The Court considers whether an objective or subjective standard governs an employment contract provision that reserves to the company the right to terminate an employee for failure to perform to the company's satisfaction.
Defendant Optus Software, Inc. ("the company"), a small computer software company, hired plaintiff Michael Silvestri ("plaintiff") as its Director of Support Services. In that capacity, plaintiff was responsible for communicating with resellers of the company's software to end-users and for supervising the technical support services provided to the company's customers. Plaintiff's two-year employment contract contained a clause that reserved to the company the right to terminate his services for failing or refusing to perform his duties faithfully, diligently or completely to the satisfaction of the company ("the satisfaction clause"). Plaintiff was terminated nine months into the contract after several clients and resellers communicated their disappointment with the performance and attitude of the support services unit in general, and several complaints targeted plaintiff specifically.
Plaintiff filed this action alleging breach of contract and tortious interference. Both parties moved for summary judgment. The company relied, in part, on copies of e-mail communications from customers who expressed difficulties with the support services unit and with plaintiff personally. Plaintiff did not assert that there was any reason for his termination other than the company's genuine dissatisfaction with his performance. However, plaintiff claimed that the dissatisfaction was not objectively reasonable or that, at the very least, it was a question for a jury to decide. The trial court granted summary judgment to the company, refusing to substitute its judgment for that of the employer. The Appellate Division reversed, holding that an employer must meet an objective standard in order to invoke a right to terminate an employee pursuant to a satisfaction clause in an employment contract.
HELD: When an employment contract contains a clause that reserves to the company the right to terminate an employee for failing to perform to the company's satisfaction, a subjective test of performance governs the employer's resort to the satisfaction clause unless there is some language in the contract to suggest that the parties intended an objective standard.
1. Agreements containing a promise to perform in a manner satisfactory to another, or to be bound to pay for satisfactory performance, are a common form of enforceable contract. Such "satisfaction" contracts generally are divided into two categories: 1) contracts that involve matters of personal taste, sensibility, judgment or convenience; and 2) contracts that contain a requirement of satisfaction as to mechanical fitness, utility, or marketability. Satisfaction contracts of the first type are interpreted on a subjective basis, with satisfaction dependent on the personal, honest evaluation of the party to be satisfied. Absent language to the contrary, contracts of the second type, involving operative fitness or mechanical utility, are subject to an objective test of reasonableness because the extent and quality of performance can be measured by objective tests. (Pp. 7 to 9).
2. A subjective standard typically is applied to satisfaction clauses in employment contracts because there is greater reason and a greater tendency to interpret the contract as involving personal satisfaction, rather than the satisfaction of a hypothetical reasonable person. In the case of a high-level business manager, a subjective test is particularly appropriate to the flexibility needed by owners and higher-level officers operating a competitive enterprise. When a manager has been hired to share responsibility for the success of a business entity, an employer is entitled to be highly personal and idiosyncratic in judging the employee's performance in advancing the enterprise. Although the subjective standard obliges the employer to act in accordance with his duty of good faith and fair dealing, genuine dissatisfaction of the employer, honestly held, is sufficient for discharge. (Pp. 9 to 10).
3. Although broadly discretionary, a satisfaction-clause employment relationship is not to be confused with an employment-at-will relationship in which an employer is entitled to terminate an employee for any reason, or no reason, unless prohibited by law or public policy. In a satisfaction-clause employment relationship, there must be honest dissatisfaction with the employee's performance. The employer may not claim dissatisfaction as the reason for termination when another reason is the actual motivation, even if that other reason is neither discriminatory nor contrary to public policy and would therefore pass muster as the basis for discharge of an at-will employee. As in an at-will employment setting, the burden of persuasion is on the employee challenging termination under a satisfaction clause in an employment contract. The employee prevails in such a cause of action if he proves that he was discharged before the expiration of the contract and either (1) the employer was not dissatisfied with him, or (2) the employer, whether dissatisfied or not, did not discharge him on account of the dissatisfaction. (Pp. 10 to 11).
4. In Fitzmaurice v. Van Vlaanderen Machine Co., 110 N.J. Super. 159 (App. Div. 1970), aff'd per curiam, 57 N.J. 447 (1971), an employment contract contained a clause permitting termination if the defendant did not find the plaintiff's consulting services to be "profitable." There, the Appellate Division held that inclusion of the word "profitable" in the clause, rather than "satisfactory," contemplated that performance would be measurable by commercial standards and therefore the court found the clause governed by an objective reasonableness standard. This Court affirmed, interpreting the contract as involving operative fitness, utility or marketability. Fitzmaurice thus teaches that the language of the contract itself must be examined to determine context and the parties' intentions concerning the standard for evaluation of the promisor's performance. (Pp. 11 to 13).
5. A subjective test of performance governs the employer's resort to a satisfaction clause in an employment contract unless there is some language in the contract to suggest otherwise. Here, nothing in the text of the satisfaction clause suggests that dissatisfaction was to be measured by any standard other than the employer's good faith, unilateral judgment. Moreover, application of another's notion of satisfactory performance would undermine recognized and accepted notions of business judgment and individualized competitive strategy, as well as principles of freedom of contract. Idiosyncratic judgments as to what constitutes satis factory performance are expected and should be permitted. Thus, applying the test of genuineness rather than reasonableness to the evidence in this case, the Court finds that the entry of summary judgment in favor of the company was appropriate. (Pp. 13 to 15).
The judgment of the Appellate Division is REVERSED and the matter is remanded for entry of summary judgment in favor of defendants.
JUSTICE ZAZZALI, dissenting, in which JUSTICE LONG joins, is of the view that the application of an objective standard is appropriate based on both the subject matter and the language of this contract and that, as a general rule, satisfaction contracts should be evaluated under an objective standard of reasonableness. Even if a subjective standard is applied in this case, however, he believes that the matter should be remanded for a jury trial on the issue of the genuineness of the company's dissatisfaction.
CHIEF JUSTICE PORITZ and JUSTICES COLEMAN, VERNIERO, and ALBIN join in JUSTICE LaVECCHIA's opinion. JUSTICE ZAZZALI filed a separate dissenting opinion in which JUSTICE LONG joins.
The opinion of the court was delivered by: LaVECCHIA, J.
On certification to the Superior Court, Appellate Division.
This is a breach of contract action. Defendant Optus Software, Inc. ("Optus" or "the company"), a small computer software company, hired plaintiff Michael Silvestri as its Director of Support Services, responsible for supervising the provision of technical support services to the company's customers. Silvestri's two-year employment contract contained a clause that reserved to the company the right to terminate his employment for failure to perform to the company's satisfaction (the "satisfaction clause").
Nine months into the contract, Silvestri was terminated under the satisfaction clause by the chief executive officer of Optus, Joseph Avellino. Silvestri filed this action, contending that the company's dissatisfaction was objectively unreasonable and that therefore his termination was a breach of the employment contract. The trial court granted summary judgment to the company. The Appellate Division reversed, however, holding that an employer must meet an objective standard for satisfaction in order to invoke a right to terminate pursuant to a satisfaction clause in an employment contract.
The question presented then is whether the employer's satisfaction is subject to an objective or subjective evaluation. We conclude that, absent language to the contrary, a subjective assessment of personal satisfaction applies and that the trial court's grant of summary judgment to the company was ...