Feld v. Henry Levy & Sons, Inc.

New York Court of Appeals · Contracts

ContractsOutput contractsGood faithExclusive dealingUCC 2-306output contractexclusive dealinggood faith

Facts

The parties entered a written agreement under which defendant would sell plaintiff all bread crumbs produced at its Brooklyn factory, with automatic yearly renewal unless either party gave six months' notice of cancellation; no cancellation notice was given. After selling plaintiff more than 250 tons of bread crumbs, defendant stopped producing bread crumbs around May 15, 1969, intentionally broke down and later dismantled the crumb-making equipment, and used the space for a computer room. Defendant indicated it would resume production if plaintiff agreed to a higher price than the contract price, and after dismantling the machinery defendant sold the raw materials formerly used for bread crumbs to animal food manufacturers. Defendant claimed crumb production was uneconomical, but the record contained no detailed cost, profit, loss, or comparative return figures.

Issue

Does an output contract for all bread crumbs produced at defendant's factory, coupled with an exclusive-dealing arrangement and a contractual six-month cancellation provision, imply an obligation that defendant continue manufacturing bread crumbs during the contract term unless it ceases production in good faith? More specifically, was defendant entitled as a matter of law to stop producing bread crumbs simply because production was allegedly uneconomical?

Rule

Under UCC 2-306 and New York law, output and exclusive-dealing contracts impose duties of good faith, reasonable diligence, and best efforts in performance. Good-faith cessation of production terminates further obligations under an output contract, but where the product is only one facet of the seller's business and the contract provides a right of cancellation on notice, the seller must continue production until cancellation unless, in good faith, continued production would cause more than trivial losses or genuinely imperil the existence of the business; reduced profitability or lower-than-expected profit is not enough.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

North Harbor Baking Co., a commercial bakery in Cleveland, signs a one-year agreement to sell Lakeview Food Ingredients all cracker meal produced at its plant, with automatic annual renewal unless either side gives six months' certified-mail notice of cancellation. After several months, North Harbor shuts down only its cracker-meal line, keeps all other bakery operations running, and sends no cancellation notice.

If North Harbor argues it had no duty once it stopped producing cracker meal, which is the best answer?

Explanation. Under the majority opinion, an output contract governed by UCC 2-306 means actual output occurring in good faith, and an exclusive-dealing arrangement implies best efforts, reasonable diligence, and good-faith performance. Where the product is only one facet of the seller's business and the parties provided a six-month cancellation mechanism, the seller is expected to continue production in good faith until cancellation unless a good-faith cessation is otherwise justified. (Derived from Feld v. Henry Levy & Sons, Inc. (n.d.).)