Cavendish Farms, Inc. v. Mathiason Farms, Inc.

• Decision Date: 18 January 2011
• Docket Number: Nos. 20090380, 20100123.,s. 20090380, 20100123.
• Citation: Cavendish Farms, Inc. v. Mathiason Farms, Inc., 2010 ND 236, 792 N.W.2d 500, 73 UCC Rep.Serv.2d 274 (N.D. 2011)
• Parties: CAVENDISH FARMS, INC., Plaintiff, Appellant and Cross-Appellee v. MATHIASON FARMS, INC., Defendant, Appellee and Cross-Appellant. Cavendish Farms, Inc., Plaintiff, Appellant and Cross-Appellee v. Valley View Farms, Defendant, Appellee and Cross-Appellant.
• Court: North Dakota Supreme Court

792 N.W.2d 500

73 UCC Rep.Serv.2d 274

2010 ND 236

CAVENDISH FARMS, INC., Plaintiff, Appellant and Cross-Appellee

v.MATHIASON FARMS, INC., Defendant, Appellee and Cross-Appellant.

Cavendish Farms, Inc., Plaintiff, Appellant and Cross-Appellee

v.Valley View Farms, Defendant, Appellee and Cross-Appellant.

Nos. 20090380, 20100123.

Supreme Court of North Dakota.

Dec. 14, 2010.

Rehearing Denied Jan. 18, 2011.

Michael J. Keaton (argued), Keaton & Associates, P.C., Palatine, IL, and Joseph F. Larson, II (on brief), Jamestown, N.D., for plaintiff, appellant and cross-appellee.

Michael Stuart Raum (argued), Fargo, N.D., and Christopher Eric Rausch (on brief), Bismarck, N.D., for defendant, appellee and cross-appellant.

CROTHERS, Justice.

[¶ 1] Cavendish Farms, Inc., appealed from district court judgments finding that it had breached contracts for the purchase of potatoes from Mathiason Farms, Inc. and Valley View Farms, Inc. ("the Growers"), and that the Growers had also breached the contracts. The Growers cross-appealed from the judgments. We affirm.

I

[¶ 2] Cavendish owns a potato processing facility, and the Growers grow potatoes. In 2005, Cavendish and the Growers entered into contracts whereby each of the Growers agreed to grow 25,000 hundredweight of russet burbank potatoes on certain designated fields and sell them to Cavendish. Cavendish agreed to buy the potatoes. The contracts specified they were for "crop year 2005," and Cavendish agreed to pay a base price of $4.70 per hundredweight for "usable potatoes." The Growers could not sell potatoes grown on the designated fields to another buyer unless Cavendish first rejected or released them.

[¶ 3] In November 2005, Cavendish made advance payments to the Growers ($36,400 to Valley View and $32,032 to Mathiason) as required by the contracts. It thereafter became apparent that there were problems with the quality of the potatoes, and the Growers attempted to recondition the potatoes by warming the piles. Cavendish refused to make the next scheduled advance payments due on February 15, 2006. Cavendish inspected two loads of potatoes in late February 2006 and determined that the potatoes were not acceptable. On March 31, 2006, Cavendish e-mailed the Growers that it was rejecting the potatoes and sent a formal letter of rejection on April 3, 2006. By that time the potatoes had deteriorated and were unmarketable.

[¶ 4] Cavendish asked the Growers to return the November advance payments, but the Growers refused. Cavendish sued the Growers, alleging they had breached the contract by failing to deliver potatoes as promised, and sought damages and return of the advance payments. The Growers answered and counterclaimed, alleging Cavendish had supplied defective seed potatoes for the 2004 crop year; ¹ Cavendish had breached the 2004 contracts by failing to pay the contract price; Cavendish had breached the 2005 contracts; Cavendish had breached an implied covenant of good faith and fair dealing in the 2005 contracts; and Cavendish had engaged in unfair trade practices under the 2005 contracts. On cross-motions for summary judgment, the district court dismissed the Growers' claims for breach of an implied covenant of good faith and fair dealing and unfair trade practices. The remaining claims and counterclaims went to trial. The district court found that Cavendish owed damages for underpayments on the 2004 contracts, that Cavendish had acted in bad faith and breached the 2005 contracts by delaying its rejection of the 2005 crop of potatoes, thereby precluding the Growers from selling the potatoes to another buyer before they totally deteriorated and resulting in damages of $50,000 for each of the Growers, and that the Growers had breached the 2005 contracts by failing to provide usable potatoes andwere required to return the advance payments made by Cavendish.

II

A

[¶ 5] At oral argument, Cavendish argued for the first time that the 2005 contracts were not contracts for the sale of goods and that the Uniform Commercial Code provisions codified in N.D.C.C. tit. 41 did not apply. We generally do not consider issues raised for the first time at oral argument on appeal, see, e.g., State v. Schmitt, 2001 ND 57, ¶ 11 n. 2, 623 N.W.2d 409. We also note that a contract to purchase a future crop is a contract for the sale of goods governed by N.D.C.C. tit. 41, even if the crop has not yet been planted. See Red River Commodities, Inc. v. Eidsness, 459 N.W.2d 811, 814 (N.D.1990); Red River Commodities, Inc. v. Eidsness, 459 N.W.2d 805, 807 (N.D.1990). Other authorities are in accord, explicitly recognizing that a contract for the sale of a future crop is a contract for the sale of goods under the Uniform Commercial Code, even if the crop has not yet been planted. See, e.g., Seminole Peanut Co. v. Goodson, 176 Ga.App. 42, 335 S.E.2d 157, 159 (1985); 2 Lary Lawrence, Anderson on the Uniform Commercial Code § 2-105:48 (3d ed.2004); 21A Am.Jur.2d Crops § 48 (2008); 67 Am.Jur.2d Sales § 58 (2003); 77A C.J.S. Sales § 4 (2008). The contracts in this case expressly provided that they were for "crop year 2005" and that "Cavendish Farms agrees to buy potatoes from Grower" and "Grower agrees to grow and sell potatoes to Cavendish Farms." These were contracts for the sale of goods governed by the Uniform Commercial Code as codified in N.D.C.C. tit. 41.

B

[¶ 6] Cavendish contends the district court "secretly revived" the good-faith count of the Growers' counterclaim after expressly dismissing that count months earlier by summary judgment. In their answer and counterclaim, the Growers raised several separate claims for relief. Count 5 alleged Cavendish had breached the 2005 contracts; Count 6 alleged breach of an implied covenant of good faith and fair dealing. On Cavendish's motion for summary judgment, the district court dismissed Count 6 of the counterclaim, but Count 5 was left for trial. After trial, the district court concluded Cavendish had failed to act in good faith and had breached the 2005 contracts when it failed to reject the Growers' potatoes until late March, after they had totally deteriorated and were unmarketable.

[¶ 7] Cavendish contends the district court's summary judgment ruling completely removed the issue of good faith from the case. To support its argument, Cavendish relies upon cases acknowledging that a tort-based remedy for breach of an implied covenant of good faith and fair dealing has only been applied in this state to insurance contracts, not general commercial contracts. See, e.g., Dalan v. Paracelsus Healthcare Corp., 2002 ND 46, ¶ 11, 640 N.W.2d 726.

[¶ 8] In addition to the implied covenant of good faith and fair dealing which has been recognized in insurance contracts in this state, the Uniform Commercial Code, as codified in N.D.C.C. tit. 41, expressly imposes an obligation of good faith in the performance of contractual terms:

"Every contract or duty within this title imposes an obligation of good faith in its performance and enforcement. This section does not support an independent claim for relief for failure to perform or enforce in good faith and does not create a separate duty of fairness and reasonableness which can be independently breached."

N.D.C.C. § 41-01-18.² This provision, while not authorizing a separate, independent claim for relief for breach of the duty of good faith, "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." N.D.C.C. § 41-01-18 cmt. 1. The interplay between lack of good faith and breach of contract has been explained:

"As far as the UCC is concerned, there is no action that can be brought merely for breach of the covenant of good faith and fair dealing. In consequence, the UCC does not permit recovery of money damages for not acting in good faith where no other basis of recovery is present.

"The only action that can be brought is an action for a breach of a contract term. It is here that the concept of good faith comes into play to the extent that it gives scope or definition to a duty imposed by the contract or protects, by its implication, that neither party take any action that would defeat the performance of the other or the purpose of the contract."

1A Lary Lawrence, Anderson on the Uniform Commercial Code § 1-304:16R (3d ed.2004) (footnotes omitted). In prior cases interpreting good faith under the Uniform Commercial Code, this Court has noted that the good-faith obligation must "attach" to an existing contract or duty. See Jerry Harmon Motors, Inc. v. First Nat'l Bank & Trust Co., 472 N.W.2d 748, 755 (N.D.1991); Union State Bank v. Woell, 434 N.W.2d 712, 716-17 (N.D.1989).

[¶ 9] The Growers had pleaded both a breach of contract claim and a separate claim for breach of the implied covenant of good faith and fair dealing. The district court's summary dismissal of Count 6 merely disposed of good faith as the basis for an independent claim, whether based upon the tort remedy or the Uniform Commercial Code. The court's ruling did not, expressly or impliedly, dispose of Cavendish's alleged lack of good faith as a basis for the breach of contract claim in Count 5. The court simply dismissed Count 6 and did not purport to preclude the Growers from alleging bad faith in the performance of the terms of the contract as a basis for their breach of contract claim pleaded in Count 5.

[¶ 10] Cavendish claims it was unfair and a violation of due process for the district court to rely upon the good-faith argument after trial because it was "resurrected ... without any notice or opportunity to be heard" and "none of the parties addressed this claim in any of the post-trial briefing." The record does not support Cavendish's claim. The Growers' pre-trial and post-trial briefs addressed the issue of good faith at length, citing N.D.C.C. § 41-01-18, and expressly argued Cavendish's failure to timely reject the potatoes when it knew it would not accept them...