against Borden to recover for its alleged breaches of contract. Initially, the complaint sought damages for Borden's failure to buy the contractual amount of clams and failure to pay the contractual price prior to the purported termination of the contract; for Borden's failure to buy clams after the purported termination; and for the decrease in value of the Sons of Thunder due to Borden's breaches. The complaint was subsequently amended to include a cause of action against Borden for breaching its covenant of good faith and fair dealing.
Before trial, Borden made a motion to preclude Sons of Thunder from introducing any testimony at trial concerning the circumstances surrounding the termination of the contract, arguing that the terms of the contract were clear and unambiguous. The trial court denied Borden's motion, finding the contract to be ambiguous. In response to specific interrogatories, the jury found that Borden had not breached its contract with Sons of Thunder by virtue of its termination of the contract but that it had breached its obligation of good faith and fair dealing in terminating the contract. The jury awarded $412,000 to Sons of Thunder for lost sales to Borden. Following the jury verdict, Borden moved for judgment notwithstanding the verdict (JNOV), arguing that a party cannot be held liable for breaching the implied covenant of good faith and fair dealing when the contract contains an express termination clause. The trial court denied Borden's motion.
Borden filed an appeal and Sons of Thunder filed a cross-appeal. The parties stipulated to narrowing the issues, so that the sole issue on appeal was whether the trial court properly denied Borden's motion for JNOV on the bad faith claim. The majority of the Appellate Division held that the right of Borden to terminate the contract in accordance with the express terms of the contract could not be overridden or eliminated by an implied covenant of good faith and fair dealing. The Dissenting opinion rejected the majority's view of both the law and the facts and further found that, in every contract, there exists an implied covenant that each party will perform its obligations in good faith.
Sons of Thunder appealed as of right.
HELD: A party to a contract may breach the implied covenant of good faith and fair dealing in performing its obligations even when it exercises an express and unconditional right to terminate and the trial court correctly determined that the jury could have reasonably found that Borden breached it obligation to perform its duties in good faith.
1. An appellate court has the same task and is bound by the same standard of review as a trial court in reviewing a motion for JNOV. (pp. 23-24)
2. When reviewing a trial court's instruction to the jury, an appellate court must read the charge as a whole and should not reverse a trial court where charges adequately convey the law and do not confuse or mislead the jury. (p. 28)
3. A trial court's interrogatories to a jury are not grounds for reversal unless they were misleading, confusing, or ambiguous. (pp. 28-29)
4. Although a party's motive in terminating a contract is irrelevant as it relates to the alleged violation of the express termination clause, the jury must still decide whether the parties breached the implied obligation of good faith and fair dealing in its performance of the contract. (pp. 29-30)
5. Although the Uniform Commercial Code (UCC) governs this case, the obligation to perform in good faith found in the common law exists in every contract, including those with express termination clauses. (pp. 30-35)
6. Lost profits are an appropriate remedy when a buyer breaches the implied covenant of good faith and fair dealing. (pp. 37-40)
Judgment of the Appellate Division is REVERSED and the judgment of the trial court is REINSTATED.
CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, O'HERN, STEIN and COLEMAN join in JUSTICE GARIBALDI's opinion.
The opinion of the Court was delivered by
This appeal concerns a breach of contract action and is before us as a matter of right. R. 2:2-1(a)(2). The jury held that Borden, Inc., defendant-respondent, breached its contract with Sons of Thunder, Inc., plaintiff-appellant. Borden moved for a judgment notwithstanding the verdict, which the trial court denied. We must decide whether the majority of the Appellate Division properly found that the trial court erroneously denied Borden's motion for a judgment notwithstanding the verdict. 285 N.J. Super. 27, 666 A.2d 549 (1995). We find that the trial court was correct in denying that motion. Therefore, we reverse the Appellate Division.
Before examining the facts, it is important to understand that the parties view this appeal differently. Plaintiff believes that Borden breached the contract in two ways: (1) by terminating the contract contrary to the termination clause; and (2) by breaching the implied covenant of good faith and fair dealing in performing the contract. Plaintiff asserts that three corporations, Sons of Thunder, Inc., Sea Labor, Inc., and Sea Work, Inc., all owned and operated primarily by Donald DeMusz, were so interrelated that Borden's course of conduct with each should have been presented to the jury to enable it to determine whether Borden breached the implied covenant of good faith while performing its obligations. The trial court agreed and permitted the case to go to the jury on that basis. The Dissent in the Appellate Division also agreed with that position. For Borden and the majority of the Appellate Division, however, the sole issue was whether the implied covenant of good faith and fair dealing can override an express and unambiguous termination clause in a contract. That position focuses only on whether Borden breached the express terms of the termination provision and ignores the fact that a party's performance may breach the implied covenant of good faith and fair dealing even when termination of the contract itself does not violate the termination provision.
With those two views in mind, we present the facts in chronological order.
Initial Dealings -- Sea Labor, Inc. and Sea Work, Inc.
Borden owned Snow Food Products Division, a leading producer of clam products, namely Snow's Clam Chowder. Borden obtained shell stock of ocean quahog clams (clams) from its own four-vessel fleet and from independent boats. Borden's policy was to attempt to fill its need for clams from its own boats first and then to obtain clams from independent boats to fill any additional need. The boats delivered the clams to Borden's Cape May Plant, where the shell stock was processed into clam meat. The meat was then shipped to Pine Point, Maine, where the final product was made and canned.
In 1978, Borden hired Donald DeMusz to be the captain of the Arlene Snow, which was one of the four boats that Borden used to harvest clams. In 1983, Wayne Booker, Group Operations Manager in charge of Snow Food Products, Kava Instant Coffee, and 'Bama Food Products, negotiated with and later entered into a charter agreement with DeMusz whereby DeMusz would manage Borden's four boats. DeMusz formed Sea Labor, Inc. to manage Borden's boats. The agreement provided that Sea Labor would receive five cents per bushel of clams harvested by the fleet. DeMusz would still receive captain's compensation for his work on the Arlene Snow.
Around the same time, Borden began to implement a long-considered project called "Shuck-at-Sea," which would enable the fishermen to shuck the clams on the boat and thereby provide a bigger haul of clams per boat trip. Borden developed the project because it would increase the return on its investment through reducing costs, would eliminate disposing of shells and visceral materials on land by returning them directly to sea, and would eliminate the need to drill a new freshwater well at the Cape May Plant. DeMusz was involved in developing the Shuck-at-Sea project. Borden initially planned to place its shucking equipment on the Arlene Snow, but it was too small.
Booker and DeMusz discussed the problem. DeMusz offered to buy a large boat, to rig it to Borden's specifications, and to use it in conjunction with Borden for the Shuck-at-Sea project. Booker determined that an agreement with DeMusz would save Borden money. Moreover, he did not think Borden would generate a high enough return on its investment if it bought the boat itself.
Following a meeting where Booker and other executives approved DeMusz's proposal, DeMusz formed Sea Work, Inc. with two partners. Sea Work purchased and operated a clam-fishing boat named Jessica Lori. Purchasing and rigging the Jessica Lori cost Sea Work $750,000, which it financed through a bank loan. Although DeMusz did not want to "double-rig" the boat, he acquiesced to Borden's demands to do so.
During the negotiations, Booker wrote Herbert A. Southwell, Group General Manager, an inter-company memorandum, describing how a contract with DeMusz would save time and money:
We 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.
On July 11, 1984, Sea Work and Borden signed the "Equipment Lease," an eleven-page contract, which provided that Borden would place its shucking equipment on the Jessica Lori in exchange for Sea Work offering to Borden all the clam meat shucked by the Jessica Lori at fifty cents per pound. The lease required the Jessica Lori to offer Borden a minimum of 15,000 pounds of clams each week.
Initially, the equipment was to be installed by the end of 1984. Problems with the equipment developed on several occasions, however, and the Jessica Lori was not functioning as a Shuck-at-Sea vessel until late 1986.
In August 1984, Booker and DeMusz began negotiations about DeMusz purchasing a second boat that would provide clams to Borden. If the Shuck-at-Sea project was successful, Borden would want a second vessel shucking at sea. Moreover, a second large boat would give Borden the advantage of receiving clam meat in bad weather because small boats generally cannot go out to sea in bad weather. Finally, Borden wanted to ensure that it received a certain amount of clams if the National Fisheries Advisory Council implemented annual limits on the amount of clams a boat could harvest.
Booker, on behalf of Borden, and DeMusz entered into an oral agreement, which gave DeMusz a long-term supply contract for the second boat. Borden's accounting manager helped DeMusz calculate how many bushels would have to be sold and how much revenue would have to be generated to support DeMusz's financing of the second boat. Booker, with Southwell's knowledge, wrote DeMusz a letter of intent to help DeMusz obtain financing.
DeMusz drafted a one-page contract by himself and sent it to Booker, who approved it with one minor change. According to Booker, the contract memorialized his oral agreement with DeMusz. DeMusz, along with Bill Gifford and Bob Dempsey, formed Sons of Thunder, Inc. to buy the second boat. Dempsey was the manager of Borden's Cape May Plant and was responsible for buying quahogs for Borden. Dempsey failed to disclose his interest in Sons of Thunder on his annual statements affirming that he had no undisclosed interest in any of Borden's suppliers. Despite his conflict of interest, Dempsey did not appear to favor Sons of Thunder, and the trial court instructed the jury not to consider his undisclosed conflict of interest as part of Borden's defense or as to the issue of fraud.
On January 15, 1985, Booker signed the contract with DeMusz, Southwell approved it, and Borden's legal department initialed it. That contract is the focus of this appeal. The contract was to begin when the boat was ready to operate. The one-page contract provided:
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 March 1985, Sons of Thunder bought a boat, which it named 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 Booker intervened in the negotiations. Booker told the representative of the bank that 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. Moreover, Booker explained to the representative that the five-year term of the contract would be sufficient to pay back the loan. Ultimately, DeMusz obtained a $515,000 loan, which he, Gifford, Dempsey, and their spouses personally guaranteed. DeMusz used a personal note to cover the remaining balance.
The boat was not ready to fish until February 1986. 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 buy the minimum amount specified in the contract.
Delay in Shuck-at-Sea Project
During the time DeMusz and Borden were negotiating about the contract with Sons of Thunder, the parties discovered that Borden's equipment would not work on the Jessica Lori. In April 1985, Borden went aboard the boat to try to get the equipment working. By September 1985, it became clear that the shucking equipment needed to be redesigned in order to work on the Jessica Lori. Thus, the equipment was removed to be reconfigured, and the ship went back to harvesting clams.
During the five months that Borden was aboard the Jessica Lori, the boat was unable to harvest clams, and therefore generated no income. Prior to signing the Equipment Lease, DeMusz and Booker had discussed payments from Borden to DeMusz to cover "downtime" while the equipment was installed. Later, Booker memorialized that agreement in writing, promising to pay DeMusz $8,500 for each week the Jessica Lori was unable to fish because of the ...