Bak-a-lum Corp. of America v. ALCOA Bldg. Prods., Inc

Brief Fact Summary.

Plaintiff and Defendant entered into an exclusive distributor agreement. Defendant terminated Plaintiff’s agreement when he found four other distributors to distribute its products in the same area. During this period, Plaintiff bought a warehouse to store Defendant’s products. Plaintiff brought suit on the grounds that Defendant breached its exclusive distributor agreement, causing him to lose $10,000 in profits.

Synopsis of Rule of Law.

All parties in a contractual relationship have an implied obligation to refrain from acting in a manner that will result in the destruction or injury of the right of the other party receiving benefits under the contract.

Facts.

Defendant, ALCOA Bldg. Prods., Inc., manufactures aluminum siding products. Plaintiff, Bak-a-lum Corp. of America, is an exclusive distributor of Defendant’s products since 1962 or 1963, based on a verbal agreement with Defendant. Thereafter, Defendant terminated agreement in January 1970 when Defendant hired four additional distributors in the same area geographically. Also, Plaintiff had just entered into a new lease that gave Plaintiff a substantially enlarged warehouse facility to use to distribute Defendant’s products. Plaintiff brought suit against Defendant for breach of contract. At trial, Plaintiff produced evidence that indicated Defendant’s actions in terminating the exclusive distributorship agreement would result in a $10,000 loss of profits for Plaintiff. Further, the trial court ruled that there was a binding and enforceable agreement between Plaintiff and Defendant. Also, the trial court held that the agreement was only terminable after a reasonable period of time and on reasonable notice was given to the other party. Additionally, the trial court held that Defendant purposefully withheld its decision to break the exclusive distributorship agreement Plaintiff to avoid Plaintiff’s zealous distribution of Defendant’s products. Likewise, based on the agreement, the trial court held that a reasonable period time had passed on the contract, and concluded that a reasonable notice to Plaintiff is seven months. The trial court determined Plaintiff’s lost profits to be $5,000 monthly and provided Plaintiff $35,000 in damages. Both parties appealed.

Issue.

Whether all parties in a contractual relationship have an implied obligation to refrain from acting in a manner that will result in the destruction or injury of the right of the other party receiving benefits under the contract.

Held.

Yes, all parties in a contractual relationship have an implied obligation to refrain from acting in a manner that will result in the destruction or injury of the right of the other party receiving benefits under the contract.

Discussion.

Since Defendant withheld information from Plaintiff about terminating the exclusive distribution agreement, Defendant breached its implied obligation of good faith and fair dealing to Plaintiff, resulting his Defendant’s liability for $10,000 per month of damages. All parties in a contractual relationship have an implied obligation to refrain from acting in a manner that will result in the destruction or injury of the right of the other party receiving benefits under the contract. During the time that the parties had an exclusive distributorship agreement, there was an implied obligation of reciprocal good faith and fair dealing. Subsequently, when Defendant withheld its intention to terminate the exclusive agreement from Plaintiff, and, at the same time, pushing Plaintiff to zealously sell Defendant’s products, Defendant acted in bad faith and breached its implied obligation of good faith and fair dealing. Further, the court noted that a breach of implied obligation of good faith and fair dealing must be evaluated in light of what is a reasonable period of notice of termination. Here, a reasonable period of notice of termination by Defendant to Plaintiff would have been 20 months. Also, Plaintiff’s assertion at trial that its loss of profits monthly was $10,000 is uncontested and, therefore, should stand. Therefore, Defendant breached its implied obligation of good faith and fair dealing and is required to award Plaintiff damages totaling $10,000 per month for 20 months.