Consumers Intern., Inc. v. Sysco Corp.

• Citation: 191 Ariz. 32,951 P.2d 897
• Decision Date: 30 December 1997
• Docket Number: CA-CV,No. 1,1
• Parties: , 259 Ariz. Adv. Rep. 77 CONSUMERS INTERNATIONAL, INC., an Arizona corporation, Plaintiff-Appellant, v. SYSCO CORPORATION, a foreign corporation, Defendant-Appellee. 97-0086.
• Court: Court of Appeals of Arizona

Page 897

951 P.2d 897

191 Ariz. 32, 259 Ariz. Adv. Rep. 77

CONSUMERS INTERNATIONAL, INC., an Arizona corporation, Plaintiff-Appellant, v. SYSCO CORPORATION, a foreign corporation, Defendant-Appellee.

No. 1 CA-CV 97-0086.

Court of Appeals of Arizona,

Division 1, Department B.

Dec. 30, 1997.

As Amended Jan. 6, 1998.

Warnock, MacKinlay & Associates, P.L.L.C. by J. Kent MacKinlay, Mesa, for Plaintiff-Appellant.

Johnston Maynard Grant & Parker, P.L.C. by Daniel D. Maynard, Phoenix, for Defendant-Appellee.

OPINION

VOSS, Judge.

Plaintiff-Appellant Consumers International, Inc. (CI) appeals from the trial court's judgment in favor of Defendant-Appellee Sysco Corporation (Sysco) on CI's claim of wrongful termination of the parties' business relationship. The sole issue on appeal is whether the implied covenant of good faith and fair dealing inherent in every contract requires that a termination-at-will clause in a distribution agreement be interpreted to require "good cause." Because we conclude that the contract contained no such requirement, and that the trial court correctly entered summary judgment on this basis, we affirm.

Facts and Procedural History

The parties entered into a written "Master Distribution Agreement" on October 1, 1993. The agreement provided that Sysco would serve as supplier of at least eighty percent of the enumerated food service products that CI distributed to its retail customers. The products included both national brands and Sysco brands.

The agreement provided as follows regarding its duration:

9. Term

The term of this Agreement will begin on October 1, 1993, and terminate two years from that date. This Agreement may be terminated prior to such date.

(a) By either party upon thirty (30) days written notice to the other party for failure of the other party to comply with any provision of this Agreement;

(b) By SYSCO upon written notice to Customer if Customer's financial position deteriorates materially, determined by SYSCO in its sole judgment; and

(c) By either party upon sixty (60) days prior written notice to the other party.

(Emphasis added.) On December 13, 1993, Sysco sent the following termination letter to CI, indicating its sixty-day notice:

This letter is to serve as notification to Consumers International that SYSCO Corporation, and its operating subsidiaries and divisions, is hereby terminating our Master Distribution Agreement with Consumers International.

The Master Distribution Agreement will therefore terminate sixty days hence, being February 12, 1994.

In August 1995, CI brought this action against SYSCO, alleging, among other things, ¹ wrongful termination of the contract based on Sysco's breach of the implied covenant of good faith and fair dealing. CI contended that the agreement implicitly contained an "implied covenant that the right of termination would only be exercised in good faith."

Sysco moved for summary judgment on this claim, asserting that it had the right to terminate the contract for any reason upon sixty days notice, under the explicit terms of the agreement. The trial court agreed and found:

THE COURT FINDS that the parties dealt at arms['] length.

THE COURT FURTHER FINDS that the parties had benefit of counsel when they entered into the contract.

THE COURT FURTHER FINDS that the parties were aware of paragraph 9(c) permitting termination of the contract without cause by the Defendant.

THE COURT FURTHER FINDS no evidence of bad cause such as gender discrimination[,] racial discrimination or violation of public policies [as] in Wagenseller v. Scottsdale Memorial Hospital [,] 147 Ariz. 370, 710 P.2d 1025 (1985).

Based on these findings, the trial court granted Sysco summary judgment on the claim of wrongful termination of contract, and concluded that the agreement terminated on February 12, 1994. After the parties stipulated to the remaining issues, the court dismissed the action, and CI timely appealed from the final judgment.

DISCUSSION

On appeal, CI contends that the implied covenant of good faith and fair dealing inherent in every contract mandates that early termination of a distribution agreement be restricted to reasons constituting "good cause." Because Sysco has not given any "good cause" reason for early termination of this contract, CI contends that summary judgment was inappropriate on its wrongful termination claim.

As a preliminary matter, we note that CI asserts that its relationship with Sysco is "akin" to that of a franchisee. Much of the case law on which CI relies involves franchise relationships. We need not, however, determine whether this distribution agreement constituted a "franchise" ² to resolve this issue; even assuming, without deciding, that the business relationship at issue here was a franchise-type relationship, our conclusion would be the same.

CI contends that, because it is a small distributor and Sysco is a large supplier, the contractual relationship between them must be viewed as an unequal one, and that public policy therefore compels limiting enforcement of the broad termination clause to good cause. CI finds support for this argument in the common law of Arizona and other jurisdictions and in analogous Arizona statutory provisions relating to supplier/dealer relationships of oil companies and liquor suppliers.

We begin with the premise that, under general principles of contract law, absent statutory regulation, parties may freely contract for any lawful purposes, including franchise agreements for the distribution of products. McDonald's Corp. v. Markim, Inc., 209 Neb. 49, 306 N.W.2d 158, 162 (1981). Freedom to contract has long been considered a valuable right:

[I]f there is one thing which more than another public policy requires it is that [people] of full age and competent understanding shall have the utmost liberty of contracting, and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by Courts of justice. Therefore, you have this paramount public policy to consider--that you are not lightly to interfere with this freedom of contract.

Wood Motor Co. v. Nebel, 150 Tex. 86, 238 S.W.2d 181, 185 (1951) (citation omitted).

This general rule has been modified by Arizona courts in some limited circumstances, however, when enforcement of contractual terms may be either unconscionable because of the unequal bargaining power of the parties, see Darner Motor Sales, Inc. v. Universal Underwriters Insurance Co., 140 Ariz. 383, 682 P.2d 388 (1984), or contravene public policy, see Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 710 P.2d 1025 (1985).

The Arizona Legislature has also statutorily modified the freedom to contract in certain limited types of franchise relationships. See, e.g., A.R.S. §§ 44-1551 to 1562 (Petroleum Products Franchises); A.R.S. §§ 44-1565 to 1567 (Spiritous Liquor Franchises); A.R.S. § 28-1301 to 28-1329 (Automobile Dealers and Wreckers). Unlike many other states, however, our legislature has not statutorily regulated the termination of all franchise contracts. Cf., e.g., Conn. Gen.Stat. Ann. §§ 42-133f and -133l(a); Delaware Franchise Security Law, 6 Del.Code § 2551 et seq.; Nebraska Franchise Practices Act, Neb.Rev.Stat. §§ 87-401 et seq.; New Jersey Franchise Practices Act, N.J. Stat. Ann. 56:10-1 to 10-8; Washington Franchise Protection Act, Wash. Rev.Code 19.100.180.

We begin our analysis with an examination of the common law of other jurisdictions on the specific issue of franchise no-cause termination agreements, and then turn to existing general Arizona contract law to resolve this issue.

Other Jurisdictions

Many of the common law cases cited by CI in the area of "good-cause" termination developed in the 1970s during a shortage of oil supplies in the United States. During that economic crisis, many courts began to limit the enforcement of contractual termination rights between large oil companies and their smaller retail dealers by construing distribution contracts to include an inherent requirement that the contract not be terminated except for "good cause." See, e.g., Shell Oil v. Marinello, 63 N.J. 402, 307 A.2d 598, 602 (1973)(public policy of state implies a covenant not to terminate franchise agreement except for "just cause"); Ashland Oil v. Donahue, 159 W.Va. 463, 223 S.E.2d 433, 440 (1976)(holding unenforceable an oil dealer's right to terminate); Atlantic Richfield v. Razumic, 480 Pa. 366, 390 A.2d 736, 742 (1978)(adopting Marinello reasoning to limit termination clause for public policy reasons). These courts based termination clause limitations on common law public policy concerns reflected in recent enactments of state legislation regulating either the petroleum industry specifically or franchise arrangements in general. For example, in Marinello, the court noted the New Jersey Legislature's recent enactment of the Franchise Practices Act, which "prohibits a franchisor from terminating, canceling or failing to renew a franchise without good cause which is defined as the failure by the franchisee to substantially comply with the requirements imposed on him by the franchise." 307 A.2d at 602, see N.J. Stat. Ann. 56:10-2. Although the statute did not apply retroactively to the Marinello contract, the court found this legislative regulation to reflect the "public policy" of the state:

[T]he Act reflects the legislative concern over long-standing abuses in the franchise relationship, particularly provisions giving the franchisor the right to terminate, cancel or fail to renew the franchise. To that extent the provisions of the Act merely put into statutory form the extant public policy of this State.

Id. Thus, the court found void as against public policy a termination clause in a dealer agreement that gave Shell Oil Corporation the "absolute" right to terminate on ten days notice. Id.

Similarly, other courts have concluded that when parties to a "chain-style" franchise...