Case Law Summaries

Wilson v. Amerada Hess Corporation

• Opinion Date: June 14, 2001
• Business Law
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CONTRACTS; IMPLIED COVENANTS—A party exercising its right to use discretion under a contract must still abide by the covenant of good faith and fair dealing and cannot act arbitrarily with the objective of depriving the other party of its reasonably expected fruits of the contract.

Three independent franchisees of an oil company maintained that the oil company violated the implied covenant of good faith and fair dealing in setting gasoline prices notwithstanding a provision in each of their contracts giving the oil company unilateral authority to set and charge dealer tank wagon (DTW) prices. The lower court granted summary judgment in favor of the oil company. The Appellate Division affirmed on the basis that “the record was devoid of evidence to suggest that the oil company’s DTW prices were established with any bad faith motive to deprive the franchisees of any profit, or that the terms offered to other stations interfere with the franchisees’ right to earn a profit.” The franchisees further appealed on the basis that they were denied the opportunity to produce circumstantial evidence of bad faith because certain discovery was denied to them and therefore summary judgment was premature. The franchisees contended that through the oil company’s DTW pricing practices, the franchisee controlled the revenue available to dealers to cover operating expenses and hence, their profit. Specifically, the franchisees alleged that after the gasoline was marked-up to cover operating expenses and profit, the gasoline became comparable in price to major brands of gasoline and substantially higher than unbranded gasoline. But, because the franchisees and other dealers of the oil company traditionally had only provided gasoline and did not provide the other services that the dealers of the major brand of gasolines provide (such as national credit card acceptance, tire sales, and service bays), they could not compete and were unable to operate a profitable business. The franchisees asserted that the oil company knowingly set DTW prices at a rate that dealers could not operate profitably. Further the franchisees argue that they were denied the opportunity to examine oil company documents to prove that the oil company was acting in bad faith. The Supreme Court began by recognizing that “a covenant of good faith and fair dealing is implied in every contract in New Jersey,” that is, “neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.” Here, the Court was confronted with the issue of the appropriate force of the implied covenant of good faith and fair dealing when a party is expressly vested with unilateral discretionary authority over pricing. The Court concluded that the unilateral discretion must be exercised reasonably. In fact, “where a party alleges frustration of its expectation or fundamental purpose in entering the contract, the question of what interest will be protected by the implied duty answers itself; the plaintiff’s interest is internal to the understanding of the parties and good faith requires the defendant not exercise such discretion as it may have under the literal terms of the contract to thwart plaintiff’s expectation or purpose.” Therefore, “a party exercising its right to use discretion in setting price under a contract breaches the duty of good faith and fair dealing if that party exercises its discretionary authority arbitrarily, unreasonably, or capriciously, with the objective of preventing the other party from receiving its reasonably expected fruits under the contract.” The question before the Court then was whether the franchisees had full opportunity to show bad motive on the oil company’s part before the oil company was granted summary judgment. The Appellate Division had made the conclusion that further discovery by the franchisees was unlikely to lead to discovery of relevant evidence on the question of breach by the oil company. Here, however, the Supreme Court held that “although that allegation may be difficult to prove, our province is not to decide questions of fact, but only to determine whether sufficient information has been presented to warrant a jury determination.” On this basis, the Court remanded for additional discovery.

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