Richard Thompson Co. v. Westinghouse Electric Corp., 275 N.Y. 119 (1937)

When a contract involves subjective matters like ‘satisfactory’ overhead cost allocation, a ‘satisfaction clause’ is interpreted literally, requiring actual personal satisfaction, not just what a reasonable person would find satisfactory.

Summary

Richard Thompson Co. (plaintiff), a printing concern, contracted with Westinghouse Electric Corp. (defendant) to supply stationery at a price based on ‘cost of production’ plus profit. The ‘cost of production’ included ‘administrative and overhead charges’ that had to be ‘satisfactory to’ Westinghouse after an audit. When a dispute arose over these charges, Westinghouse claimed dissatisfaction, but the referee found this dissatisfaction was unreasonable. The New York Court of Appeals reversed, holding that the satisfaction clause should be interpreted literally, requiring actual satisfaction from Westinghouse, not merely what a reasonable auditor would deem satisfactory.

Facts

Plaintiff and Western Electric (defendant’s assignor) entered into a contract where plaintiff would supply stationery to defendant at fixed prices for a set period.
Due to rising costs, the contract was modified to a ‘cost of production’ plus profit model. ‘Cost of production’ included administrative and overhead charges that had to be ‘satisfactory to the Electric Company’ after auditing plaintiff’s books.
Plaintiff advanced ‘administrative and overhead charges’ subject to audit. Defendant counterclaimed, alleging the audited items were not satisfactory to Western Electric.

Procedural History

The referee excluded proof that Western Electric was not satisfied, finding their dissatisfaction mirrored the defendant’s and lacked reasonable justification.
The trial court affirmed the referee’s ruling, and the Appellate Division affirmed the trial court’s judgment in favor of the plaintiff.
Defendant appealed to the New York Court of Appeals.

Issue(s)

Whether the ‘satisfactory to the Electric Company’ clause regarding administrative and overhead charges should be interpreted as requiring actual satisfaction from the Electric Company, or whether it should be interpreted as requiring only that the charges be satisfactory to a reasonable person.

Holding

No, because the allocation of ‘administrative and overhead charges’ involves subjective judgment, and the contract language requires actual satisfaction from the Electric Company, not merely a reasonable assessment of the charges. The court held the literal meaning of the phrase should be applied.

Court’s Reasoning

The court reasoned that overhead costs are difficult to define and allocate precisely, involving judgment calls rather than objective standards. The court cited *Dairymen’s League Co-operative Assn., Inc. v. Holmes, 207 App. Div. 429, 438*, noting overhead includes “broadly the continuous expenses of a business irrespective of the outlay on particular contracts.” The court found that allocating overhead to specific projects is