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

• Court: Supreme Court of Oregon
• Writing for the Court: Before O'CONNELL; HOWELL
• Citation: 273 Or. 701,543 P.2d 283
• 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.
• Decision Date: 12 December 1975
• Docket Number: PHILCO-FORD

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.

[273 Or. 703]

Page 284

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-

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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.

[273 Or. 704] 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[273 Or. 705] 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

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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[273 Or. 706] 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., [273 Or. 707] 323 F.Supp. 1300, 1308 (S.D.N.Y.1970), Aff'd 444 F.2d 372 (2d Cir.), Cert...