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Ruggiero Seafood, Inc. v. Newark Refrigerated Warehouse, Inc.

A-0514-04T2 (N.J. Super. App. Div. 2006) (Unpublished)

CONTRACTS; GOOD FAITH — If contracting parties have a long term history of small price increases every four or five years, it may be a breach of a seller’s implied covenant of good faith and fair dealing to unilaterally increase prices by a significant amount shortly after a previous, more usual, price increase has taken effect.

One the largest processors of squid stored substantial volumes of frozen product in the public warehouses operated by another company. The processor was a customer of the warehouse operator for over fifteen years. Indeed, the processor was the warehouse operator’s largest customer. The processor’s monthly storage rate was historically a flat rate. The warehouse operator’s published tariffs provided for a sliding scale rate, with a higher per pound charge on smaller lots than larger lots. However, because of the large volume business provided by the processor and the ongoing nature of that business, the processor was given a flat rate. Generally speaking, the processor’s rate was lower than most other large customers and could be characterized as a preferential rate.

The warehouse operator negotiated a rate increase with the processor. The processor continued to enjoy a flat rate and the increase only applied to new product entering the warehouse. The increase was consistent with the prior history between the parties, ranging from three to four percent. In fact, about every four or five years during their business relationship, the negotiated an increase of similar magnitude.

From time to time in the warehousing business, a customer’s product is lost or damaged. When that occurs, the warehouse operator pays or credits the customer for the loss. Considering the large volume of the processor’s product constantly entering and leaving warehouse operator’s facilities, it was not uncommon that some product was lost or damaged from time to time. Whenever this occurred, the parties resolved it by reaching agreement on the amount of product involved, and the warehouse operator would credit the processor for the full value of the affected product. Although the warehouse receipt issued to all customers, including the processor, contained a condition limiting the warehouse operator’s liability for lost or damaged goods, the warehouse operator routinely paid full value to all customers, including the processor.

In one particular month, the processor submitted a claim for lost product in an amount much larger than the typical claims for lost or damaged product. The president of the warehouse operator corporation responded by contending that they had inadvertently made an over-delivery to the processor. The president and the owner of the processor company personally had numerous meetings and the dispute on this issue became very contentious.

During the negotiations, the warehouse operator’s president proposed splitting the difference and crediting the processor for half of the disputed amount over a period of time. Immediately after making that offer, the president submitted to the processor notice of a new rate increase. The effect was to increase the processor’s charges by thirty to forty percent. And, the new rate would apply to all of the processor’s product, including that which was already in storage.

The processor protested. It contended that it was being singled out among the warehouse operator’s customers for this treatment, and it was in retaliation for pursuing its bona fide claim for lost product. The processor threatened to remove all of its product from the warehouse operator’s facilities. However, upon calling the four or five comparable facilities in the immediate area, it learned they were all full. The processor refused to pay the new rates, believing it was contrary to an understanding that the old rates would continue to apply to existing stored product, and the processor would try to place all of its product in other facilities. Although other facilities could not take all or most of its inventory, the processor was able to place inbound product elsewhere on an ongoing basis. The processor ceased placing any new product in the warehouse operator’s facilities.

The warehouse operator contended that the price increase to the processor was justified based upon an analysis the warehouse operator caused to be made of the various customers and to achieve an appropriate level of profitability from the processor’s business.

Because the processor was no longer delivering new product, the warehouse operator seized upon an additional justification for the new rate, namely that the processor was no longer entitled to preferred status as a regular large customer. Because the processor refused to pay, the warehouse operator refused to release product. The processor began to pay the new rates in order to free up its product, but the payments were made under protest.

The warehouse receipts that were uniformly used by the warehouse operator provided that all storage was on a month-to-month basis. When this dispute arose, the warehouse operator did not demand that the processor remove its product. Indeed, it encouraged the processor to resume delivering new product. However, it insisted upon the new rates.

After some space became available at other warehouses, the processor moved some of its product out of the warehouse operator’s facilities. The processor moved to avoid the high rate the warehouse operator was charging and to avoid the ongoing problems with getting its products released from the warehouse operator’s facilities. After substantial alternate space opened up, the processor removed almost all of its remaining product from the warehouse operator’s facilities.

Thereafter, the processor filed a complaint against the warehouse operator, alleging breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, consumer fraud, fraud, intentional tort and conversion, claiming compensatory and consequential damages plus punitive damages. The warehouse operator filed its answer and counterclaimed for an outstanding balance due for unpaid storage charges, plus interest.

In a comprehensive written decision, the lower court determined that the processor was entitled to recover amounts for overcharges on existing product for the seven first month’s charges; for the cost of moving product to an alternate warehouse; for the lost product involved in the over-delivery dispute; for the remaining lost and damaged product disputes; and on its overtime pay claim. The lower court determined that the processor was not entitled to recover treble damages under the Consumer Fraud Act or to recover punitive damages. On the warehouse operator’s counterclaim, the lower court determined it was entitled to collect an amount from the processor. Final judgment was entered ordering that the processor recover from the warehouse operator an amount less the amount that the warehouse operator recovered from the processor, thus resulting in a judgment in favor of the processor.

In its appeal, the warehouse operator argued that the lower court erred in: (1) finding that it breached the covenant of good faith and fair dealing; (2) not applying the liability limitation; and (3) not applying a nine-month limitation. In its cross-appeal, the processor argued that the lower court erred in: (1) limiting its damages from overcharges to seven months; and (2) not applying the Consumer Fraud Act.

At the outset of its discussion, the Appellate Division stated that the warehouse operator’s second and third arguments warranted brief discussion. The Court found that the record supported the lower court’s finding that the warehouse operator never attempted to enforce the liability limitation in its long relationship with the processor, nor did it ever enforce it with any of its customers. Further, the Court found that this was the custom in the trade and that the written provision in the warehouse receipts did not prohibit oral modification or waiver of the limitation.

As to the warehouse operator’s argument that the warehouse receipt required that any claims by a storer against the warehouse be made no later than nine months from the date of loss, the Court found that the provision actually stated otherwise. The Court found that the provision actually imposed the nine-month limitation following notice from the warehouse operator. There was no dispute that the processor made timely claims upon learning of any loss or damage to its product. Further, the warehouse operator produced no evidence of any notification.

Thus, the remaining issues on appeal pertained to the overcharges and whether the processor was entitled to recover for overcharges, whether it should also recover treble damages and attorney’s fees. In analyzing the overcharge claim, the lower court noted the dilemma with which the it was confronted. The agreement between the parties for the earlier flat rates pertained to existing product, with the understanding that any subsequent increase in rates would apply only to new incoming product. However, provisions in the warehouse receipts provided that storage of goods was on a monthly basis and authorized the warehouse owner to require the customer to remove all of its product on thirty days’ notification.

The lower court concluded that there was no clear agreement between the parties as to whether in these circumstances a future price increase would apply to existing product. The lower court determined that the probable intent of the parties when they negotiated their agreements over the years was that in the event of a dissolution of their relationship, the processor would have a reasonable length of time to move its product in an orderly manner, during which time it would pay the old rates. Under all of the circumstances, the lower court determined that the seven-month turnaround time constituted a reasonable period of time in which the processor could remove its product.

Alternatively, the lower court found that even if the parties’ intent could not be ascertained or if the parties should be bound by the written documents, and if those documents were unambiguous, the warehouse operator would violate the implied covenant of good faith and fair dealing in the circumstances existing by forcing the processor to move four million pounds of product within thirty days or face drastically higher rates. It was also significant that this price increase occurred within one year of the previous price increase, because it was the past practice of the parties to negotiate a new price every four to five years. Thus, the lower court concluded that the warehouse operator’s conduct under the circumstances constituted a violation of the implied covenant of good faith and fair dealing.

With respect to damages, however, the lower court struck a balance, limiting the processor’s recovery to the seven month turnaround time which the lower court found a reasonable period of time for winding down the business relationship. The Appellate Division found that the lower court correctly applied the proper legal principles in determining that the warehouse operator’s attempt to unilaterally increase the processor’s rates on existing product on thirty days’ notice, which was done in bad faith with knowledge that the processor could not accommodate the action by going elsewhere, constituted a breach of the warehouse operator’s implied covenant of good faith and fair dealing.

Next, the Appellate Division addressed the processor’s contention that the lower court erred in refusing to apply the Consumer Fraud Act. The processor argued that the warehouse operator engaged in unconscionable commercial practices in their subsequent performance under their contract with him. The lower court did not find that the conduct in this commercial setting rose to the level of improper subsequent performance. The lower court did not find the increase in rates unconscionable per se. It found that the sudden unilateral increase under all of the circumstances was improper on short notice. Accordingly, the Court found that the processor’s arguments were properly rejected by the lower court.

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