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Friday, Mar 29, 2024

Breaching the Covenant, Nice Employer Got Played

Q: My company develops and manufactures various lines of product in the health and beauty industry. We recently contracted to develop a new exclusive line for a well known retailer. After investing a significant amount of resources (including hundreds of thousands of dollars), just prior to launch, the retailer notified us that they were dropping the line. They didn’t provide any specific grounds, other than that they were not happy with some of the other retailers with whom we had recently reached agreements regarding different lines. The retailer stated that since our agreement is silent as to the duration of our commitment, they can terminate at their leisure. This doesn’t seem fair. Do we have any recourse? A: I’m sorry to hear of this unfortunate development. With the benefit of hindsight, I suggest that you negotiate certain contract terms to include in your next supply agreement (e.g. perhaps a minimum initial term, renewal term options, minimum notice provisions regarding non-renewal or termination, to name a few). Assuming your current contract does not address any of these provisions, you may still have some recourse. All contracts in California, as a matter of law, are found to include a covenant of good faith and fair dealing (“covenant” is just a fancy legal word for promise). This covenant implies that each party will refrain from doing anything which would render performance impossible, or otherwise interfere with the right of the other to receive the benefits of the agreement. A breach of this covenant by failure to deal fairly or in good faith gives rise to an action for damages. Depending on the facts and circumstances surrounding your negotiations, and the parties’ intent, it is possible that the retailer breached this covenant by abruptly terminating your agreement. Often, when contracts are silent as to term (as yours is here), the court will imply a term of duration “commensurate with the intentions of the parties .” Thus, it is important to evaluate the course of the parties’ negotiations, projections, amount of up-front investment, and other factors to determine what the parties’ intentions were going into the relationship in terms of duration. For example, I would expect that the parties exchanged projections and budgets speaking to launch, first year sales totals, second year sales totals, and perhaps beyond. If so, especially in light of the hundreds of thousands of dollars you refer to above, a court may very well determine that the parties’ intentions were to give this line a chance to hit the projected sales figures discussed by the parties during their negotiations. Certainly, your company wouldn’t have invested hundreds of thousands of dollars into a line designed exclusively for this retailer if you had reason to believe they could terminate the line before launch on grounds that have nothing to do with the responsibility of the parties under the agreement. Though they might not realize it, your retailer “partner” may have breached the covenant of good faith and fair dealing, since their decision to abruptly terminate deprived your company of its opportunity to enjoy the benefits of the agreement. The nature and extent of available legal remedies will turn on far more facts and circumstances than your question contains. I encourage you to consult with a lawyer practicing business litigation. Q: What is a joint venture? A: A joint venture is simply a partnership for a specific project. Companies of all sizes frequently form joint ventures for various reasons (e.g. to penetrate new markets or to leverage capital, technology, or human resources, among many others). In a joint venture (“JV” for short), two or more parties agree to make certain contributions, in exchange for which they agree to split profits and losses along certain lines. Since it is project specific, once the specific project terminates, so does the joint venture. Though not required, it is recommended that parties reduce their agreements to writing, usually in the form of a joint venture agreement. This serves as a good exercise in forcing the parties to think through various issues they otherwise may not be focusing on, and also serves to memorialize the parties’ intentions. Joint ventures are not without risk. Depending on a number of factors, it is not unusual for one joint venture partner to have exposure for the sins of another joint venture partner (a legal doctrine known as vicarious liability). This is just another reason not to enter into a joint venture without consulting competent counsel first. Q: I allowed an employee to take two weeks of vacation in January, even though he had only accrued two vacation days at the time. Upon his return, he gave notice and quit. I instructed my controller to deduct the eight days of advanced pay from his last paycheck. My controller’s comments gave me pause as to if we could lawfully do so. Could we? A: Although your sense of fairness may not like this answer, those who like black and white answers will. The answer to your question is “no.” Though your intuition likely suggests that since you advanced the employee eight paid vacation days, and he quit before paying them back, that you are free to offset those paid days from his last pay check. However, this not-so-uncommon scenario is a trap for the unwary. It is true that the advance wages creates a debt; however, since wages are exempt from pre-judgment attachment, an employer cannot unilaterally collect that debt through self-help means. Essentially, you have two choices. One, secure the employee’s prior written consent to allow the company to deduct his debt from his last paycheck. Or, two, initiate a small claims suit to recover the amount due. This column contains general information and under no circumstances constitutes legal advice. This information is not provided in the context of an attorney-client relationship and nothing herein creates an attorney-client relationship. Readers should not act upon this general information without first seeking professional advice. Ira Rosenblatt is a business and corporate lawyer and a co-founder and Director of Stone, Rosenblatt & Cha, a business law firm in Warner Center. Rosenblatt has earned Martindale-Hubbell’s highest rating (“AV”) for legal ability and ethics and is listed in Martindale-Hubbell’s National Bar Register of Pre-eminent Lawyers. He can be reached at [email protected].

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