Opinion ID: 684071
Heading Depth: 2
Heading Rank: 2

Heading: Breach of Implied Contractual Obligation of Good Faith

Text: 20 The district court found that TWA breached the implied duty of good faith and fair dealing under the 1984 contract by failing to produce and distribute a sufficient number of tour brochures to achieve the mutually agreed upon minimum number of Getaway passengers. TWA argues that the 1984 contract specifically conferred upon TWA sole discretion to determine the level of promotion for Getaway tours; that it exercised that discretion consistent with reasonable business principles, chiefly a decision to cut the costs of generating an excessive number of Getaway brochures; and that a damage award for lost profits cannot rest on the breach of implied contract obligations. 21 Under New York law, the implied covenant of good faith and fair dealing inheres in every contract. Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publishing Co., 30 N.Y.2d 34, 45, 281 N.E.2d 142, 144, 330 N.Y.S.2d 329, 333, cert. denied, 409 U.S. 875, 93 S.Ct. 125, 34 L.Ed.2d 128 (1972). Even when a contract confers decision-making power on a single party, the resulting discretion is nevertheless subject to an obligation that it be exercised in good faith. See Carvel Corp. v. Diversified Management Group, Inc., 930 F.2d 228, 231 (2d Cir.1991); Cross & Cross Properties, Ltd. v. Everett Allied Co., 886 F.2d 497, 502 (2d Cir.1989). 22 TWA characterizes its obligation to produce and distribute brochures as a discretionary promotion. It is well-settled that, in construing discretionary promotional contracts, courts will not read into them a best efforts or a promote fully clause unless the parties have explicitly bargained for such an obligation. See Zilg v. Prentice-Hall, Inc., 717 F.2d 671, 679 (2d Cir.1983), cert. denied, 466 U.S. 938, 104 S.Ct. 1911, 80 L.Ed.2d 460 (1984). However, even in a discretionary promotional contract, the obligation of good faith remains, and the particular duties of each party are derived both from the common expectations of [the] parties ... and from the relationship of those parties as structured by the contract. Id. Moreover, TWA's promotional duties under the 1984 joint venture agreement cannot fairly be characterized as purely discretionary. 23 The 1984 contract confers discretion upon TWA to determine the appropriate level of advertising and marketing, but defines and limits that discretion by mandating a cooperative and collaborative process: 24 TWA agrees that it will at its own expense ... (i) produce and distribute brochures for the Tours in such numbers as are deemed appropriate to produce the number of Tour passengers desired by TWA and [Travellers], such desired number of Tour passengers to be mutually agreed upon for each year by TWA and [Travellers], but in no event to be less than 100,000 per year; (ii) advertise the Tours in various media as deemed necessary by TWA; (iii) wholesale the Tours to travel agents and make retail sales of the Tours at TWA's own Sales offices or through other distribution channels as deemed appropriate by TWA.... In determining the number of Tour brochures and the type and extent of advertising for the Tours, TWA will give full consideration to the recommendations of [Travellers]. 25 This language and the prior course of dealings between the parties (as Judge Ward found) required TWA to consult with Travellers in determining the number of brochures to be produced and distributed for each tour season, to give full consideration to Travellers' recommendations, and to produce and distribute a volume of brochures deemed appropriate to generate the minimum targeted number of Getaway passengers. TWA argues that the required number of brochures deemed appropriate is the number that TWA alone deemed appropriate. That reading is not obvious from the language, which specifies no point of view in this phrase, and in any event requires the exercise of good faith in determining an appropriate number. 26 We adhere to the general proposition that a damage award for lost profits cannot rest upon the breach of the implied duty of good faith and fair dealing. Here, however, the implied duty was not invoked to create a new obligation, but to measure compliance with an explicit contract obligation (the production and distribution of enough brochures to attract a specific target number of customers) that requires consultation in good faith and the exercise of judgment. To prevail, Travellers must prove: (1) that TWA's promotional efforts were insufficient to attract the specific target number of customers, and (2) that the nature and extent of TWA's efforts did not reflect good faith business judgments, but were in fact determined by improper motives. Cf. Zilg, 717 F.2d at 681. 27 Judge Ward concluded that TWA's promotional efforts were inadequate. The district court found that TWA unilaterally and unreasonably reduced the level of promotion for Getaway tours over the strenuous and repeated objections of Travellers. There is sufficient record evidence to support the finding that TWA failed to comply with its obligations under the 1984 contract. Subsequent to the 1987 planning meeting, TWA began reducing both the types and quantity of brochures produced. Judge Ward found that this was done with little regard for the impact it would have on the number of Getaway passengers. For the 1986 tour season, TWA distributed eleven different tour programs--packaged by location, season and price--and a total of over six million individual brochures some of which were over 250 pages in length. For the 1989 tour season, TWA distributed only four different tour programs and fewer than two million brochures. Over this same period, TWA reduced its emphasis on Getaway Europe in its advertising, increased its patronage of Travellers' competitors, and failed to employ other promotional efforts to sell Getaway tours. In the face of declining sales and the repeated failure to meet the 100,000 passenger target, the district court found that TWA took no affirmative step to stimulate demand in Getaway. 28 TWA forcefully argues that cost cutting is a legitimate business objective. In exercising judgment as to the appropriate volume of brochures, it would not be bad faith to consider efficacy relative to cost or to attempt to reduce expenses. Furthermore, a good faith exercise of judgment could misfire without giving rise to a claim for lost profits. In the absence of an explicit best efforts clause or specific promotional obligation, courts are properly reluctant to award lost profits damages for a failure to adequately promote a product where a party's discretionary decisions are exercised pursuant to good faith business judgment. See, e.g., Zilg, 717 F.2d at 679-82. However, when a party undertakes specific promotional obligations, its discretion must be exercised in good faith and, in addition, the determination of [the] effectiveness ... of promotion [has] to be made in good faith. Contemporary Mission, Inc. v. Famous Music Corp., 557 F.2d 918, 923 n. 8 (2d Cir.1977). 29 According to TWA, the implementing of cost controls and the reduction in the number of brochures was a good faith exercise of business judgment that was fully justified by the surplus of brochures remaining in inventory at the conclusion of each tour season. Prior to the 1987 tour season, TWA had followed a force-feed marketing strategy to promote Getaway tours based on its own market research showing the critical importance of ensuring that travel agents had a sufficient stock of brochures available for potential customers. The decision to reduce the number of brochures contravened this long-standing promotional strategy. TWA contends that any adverse effect of reduced volume could be offset through continuous monitoring of its inventory and the ability to print and distribute additional brochures as needed. While the district court accepted this argument, Judge Ward found that TWA never in fact instituted a procedure for continuous monitoring of its inventory or of the ongoing distribution of additional brochures. For the 1988 tour season, for example, although a modest surplus existed for some of the brochures, TWA ran out of the most important Getaway brochure--the Fall/Winter/Spring catalog. 30 Generally, a court need not scrutinize the motivations behind a promoter's exercise of business judgment in a discretionary promotional contract. Because the promoter stands to share in the profits of the joint venture, we can rely on the promoter's self-interest to ensure that the goal of profit maximization guides its business decisions. Cf. Zilg, 717 F.2d at 670-80. Here, however, the district court found that TWA was not trying to maximize the profits from the Getaway joint venture; rather, TWA was trying to maximize its profits by eliminating Travellers as the middleman. In the Spring of 1987, TWA determined that it no longer needed Travellers to fill its designated tour passenger seats. TWA further determined that they could substantially increase their margins on Getaway tours by bringing Getaway in house. Consequently, Icahn first offered to purchase Travellers and, when that offer was refused, Icahn threatened Travellers, citing their vulnerable position, and then directed TWA to terminate the joint venture agreement with Travellers. The district court found, and the record fully supports, that the promotional efforts of TWA were not guided by valid, good faith business judgments, but were rather based on the improper motive of attempting to eliminate Travellers. 31 In short, the district court did not err in finding a specific promotional obligation on the part of TWA, premised upon the contract provisions that required Travellers to devote substantially all of its efforts to furnishing a supply of ground arrangements, allowed TWA to exercise judgment in respect of the promotional efforts to generate the demand for Getaway tours, jointly fixed a minimum target of customers, allocated the costs of attracting those customers to TWA, and mandated that TWA pursue those efforts in consultation with Travellers. The district court's finding was reinforced by the parties' course of dealing. Although the parties did not explicitly incorporate a best efforts clause or establish a fixed number of brochures to be distributed annually, they did the next best thing: the parties explicitly set a minimum targeted number of Getaway passengers to be achieved each year. Under these circumstances the district court properly concluded that TWA had the duty to exercise good faith in fulfilling its specific promotional obligations and in exercising its discretion under the contract. 32 The district court's finding of liability was supported by sufficient evidence. Judge Ward found that TWA breached its implied duty of good faith and fair dealing by failing to take steps reasonably calculated to achieve the agreed upon minimum number of Getaway passengers, by failing to ascertain the number of brochures appropriate to generate those passengers, and by failing to ensure an adequate supply of brochures. Judge Ward further found that TWA's promotional efforts were not conducted in good faith but were in fact influenced by the improper motive to eliminate.