Procedural Posture

Respondent distributor filed a breach of contract action against appellant manufacturer after the manufacturer canceled a distribution contract between the parties. The Superior Court of Contra Costa County (California) held that the contract contained an implied covenant obligating the manufacturer to repurchase or give credit for unused stock that the distributor had on hand at the time of the cancellation. The manufacturer appealed.

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Overview

The manufacturer and the distributor entered into a written jobber-distributor contract that allowed either party to terminate the agreement with 30 days’ notice. The trial court found that there was an implied covenant by the manufacturer in the contract, which it had breached, to repurchase or give credit for merchandise previously purchased by the distributor that had not been disposed of before the contract was terminated. The court held that evidence of oral and unexpressed agreements was properly admitted to explain the transaction between the parties because a contract could be explained by reference to the circumstances under which it was made. However, the court held that there was no implied covenant to repurchase in the parties’ contract because the agreement was not a contract of adhesion and the covenant was neither indispensable to effectuate the parties’ intention nor a legal necessity. Even if there had been an implied covenant to repurchase, the distributor failed to show compliance with Cal. Civ. Code § 1783(3) because there was no proof that it offered the merchandise to the manufacturer for repurchase or that the distributor had the ability to perform.

Outcome

The court reversed the portion of the trial court’s judgment finding that the parties’ contract contained an implied covenant to repurchase and awarding the distributor the value of merchandise that it had in stock when the contract was canceled.