Contracts II, Pages 833–836

Bak-A-Lum Corp. of America v. Alcoa Building Products, Inc.

Supreme Court of New Jersey, 1976

Facts:

Plaintiff verbally agreed to be the exclusive distributor of defendant's aluminum siding and certain related products. Plaintiff did not agree to only handle defendant's siding, but the understanding was that it would promote defendant's products. Evidence shows that plaintiff fulfilled this duty, even meeting quotas defendant set during the later part of their relationship.

Seven years later, defendant terminated the exclusive part of the relationship by appointing for more distributors to share plaintiff's territory.

Procedural History:

Trial court refused a request for a preliminary injunction against the termination of the exclusive distributorship, but after trial held that there was a binding agreement between the parties terminable only after a reasonable period of time and on reasonable notice. It found that a reasonable period of time before termination had passed but that a reasonable period of notice would have been seven months. It established plaintiff's damages at $5,000 per months and entered judgment for plaintiff for $35,000.

Issue:

Did defendant have to give notice to terminate the agreement?

Plaintiff's Arguments:

  • Plaintiff established damages for $10,000 per month, not only the $5,000 awarded.

  • While defendant was planning on terminating the contract but not telling plaintiff yet, plaintiff undertook a major expansion of its warehouse facilities, which defendant encouraged.

Rule:

Page 835Good faith and fair dealing requires that "neither party do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract."

Reasoning:

There was a distributor agreement that needed reasonable notice to be terminated, but seven months was not an adequate period of notice. While defendant ordinarily would not have to inform plaintiff about its plans to terminate their agreement, there is an implied covenant of good faith and fair dealing in every contract. Defendant not telling plaintiff breached their covenant of good faith.

However, plaintiff was able to mitigate damages as to the remaining time on the lease on the warehouse, so damages based on that time period is too much. A proper amount of notice would have been 20 months.

Moreover, there is no reason to reduce the damages to $5,000 per month when the unchallenged evidence showed it to be $10,000. Yet, respecting the trial court's feel for the credibility of the proof, the plaintiff's monthly losses will be fixed at $7,500.

Holding:

The distributorship agreement was only terminable on reasonable notice. Here, that would be 20 months, for a total amount of damages of $150,000. Defendant's appeal affirmed with costs. Plaintiff's appeal modified in accordance with this opinion, with costs.

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