Monday, October 8, 2018
A new Seventh Circuit Court of Appeals case demonstrates the importance of filing suit in a timely manner in order to retain one’s contractual rights. It also shows just how nasty contractual parties may act towards each other in violation of the duty of good faith and fair dealing.
JTE distributed products in Chicago for Bimbo Foods Bakeries Distribution Company (“Bimbo”) for over a decade. The contract had no duration, but stipulated that it could be terminated in cases of non-curable breaches by one of the parties. Bimbo sought to force JTE to forfeit its contractual rights so that Bimbo could start working with a new distributor that would accept a smaller slice of the pie: 18% instead of 20%. But because JTE had performed the contract as required, Bimbo
"began fabricating curable breaches in the spring of 2008 as part of a scheme to force JTE out as its distributor. Bimbo Foods employees filed false reports of poor customer service and out-of-stock products at stores in JTE’s distribution area. Even more egregiously, Bimbo employees would sometimes remove JTE-delivered products from grocery store shelves, photograph the empty shelves as “proof” of a breach, and then return the products to their initial location. On one occasion, in 2008, a distributor caught a Bimbo Foods manager in the act of fabricating a photograph and reported him. Bimbo assured JTE that this misconduct would never happen again. Nevertheless, unbeknownst to JTE, Bimbo Foods continued these scurrilous tactics … When JTE refused to sell its distribution rights in January 2011, Bimbo Foods breached the distribution agreement and unilaterally terminated JTE’s agreement, citing the fabricated breaches as cause. Several months later ... Bimbo Foods forced JTE to sell its rights to new distributors."
JTE filed suit in 2017. Under the Illinois law, the statute of limitations for breaches of common law contracts is ten years whereas under the UCC, it is four years. The question thus became whether the parties had entered a contract for sale of goods. They had. Said the court: “Under the primary-purpose test, the distribution agreement between JTE and Bimbo Foods easily qualifies as a contract for the sale of goods. We have previously pointed out that ‘virtually every jurisdiction that has addressed this issue’ has concluded that dealership and distributorship agreements are predominantly for the sale of goods.” The suit was thus untimely filed.
JTE’s additional claim for tortious interference with contract fared no better as a five-year statute of limitation governed that. The court did, however, comment on the merits of the alleged tort. It found that “a party cannot tortiously interfere with its own contract, nor can it tortiously interfere with any business expectancies created by that contract. As the Illinois courts have noted, ‘[t]o allow such claims to be litigated would invite tort law to absorb contract law.’” Thus, because JTE was one of the parties to the suit, it could not assert that claim even thought it was Bimbo, not JTE, that had acted in a highly unwarranted manner.
None of the parties asserted the duty of good faith and fair dealing under UCC §1-304 which states that “[e]very contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.” “Good faith” is defined as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” UCC § 1-201.
What Bimbo allegedly did clearly did not meet this standard. However, because the four-year statute of limitations had run, JTE could still not have asserted that argument. The moral of this story is for your clients to monitor the contractual performance by the other party closely and, if anything seems awry, bring this up and resolve the issue as soon as possible.
The case is Heiman v. Bimbo Foods Bakeries Distribution Co., 902 F.3d 714 (7th Cir. 2018).