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Middleton v. SMH, U.S., Inc.

A-4851-02T3 (N.J. Super. App. Div. 2005) (Unpublished)

CONTRACTS; NOTICES; DEFAULT—It is for a jury to decide if, under the circumstances, a complaining party may pursue a breach of contract claim even though it had not first given the allegedly breaching party the contractually required default notice.

When employees learned that their company was selling its outlet stores, they entered into an asset sale agreement to purchase them from their employer. The agreement provided for the transfer of inventory, fixtures, leases, and the outlet store’s tradename. The stores were to be operated as authorized factory outlets for the company. The employees’ company was to have the exclusive right to open additional company outlet facilities in several territories over the following five years. The agreement also gave them the right to continue to acquire the company’s products. Pursuant to the agreement, the company was to provide a list of its excess items to be offered to the outlets. Then, the outlets and the company would then have a ten day period in which to reach an agreement with respect to price and payment terms. If no agreement was reached, or if the outlets rejected the merchandise, the company could offer the products to other potential buyers. The agreement also identified various circumstances that would constitute a default, including failure to negotiate in good faith or breaching the agreement’s non-competition provisions. Each company was to send written notices to the other if there was a default and give the other company a chance to cure.

After the outlet stores sold the original inventory delivered at closing, they were never able to buy more excess products from the company even though the company was selling significantly discounted excess products to other customers. Despite phone calls, letters, and meetings between the parties, the problem continued until the outlet stores declared bankruptcy. In the bankruptcy, the outlets assigned their rights to a third party who, as assignee of the bankruptcy estate, sued the company . The suit was for breach of express contract and breach of the implied covenant of good faith and fair dealing. The lower court granted the selling company’s motion for summary judgment. The breach of contract claim was dismissed because of the outlets’ failure to give written notice of default and opportunity to cure. The court dismissed the breach of the implied covenant of good faith and fair dealing claim because it found that it was not independent of the other cause of action.

On appeal, the assignee claimed that the lower court erred in dismissing the breach of contract claim for failure to give notice of default because a jury could find on the facts that the outlet was excused from complying with this contractual requirement. The Appellate Division agreed. The evidence showed that the company had promised to provide the outlets with merchandise and had failed to do so. Consequently, the lower court was obligated to consider whether the outlets were excused from compliance with the contractual notice requirement. The assignee argued that a jury was free to find that the outlets lacked sufficient knowledge of the facts underlying the company’s breach because of the course of bad faith and unfair dealing engaged in by the company throughout the duration of the contract. Specifically, there was evidence that the company’s employees and its brand managers told the outlets that there was no product, did not respond to the outlets’ requests for products, and kept the outlets generally uninformed about what products were available and to which other entities it was selling.

The Court also pointed out that there was evidence to suggest that, on the one hand, the breach caused significant loss to the outlets while, on the other hand, the risk that the company would not have a chance to cure its default by not receiving formal notice was minimal, if not completely eliminated by the numerous telephone calls, letters, and meetings between the outlets and the company’s representatives. Therefore, the Appellate Division held that the lower court erred by not letting a jury determine whether fulfillment of the contractual notice condition could have been excused.

The assignee also claimed that it was error to dismiss its claim for breach of the implied duty of good faith and fair dealing as duplicative. The Appellate Division held that a defendant cannot be found separately liable for breaching the implied covenant of good faith where it has also been found to have breached a literal term of the contract. However, where there are separate facts to support each cause of action, either or both claims may succeed. In this case, the Court found that the assignee used identical facts to support its two claims, namely, that the company failed to provide products to the outlets as required under the agreement. Accordingly, the Court held that the facts did not establish that a breach of the duty of good faith existed in the absence of any breach of the contract’s literal terms.

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