Feld v. Henry S. Levy & Son, Inc., 37 N.Y.2d 466 (1975): Good Faith Required in Output Contracts

Feld v. Henry S. Levy & Son, Inc., 37 N.Y.2d 466 (1975)

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In an output contract under UCC § 2-306, a seller is obligated to continue production in good faith, and can only cease production if losses from continuance would be more than trivial, especially when a cancellation clause exists.

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Summary

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Crushed Toast Company (plaintiff) contracted with Henry S. Levy & Son, Inc. (defendant) to purchase all bread crumbs produced by Levy’s Brooklyn factory. After selling a substantial quantity, Levy ceased production, claiming it was uneconomical. Feld sued for breach of contract. The court considered whether Levy was obligated to continue manufacturing bread crumbs for the contract’s duration. The court held that Levy had a good faith obligation to continue production unless losses were more than trivial, and genuine economic hardship, not just reduced profitability, would be needed to justify cessation of production. The case was remanded for a factual determination of Levy’s good faith.

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Facts

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Crushed Toast Company contracted with Henry S. Levy & Son, Inc. to purchase all bread crumbs produced at Levy’s Brooklyn factory from June 19, 1968, to June 18, 1969, with automatic yearly renewals unless canceled with six months’ notice.

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Levy sold substantial quantities of bread crumbs to Crushed Toast until May 15, 1969, when it stopped production.

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Levy’s comptroller claimed the bread crumb operation was