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Sons of Thunder, Inc. v. Borden, Inc.

148 N.J. 396, 690 A.2d 575 (1997)

UCC; CONTRACTS; IMPLIED COVENANTS—Even if a party has the unrestricted right to terminate a contract for the sale of goods, it is not relieved of liability if its pre-termination conduct was not “honest in fact” and if such conduct breaches its implied common law obligation of good faith.

A buyer terminated a minimum supply contract pursuant to an express provision that either party could cancel without reason. The record showed that before termination, the buyer did not comply with some of the other express provisions of the contract. At trial, the jury found that the termination did not constitute a breach of the contract, but the buyer did breach its obligation of good faith, and the jury awarded the seller damages for lost profits. The buyer moved for judgment notwithstanding the verdict, arguing that a party cannot be liable for breaching the implied covenant of good faith when it complies with express provisions of a contract. The trial court denied the buyer’s motion, but the Appellate Division reversed, concluding that the right to terminate the contract in accordance with its express terms could not be overridden by the implied covenant of good faith.

The New Jersey Supreme Court held that Article 2 of the Uniform Commercial Code, which states that every contract imposes an obligation to perform in good faith, was applicable in this case since there was a sale of goods. Additionally, every contract in New Jersey contains the implied covenant of good faith, regardless of any express clause. Although the Court agreed with the notion that this implied covenant does not override an express termination clause, this finding was not dispositive because the question of whether the buyer breached the covenant of good faith in its performance of the contract prior to termination had not been resolved. In other words, the implied covenant of good faith was considered independently of whether the express termination clause was violated. The Court then cited many cases discussing this distinction and holding that a party can violate the covenant of good faith without violating any express contractual provision. The Supreme Court concluded that a party may breach an implied covenant even when exercising an express contractual right, and the trial court correctly determined that the jury could have found that the buyer breached its obligation of good faith before exercising its right of termination. The Court concluded that the jury also understood this distinction, and that it was the basis of the award of damages. The Court found that the buyer’s conduct was not “honest in fact” as required by the UCC, and that its breach of the implied common law obligation of good faith destroyed the other parties’ reasonable expectation of the fruits of the contract.

The Supreme Court also held that lost profits were an appropriate remedy when the implied covenant of good faith is breached, and that one year’s profits was a reasonable and fair estimate as long as the amount of damages was proven with a reasonable degree of certainty. This remedy puts the aggrieved party in as good a position as if the breaching party had fully performed.


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