W. L. May Co., Inc. v. Philco-Ford Corp.

• Citation: 273 Or. 701,543 P.2d 283
• Decision Date: 12 December 1975
• Docket Number: PHILCO-FORD
• Parties: , 18 UCC Rep.Serv. 599 W. L. MAY CO., INC., an Oregon Corporation, Respondent-Cross-Appellant, v.CORPORATION, a Delaware Corporation with its principal place of business of Philadelphia, Pennsylvania, Appellant.
• Court: Supreme Court of Oregon

Page 283

543 P.2d 283

273 Or. 701, 18 UCC Rep.Serv. 599

W. L. MAY CO., INC., an Oregon Corporation, Respondent-Cross-Appellant, v. PHILCO-FORD CORPORATION, a Delaware Corporation with its

principal place of business of Philadelphia,

Pennsylvania, Appellant.

Supreme Court of Oregon.

Argued and Submitted Sept. 8, 1975.

Decided Dec. 12, 1975.

Floyd Hinton of Deich, Deich & Hinton, Portland, argued the cause and filed briefs for appellant.

N. Robert Stoll, Portland, argued the cause and filed a brief for respondent- cross-appellant, and a reply brief to amicus curiae General Electric Co.

Ernest Bonyhadi and David Kaye of Rives, Bonyhadi & Drummond, Portland, filed a brief for General Electric Co. as amicus curiae. With him on the brief was James T. Hughes, Division Counsel, Erie, Pa.

Before O'CONNELL, C.J., and DENECKE, HOLMAN, TONGUE, HOWELL and BRYSON, JJ.

HOWELL, Justice.

This is an action at law for damages arising out of the termination of a distributorship contract between the plaintiff, W. L. May Co., Inc., and the defendant, Philco-Ford Corporation. It was tried before the circuit court sitting without a jury. Defendant appeals from a judgment for plaintiff for $6,500.

Plaintiff May Co., a wholesale parts distributor located in Portland, distributes the appliance parts of approximately 40 manufacturers to local servicemen and retail dealers. Plaintiff entered into a distributorship agreement with Philco in July, 1962. The agreement provided that either party could terminate at any time upon written notice of 90 days. Under the agreement, plaintiff was required to carry an 'adequate' inventory of Philco parts. The agreement also provided:

'* * *.

'15. Upon termination of this Agreement Distributor shall cease to be an authorized Philco Distributor and:

'* * *.

'(c) Distributor will resell and deliver to Philco upon demand, free and clear of all liens and encumbrances, such Philco Products and materials bearing Philco's name as Philco shall elect to repurchase, at a mutually agreed price but not in excess of Philco's current distributor price for said products and materials.'

The parties operated under this contract until April 1, 1971, at which time Philco gave plaintiff written notice of termination effective July 1, 1971. The termination was due to a change in Philco's parts distribution policy, and all independent Philco distributors were terminated at that tims.

Following notice of termination, Philco notified plaintiff that it did not intend to demand repurchase of any of its products which might remain after termination. Philco contended that the 90-day notice period allowed plaintiff 'adequate time to sell profitably' the Philco parts which remained on hand. However, plaintiff was unable to market most of its remaining Philco inventory during the 90-day period or thereafter. Approximately one year later, plaintiff requested that Philco buy back the remaining Philco inventory because it was impossible for plaintiff to dispose of it. Philco refused.

Plaintiff's complaint alleged that the termination provisions of the contract were unconscionable and sought reimbursement for its damages arising out of the termination. More specifically, plaintiff alleged that the agreement (a) gave Philco an option to cancel on 90 days' notice, with or without cause, (b) required plaintiff to maintain an adequate inventory, and (c) gave Philco an option to refuse to repurchase the inventory upon termination. Plaintiff also alleged that Philco, having terminated the agreement, refused to repurchase the Philco inventory, and that plaintiff was thereafter unable to dispose of its remaining Philco products. Plaintiff's complaint argued that the 'totality of circumstances' rendered the termination provisions unconscionable within the meaning of Article 2, § 302, of the Uniform Commercial Code. ¹ Plaintiff sought damages in the amount of the value of the remaining Philco inventory.

The trial court found, as a matter of law, that the repurchase election provision of the contract was unconscionable as of the time of the formation of the contract. The court also concluded that there had been a breach of an implied covenant of good faith and fair dealing when Philco exercised its election not to repurchase at the time of termination. The court then awarded plaintiff $6,500 in damages for breach of the implied covenant.

Defendant contends (a) that the termination provision granting Philco an election to repurchase was not unconscionable, (b) that damages cannot properly be awarded on a theory of unconscionability, and (c) that a breach of contract was not alleged in the complaint and, therefore, an award of damages for breach of an implied obligation of good faith was improper.

Section 2--302 of the Uniform Commercial Code provides as follows:

' § 2--302. Unconscionable Contract or Clause

'(1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

'(2) When it is claimed or appears to the court that the contract or any clause thereof may be unconscionable the parties shall be afforded a reasonable opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making the determination.'

Unconscionability is a legal doctrine currently undergoing a rapid evolution. Most parties who have successfully asserted it in the past have been consumers and, frequently, have also been poor or otherwise disadvantaged. Courts have generally not been receiptive to pleas of unconscionability by one merchant against another except in cases involving damage provisions or warranty disclaimers. See County Asphalt Inc. v. Lewis Welding & Engineering Corp., 323 F.Supp. 1300, 1308 (S.D.N.Y.1970), Aff'd 444 F.2d 372 (2d Cir.), Cert. denied 404 U.S. 939, 92 S.Ct. 272, 30 L.Ed.2d 252 (1971); J. White & R. Summers, The Uniform Commercial Code 114--115 (1972). Normally, the doctrine is asserted as an affirmative defense, and it does not appear that it was originally intended as a basis for damage recovery. White & Summers, Supra at 116.

It is clear from the language of § 2--302 that unconscionability is an issue of law to be decided by the court, and that the party asserting unconscionability must demonstrate that the clause in question was unconscionable at the time the contract was made. See Sinkoff Beverage Co. v. Jos. Schlitz Brewing Co., 51 Misc.2d 446, 273 N.Y.S.2d 364, 3 UCC Rep. 733 (S.Ct. 1966); 1 Anderson, Uniform Commercial Code 406--07, §§ 2--302:20, 2--302:22 (2d ed. 1970). Although the Code itself does not define 'unconscionability,' the official comment to § 2--302 suggests the following standard:

'* * * The basic test is whether, in the light of the general commercial background and the commercial needs of the particular trade or case, the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract. * * * The principle is one of the prevention of oppression and unfair surprise (Cf. Campbell Soup Co. v. Wentz, 172 F.2d 80, 3d Cir. 1948) and not of disturbance of allocation of risks because of superior bargaining power.'

Uniform Commercial Code § 2--302, Comment 1. (Emphasis added.)

Thus, in determining whether the substantive contract provisions of a commercial contract are unconscionable, we look to the circumstances existing at the time of the execution of the contract and examine the challenged provisions in the light of both the general commercial background and the special commercial needs of the particular trade involved. See Division of Triple T Service, Inc. v. Mobil Oil Corp., 60 Misc.2d 720, 304 N.Y.S.2d 191, Aff'd 34 A.D.2d 618, 311 N.Y.S.2d 961 (1969). In order to prove the unconscionableness of the termination provisions of a contract between merchants, it must be shown that the terms of the agreement bear no reasonable relation to the business risks involved and are so one-sided as to be oppressive. See Central Ohio Co-op. Milk Producers Inc. v. Rowland, 29 Ohio App.2d 236, 281 N.E.2d 42 (1972).

We do not feel that plaintiff has shown that the repurchase provision was unconscionable within the meaning of § 2--302 at the time of the formation of the contract. Plaintiff has not shown that Philco's reasons for reserving a repurchase election in its distributorship agreements were not reasonably related to the business risks involved and to Philco's reasonable commercial interests at the time of eventual termination. Although Philco presented no evidence to explain its inclusion of the repurchase election, we are not persuaded that it is unreasonable per se for a manufacturer to reserve the right to refuse to repurchase at least portions of a distributor's inventory upon termination. It may be that Philco was able to insist upon this particular allocation of risks only because of its superiod bargaining power. However, under the Code, a bona fide allocation of risks will not be disturbed merely because one party had a superior bargaining position. See UCC § 2--302, Comment 1. It may also be noted that both parties to this particular contract were sophisticated business people. This is clearly not the case of an innocent consumer who has...