Brief Fact Summary.
Plaintiff, a purchaser of popcorn, and Defendant, a supplier of popcorn, entered into an agreement in which Defendant was to deliver three shipments of popcorn to Plaintiff. At each delivery, Plaintiff was to pay Defendant for that delivery. Plaintiff did not pay Defendant at either of the first two deliveries. Nevertheless, neither party mentioned anything about a lack of payment. Instead, the parties continued to schedule the last delivery. After scheduling the last delivery, Defendant notified Plaintiff of its decision to terminate the contract. Immediately after, Plaintiff paid Defendant. Plaintiff brought suit against Defendant. The trial court held for Plaintiff, and both parties appealed.
Synopsis of Rule of Law.
A termination clause in a contract carries an implied obligation to exercise in good faith.
Plaintiff, Baker, purchases and resells popcorn in a plant in Stratford, Texas and processes his payments and further business in Garden City, Kansas. Defendant, Ratzlaff, grows popcorn. Plaintiff contracted with Defendant to purchase popcorn from Defendant for $4.75 per hundredweight. Under the contract, Defendant was supposed to bring the popcorn in three shipments. Plaintiff was required payment on each delivery. Also, the agreement included a termination clause, which stated if Plaintiff failed to pay Defendant, Defendant would be entitled to relinquish the contract and keep or dispose of the outstanding popcorn. After the parties entered into the contract, the market price of popcorn increased to over $8.00 per hundredweight. Thereafter, Defendant made two popcorn deliveries to Plaintiff’s plant in Stratford, Texas, and Defendant did not ask for payment at either deliver, nor did Plaintiff offer payment. Plaintiff’s foreman only drafted weight slips at each delivery, which was Plaintiff’s standard practice. After, Plaintiff would send a copy of the weight slips to the Garden City office, where the office would process the payments for the deliveries, according to the weight slips. Subsequently, Defendant spoke with Plaintiff over the telephone to schedule a future delivery. Neither party mentioned the lack of payment. A short period after the phone call, Defendant sent Plaintiff a notice of termination of the contract, due to lack of payments. When Plaintiff received notice of termination, Plaintiff immediately sent Defendant two payments for the two deliveries. At this time, Defendant already obtained another contract with a third party to deliver popcorn $8.00 per hundredweight. Plaintiff was obligated to obtain another popcorn supplier to obtain popcorn at a price of $10.30 per hundredweight. Plaintiff brought suit in against Defendant, and the trial court awarded Baker $52,000 in damages. Plaintiff and Defendant appealed.
Whether a termination clause carries an implied obligation to exercise in good faith.
Yes, a termination clause carries an implied obligation to exercise in good faith.
Defendant terminated his contract with Plaintiff in bad faith, entitling Plaintiff to damages. A termination clause in a contract carries an implied obligation to exercise in good faith. Also, the court may find that a party breached his or her duty to terminate a contract in good faith when the termination is founded on a technicality instead of a legitimate reason, as anticipated by the termination clause. Here, the trial court could reasonably have found that Defendant breached his duty to act in good faith when terminating the agreement with Plaintiff. Defendant knew of that Plaintiff’s Garden City office and might have expected payments to be processed out of that office, rather than Plaintiff’s plant in Stratford. Also, Plaintiff’s Garden City office, located directly on the way, between Plaintiff’s Stratford plant and Defendant’s farm, was an accessible location for Defendant to stop as demand payment in person. Lastly, Defendant terminated the contract after the market price of popcorn increased substantially, almost doubled. Therefore, the court found that, based on all the circumstances, Defendant’s actions indicate that he terminated the contract for nonpayment based on a technicality and not a legitimate reason of the contract’s termination clause. Thus, Defendant exercised the termination clause in bad faith, and the trial court’s judgment is affirmed.