Ships and Liability Passing in the Night?

 

 

 

 

 

 

 

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 ob- tain 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. Ultimately, Mr. DeMusz obtained a $515,000 loan, which he, Mr. Gifford, Mr. Dempsey, and their spouses personally guaranteed.

For most weeks, the records show that Borden did not buy the minimum amount specified in the contract. Problems continued and the relationship soured. When Borden discovered that a $500,000 accounting error had actually overstated the benefits of the Shuck-at-Sea pro- gram, Borden exercised its termination rights under the contract.

Mr. DeMusz, stuck with a boat and a loan and no customer, filed suit. Borden moved for summary judg- ment 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 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.

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. Borden’s failure to honor the contract left Sons of Thunder with insufficient revenue to sup- port 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.

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 rea- sonable 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.

 

Case Questions

1.  Explain the nature of the relationships between Mr. DeMusz and Borden.

2.  What impact does “good faith” have on termina- tion of a contract?

3.  What are the damages when there is a lack of good faith in the termination of a contract?