News & Noteworthy

Authored - NJ Contract Law Update - What Can Happen If a Significant Business Relationship Develops Without a Master Agreement
AUGUST 14, 2012 | Windels Marx - Commercial Litigation

From time to time, a significant business relationship that was never reflected in a signed master agreement (as opposed to individual invoices, for example) results in a dispute--and leaves the court without much guidance. One fairly well-known case, resulting in the court's potential structuring of the parties' arrangement as a "joint venture", is Lo Bosco v. Kure Engineering Ltd., 891 F. Supp. 1020 (D.N.J. 1995). Or, as occurred in Kare Distribution Inc. v. Jam Labels and Cards, LLC, 2012 WL 266386 (D.N.J. January 30, 2012), one party's investment in the ostensible contract structure may be so significant that the resisting party may not even dispute the existence of a master contractual arrangement, at least at the summary judgment stage; but may instead elect to dispute its terms.

In such contexts, one also sees a substantial number of quasi-contract and contract-substitute claims. (See, e.g., my 6/27/12 article on "Quasi-Contract Claims".) These 'contract penumbra' claims can include "joint venture", as in Lo Bosco1; or conversion, replevin, unjust enrichment, tortious interference, covenant of good faith, estoppel, fraud, duress, and even statutory violations such as the New Jersey Consumer Fraud Act, as in Kare.

Parties sometimes proceed without written contracts because they think it will give them added flexibility; or because the disproportionate bargaining power of one of the parties renders the more vulnerable party unlikely to demand a written contract--perhaps even as that party performs part of that contract, and invests heavily in it, as was alleged in Kare.

Clients should be aware that when they proceed on this basis, they act at great peril. In my experience, however, the contract and its performance may go forward without any attorney input. When the dispute starts, creativity is the order of the day--as the above cases reflect.

The Kare Court's treatment of some of the specific 'contract penumbra' claims is also of interest. For example, the Court indicated:

  1. The same facts may preclude summary judgment on both contract and promissory estoppel.
  2. Supposed personal antagonism--or allowing competition where (allegedly) none such was permitted to exist, but doing so openly--did not constitute violations of the covenant of good faith.
  3. Under New Jersey law, "a plaintiff cannot maintain a claim for breach of the implied covenant of good faith and fair dealing, when the conduct at issue is governed by the terms of an express contract or the cause of action arises out of the same conduct underlying the alleged breach of contract" (citations omitted).
  4. Conversion damages are (the Court opined) limited to the value of the items 'converted', not encompassing collateral damages as well.
  5. Even a dramatic markup (ostensibly undisclosed) cannot give rise to a fraud cause of action, where (a) the general concept of marking-up was known, and (b) the complaining party apparently tolerated markups from competitor bids.

One final note: The schism between the parties appears to have arisen based on a change in the plaintiff's management. The former manager later gave testimony favorable to the defendant. Be aware of the risk of former or fired employees at all times (an important tactical subject, worthy of a separate article).

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education, originally published in 2007 and updated in November 2011. His updates on New Jersey contract law are based in recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments.

1 "Partnership" is another candidate.

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