Food Fair Stores, Inc. v. Blumberg Court Case Analysis PDF

FOOD FAIR STORES, INC. v. BLUMBERG, COURT OF APPEALS OF MARYLAND, 234 MD. 521, 200 A.2D 166 (1963):  Prescott, J.\*5  . . .  Although percentage leases are generally governed by the rules of law applicable to ordinary leases, the peculiar features of provisions making rental dependent in some way u...

FOOD FAIR STORES, INC. v. BLUMBERG, COURT OF APPEALS OF MARYLAND, 234 MD. 521, 200 A.2D 166 (1963):  Prescott, J.\*5  . . .  Although percentage leases are generally governed by the rules of law applicable to ordinary leases, the peculiar features of provisions making rental dependent in some way upon the percentage of income from, or gross sales of, business on the leased premises frequently present difficult questions of construction, which render such leases in the nature of agreements sui generis . . . . Considerable case law involving the construction of such leases has developed in recent years. It has been held that where the percentage lease provides no minimum guaranteed rental or a purely nominal guarantee, the tenant is under an implied obligation to conduct the business in good faith . . . . It has also been held that if the guaranteed rental provides the landlord an adequate return on his investment and the percentage rental feature is in the nature of a bonus, there is no obligation upon the tenant as to the manner of conducting the business not expressed in the lease . . . . And it has been further held that the tenants under percentage leases were, or were not, under an implied obligation as to the manner of conducting tenants' businesses, depending upon the intention of the parties, as expressed by the provisions of the particular leases, interpreted with a due consideration of the circumstances surrounding the execution of the lease contracts . . . . However, the construction and application of the percentage features of the leases have depended largely upon the specific wording of the individual leases, and the character and nature of the questions involved have varied widely, due to the circumstances of each particular case. Hence, it would serve no useful purpose to attempt to formulate a comprehensive set of rules of construction applicable to all cases of percentage leases. For the purposes of the decision herein, we need only state that in every contract there exists an implied covenant that each of the parties thereto will act in good faith and deal fairly with the others . . . . And we adopt the principle expressed by the Louisiana Court in Selber Bros. v. Newstadt's Shoe Stores \[194 La. 654\] 194 So. 579, and thereafter, in substantially the same wording, by the Court of Appeals of California in Professional Building of Eureka v. Anita Frocks, Inc.\[, 178 Cal. App. 2d 276,\] 2 Cal. Rptr. 2d 914: Whether that doctrine \[whether the lessor under a percentage lease guaranteeing a minimum rental has cause to complain when the business is conducted in such a way that it will not produce additional rent consisting of percentages of gross sales\] is applicable to a given case depends upon the intention with which the parties entered into the contract of lease, as expressed in the contract, construed in the light of the circumstances in which the contract was made. p\. 831 Applying the above principles to the allegations contained in the lessors' bill of complaint, we reach the conclusion that lessors cannot prevail. There is no allegation of a wilful intent on the part of the lessees to divert sales from lessors' store, nor was there an abandonment of the business. There is nothing in the record that showed a lack of good faith or fair dealing by the lessees. They were engaged in a highly competitive business (this feature thereof being very generally known) in a quickly growing community. The bill alleges that lessees expanded their business by opening two additional stores in the area and anticipated a third. There is nothing unusual in the large chain stores which sell food products in supermarkets adding to the number of their stores, when circumstances permit.  . . .  We are dealing here only with an alleged implied covenant. There was, of course, no legal obstacle to prevent an express covenant being placed in the lease, so as to provide for lessors' contentions here. After considering the nature of lessees' business and the terms of the leases and after construing them in the light of the circumstances surrounding the parties at the time the leases were made, we are unable to conclude the parties impliedly covenanted that the lessees would not expand their business in the area of lessors' store. What the Supreme Court of Pennsylvania said in Dickey v. Phila. Minit-Man Corp.\[, 377 Pa. 549,\] 105 A.2d 580, is, we think, apposite here: If an implied covenant, as claimed by \[the lessors\] should be held to arise in such cases what would be the extent of the restriction thereby imposed upon the lessee\[s\]? Would it extend to each and every act on \[their\] part that might serve to reduce the extent of \[their\] business and thereby the percentage rental based thereon? Would it forbid \[them\], for example, if operating a retail store, from keeping it open for a fewer number of hours each day than formerly? Would it forbid \[them\] from dismissing salesmen whereby \[their\] business might be reduced in volume? Would it forbid \[them\] from discontinuing any department of \[their\] business even though \[they\] found it to be operating at a loss? It would obviously be quite unreasonable and wholly undesirable to imply an obligation that would necessarily be vague, uncertain and generally impracticable. Study Guide:  Does the theory enunciated by Judge Posner in the following excerpt illuminate the doctrine of good faith performance being applied in the lease cases we have just read? This case concerned the termination of a franchise by the franchisor, another specific type of contract in which the use of the concept of good faith has grown in recent years. THE ORIGINAL GREAT AMERICAN CHOCOLATE CHIP COOKIE CO. v. RIVER VALLEY COOKIES, LTD., UNITED STATES COURT OF APPEALS, SEVENTH CIRCUIT, 970 F.2D 273 (1992):  Posner, Circuit Judge:  . . .  Illinois, like other states, requires, as a matter of common law, that each party to a contract act with good faith, and some Illinois cases say that the test for good faith "seems to center on a determination of commercial reasonability." Dayan v. McDonald's Corp., 125 Ill. App. 3d 972, 993, 81 Ill. Dec. 156, 171, 466 N.E.2d 958, 973 (1984) . . . . The equation, tentative though it is ("seems to center on"), makes it sound p. 832as if, contrary to our earlier suggestion, the judges have carte blanche to declare contractual provisions negotiated by competent adults unreasonable and to refuse to enforce them. We understand the duty of good faith in contract law differently. There is no blanket duty of good faith; nor is reasonableness the test of good faith. Contract law does not require parties to behave altruistically toward each other; it does not proceed on the philosophy that I am my brother's keeper. That philosophy may animate the law of fiduciary obligations but parties to a contract are not each other's fiduciaries,  . . .  even if the contract is a franchise . . . . Contract law imposes a duty, not to "be reasonable," but to avoid taking advantage of gaps in a contract in order to exploit the vulnerabilities that arise when contractual performance is sequential rather than simultaneous . . . . Suppose A hires B to paint his portrait to his satisfaction, and B paints it and A in fact is satisfied but says he is not in the hope of chivvying down the agreed-upon price because the portrait may be unsaleable to anyone else. This, as we noted in Morin Building Products Co. v. Baystone Construction, Inc., 717 F.2d 413, 415 (7th Cir. 1983), would be bad faith, not because any provision of the contract was unreasonable and had to be reformed but because a provision had been invoked dishonestly to achieve a purpose contrary to that for which the contract had been made . . . . RESTATEMENT (SECOND) OF CONTRACTS §205. DUTY OF GOOD FAITH AND FAIR DEALING Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement. SALES CONTRACTS: THE UNIFORM COMMERCIAL CODE §1-304. OBLIGATION OF GOOD FAITH Every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance and enforcement. Official Comment This section sets forth a basic principle running throughout the Uniform Commercial Code. The principle is that in commercial transactions good faith is required in the performance and enforcement of all agreements or duties. While this duty is explicitly stated in some provisions of the Uniform Commercial Code, the applicability of the duty is broader than merely these situations and applies generally, as stated in this section, to the performance or enforcement of every contract p. 833or duty within this Act. It is further implemented by Section 1-303 on course of dealing, course of performance, and usage of trade. This section does not support an independent cause of action for failure to perform or enforce in good faith. Rather, this section means that a failure to perform or enforce, in good faith, a specific duty or obligation under the contract, constitutes a breach of that contract or makes unavailable, under the particular circumstances, a remedial right or power. This distinction makes it clear that the doctrine of good faith merely directs a court towards interpreting contracts within the commercial context in which they are created, performed, and enforced, and does not create a separate duty of fairness and reasonableness which can be independently breached. §2-103. DEFINITIONS AND INDEX OF DEFINITIONS \(1) In this article unless the context otherwise requires . . . . \(b) "Good faith" in the case of a merchant means honesty in fact and the observance of reasonable standards of fair dealing in the trade. Reference: Barnett, §5.1 Farnsworth, §7.17 Calamari & Perillo, §11.38 Murray, §93 B. IMPLIED AND EXPRESS WARRANTIES The scope of performance is often defined by a warranty. When parties are silent, contract law supplies some warranties by default. Two provided by the Uniform Commercial Code are the implied warranty of merchantability and the implied warranty of fitness for a particular purpose. After considering the difference between these two implied warranties, we shall examine how parties may contract around them, either by adding an express warranty in addition to or in place of an implied warranty or by expressly disclaiming the implied warranties. 1. Implied Warranties of Merchantability and Fitness for a Particular Purpose Study Guide:  In the next case, pay close attention to the defendant's argument. According to its theory of the case, why isn't it liable? According to the plaintiff, what must he show to prove the defendant's liability? How does the defendant's duty arise? p\. 834 VLASES v. MONTGOMERY WARD & CO. United States Court of Appeals, Third Circuit, 377 F.2d 846 (1967) Gerald McLaughlin, Circuit Judge.\*6 This case revolves around the charge that defendant-appellant, Montgomery Ward, was liable for the breach of implied warranties in the sale of one day old chickens to the plaintiff-appellee, Paul Vlases. The latter came to this country from Greece when he was sixteen and until 1954 his primary occupation was that of a coal miner. He had always raised chickens but because of his job as a miner his flocks were small, ranging from between twenty-five to one hundred chicks. In 1958 plaintiff began the construction of a two story chicken coop large enough to house 4,000 chickens and a smaller side building where he could wash, grade and sell the eggs. Vlases worked alone on the coop, twelve hours a day, fifty-two weeks a year, until its completion in 1961. In November of 1961 plaintiff placed an order at defendant's outlet store in Brownsville, Pennsylvania for the purchase of 2,000 one day old chicks. The chickens selected by the plaintiff from Ward's catalogue were hybrid Leghorns and were noted for their excellent egg production. On December 21, 1961 plaintiff received the 2,2002 chickens and placed them on the first floor of the coop which had been equipped with new brooders, feeders and within a short time, waterers. As a further hygienic precaution wire and sugar cane were placed on the ground so the chickens would not come in contact with the dirt floor. For the first six months Vlases slept in the coop in order to give the new chicks his undivided attention. During the first few weeks after delivery the chickens appeared to be in good health but by the third week plaintiff noticed that their feathers were beginning to fall off. This condition was brought to the attention of Mr. Howard Hamilton who represented the Agway Corporation which was supplying the plaintiff with feed on credit. In February of 1962 Mr. Hamilton took five chickens to the Bureau of Animal Industry Diagnostic Laboratory where they were examined by Dr. Daniel P. Ehlers. The examination revealed signs of drug intoxication and hemorrhagic disease involving the weakening of blood vessels. Four chicks were brought to Dr. Ehlers in May of 1962 and were found to be suffering from fatigue. On the 14th of August 1962 Mr. Hamilton brought three chickens to the laboratory where Dr. Ehlers' report noted that two of the chicks were affected with visceral leukosis, one with ocular leukosis, one had bumble foot and one had been picked. Visceral and ocular leukosis are two types of avian leukosis complex or bird cancer which disease infected plaintiff's flock either killing the chicks or causing those remaining to be destroyed. Plaintiff in this two count suit in assumpsit charged negligence and breach of warranty with jurisdiction resting on the diversity provisions of 28 U.S.C.A. §1332. After the second day of trial the negligence claim was p. 835dropped leaving the breach of warranty as the sole problem for the jury's consideration. A verdict was returned in favor of the plaintiff in the amount of \$23,028.77. Montgomery Ward appeals from the resultant judgment. I Appellant takes the position that an action for breach of implied warranties will not lie for the sale of one day old chicks where there is no human skill, knowledge or foresight which would enable the producer or supplier to prevent the occurrence of this disease, to detect its presence or to care for the sickness if it was present. The jury was instructed by the court that recovery on behalf of the plaintiff required a finding that the chickens were afflicted with leukosis at the time defendant made delivery. The expert testimony for both sides indicated that there was no way of determining whether newly hatched chicks have leukosis and that there is no medication available to prevent the disease from occurring.3 Assuming the chickens were diseased upon their arrival the thrust of appellant's argument questions the sufficiency of the law to support a finding that Ward is liable under Pennsylvania law for the breach of implied warranties. The two implied warranties before us are the implied warranty of merchantability, 12A P.S. §2-314,4 and the implied warranty of fitness for a particular purpose, 12A P.S. §2-315.5 Both of these are designed p. 836to protect the buyer of goods from bearing the burden of loss where merchandise, though not violating a promise expressly guaranteed, does not conform to the normal commercial standards or meeting the buyer's particular purpose, a condition upon which he had the right to rely. Were it to be assumed that the sale of 2,000 chickens infected with avian leukosis transgressed the norm of acceptable goods under both warranties, appellant's position is that the action will not lie in a situation where the seller is unable to discover the defect or cure the damage if it could be ascertained. That theory does not eliminate the consequences imposed by the Code upon the seller of commercially inferior goods. It is without merit. The fact that avian leukosis is nondetectable could be an important issue but only as bearing on the charge of negligence, which is no longer in this suit. The Pennsylvania decision in Vandenberg & Sons, N.V. v. Siter, 204 Pa. Super. 392, 204 A.2d 494 (1964), buttresses our conclusion in upholding the implied warranties. There latent defects in certain tulip and hyacinth bulbs went undetected in the face of two inspections and the court, though aware that the imperfections could only be uncovered after growth, limited its concern to the question of whether the seller's express provision that notice of any breach be communicated within a certain time, was reasonable. The entire purpose behind the implied warranty sections of the Code is to hold the seller responsible when inferior goods are passed along to the unsuspecting buyer. What the Code requires is not evidence that the defects should or could have been uncovered by the seller but only that the goods upon delivery were not of a merchantable quality or fit for their particular purpose. If those requisite proofs are established the only exculpatory relief afforded by the Code is a showing that the implied warranties were modified or excluded by specific language under Section 2-316.6 p\. 837 Lack of skill or foresight on the part of the seller in discovering the product's flaw was never meant to bar liability. The gravamen here is not so much with what precautions were taken by the seller but rather with the quality of the goods contracted for by the buyer. Even a provision specifically disclaiming any warrant against avian leukosis would not necessarily call for the defendant's freedom from liability. Section 1-102(3)7 of the Code's General Provisions states that standards which are manifestly unreasonable may not be disclaimed and prevents the enforcement of unconscionable sales where, as in this instance, the goods exchanged are found to be totally worthless.  . . .  The judgment of the District Court will be affirmed.