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N.Y. U.C.C. § 1-203 states that every output contract imposes an obligation of good faith in its performance. The commercial background and intent must be read into the language of any agreement and good faith is demanded in the performance of that and, it is the general rule that good faith cessation of production terminates any further obligations thereunder and excuses further performance by the party discontinuing production.
Plaintiff operated a wholesale bread baking business. The parties entered into a written contract in which defendant agreed to sell and plaintiff agreed to purchase all the bread crumbs produced by defendant. There was a cancellation clause in the contract that required six months notice to the other party. After making the agreement, a substantial quantity of bread crumbs was sold by defendant to plaintiff, but defendant stopped its bread crumb production because the contract was unprofitable. Plaintiff sued to compel defendant to complete the contract. The trial court ruled that economic feasibility was not a factor that justified cancellation of the contract without notice. The appellate courts agreed. On appeal, the court affirmed.
Did the agreement carry with it an implication that defendant was obligated to continue to manufacture bread crumbs for the full term?
Since bread crumbs were but a part of defendant's enterprise and since there was a contractual right of cancellation, good faith required continued production until cancellation, even if there be no profit. In circumstances such as these and without more, defendant would be justified, in good faith, in ceasing production of the single item prior to cancellation only if its losses from continuance would be more than trivial, which, overall, is a question of fact.