Feld v. Henry S. Levy & Sons, Inc

Brief Fact Summary. Feld (Plaintiff) and Henry S. Levy & Sons, Inc. (Defendant) entered into a contract where the Plaintiff agreed to buy and the Defendant agreed to sell bread crumbs. Both parties appeal from a judgment of the Appellate Division affirming the Special Term’s decision denying Plaintiff’s Motion for Summary Judgment and rejecting Defendant’s request for a summary judgment of dismissal.

Synopsis of Rule of Law. Under an output contract, good faith cessation of production of the subject of the contract terminates any further obligations and excuses performance by the party discontinuing production.

Facts. Plaintiff, who operates Crushed Toast Company, and Defendant, who is in the wholesale bread baking business, entered into a contract in which Defendant agreed to sell and Plaintiff to purchase all bread crumbs produced by the Seller for a certain period of time. The agreement was deemed to automatically renew for successive renewal periods of one year with the right of either party to terminate by giving not less than sixth months. A faithful performance bond was delivered by Plaintiff at inception of the contractual relationship. A substantial quantity of bread crumbs was sold by Defendant to Plaintiff but Defendant stopped producing the bread crumbs. Evidence demonstrated that it was uneconomical for the Defendant to continue operating his oven, however, no steps were taken to acquire another oven. The oven was destroyed and Defendant used the area as a computer room. Defendant indicated to the Plaintiff, that the Plaintiff would resume bread crumb production if the contract
price of six cents per pound were changed to seven cents. The Special Term denied Plaintiff’s Motion for Summary Judgment on the issue of liability and rejected Defendant’s request for a summary judgment of dismissal. Both parties appealed from a judgment of the Appellate Division affirming the Special Term’s holding.

Issue. Whether an output contract requires the seller to continue manufacturing the subject of the contract through the contract term?

Held. No, as long as cessation is in good faith. Judgment affirmed.
A term, which is measured by the quantity of output of the seller or the requirements of the buyer means that such actual output as may occur in good faith except that no quantity unreasonably disproportionate to the stated estimate may be demanded. Further, a lawful agreement by the seller or the buyer for exclusive dealing in goods imposes an obligation on the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale. Under the Uniform Commercial Code, every contract of this type imposes an obligation of good faith in performance. In output contracts, good faith cessation of production terminates any further obligation for performance.
Here, Defendant did not cease operations of bread baking, however, he determined that it was uneconomical to continue production. Questions of facts exist as to whether Defendant performed in good faith and whether its cessation of production was in good faith. Defendant’s cessation prior to cancellation of the contract due to losses from producing the bread crumbs under the existing circumstances would be justified in good faith if its losses from continuing would be more than trivial. Therefore, there are question of fact remaining and thus both parties’ Motions for Summary Judgment are denied.

Discussion. Agreements to sell all the goods or services a party may produce or perform to another party are output contracts.
Section 1-203 of the Uniform Commercial Code provides that every contract imposes an obligation of good faith in its performance. Section 205 of the Restatement Section of Contracts states that a duty of good faith is imposed in all contracts.