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2004-MO-050 - Thermal Engineering Corp. v. Rasmussen Iron Works, Inc.

THIS OPINION HAS NO PRECEDENTIAL VALUE.  IT SHOULD NOT BE CITED OR RELIED ON AS PRECEDENT IN ANY PROCEEDING EXCEPT AS PROVIDED BY RULE 239(d)(2), SCACR.

THE STATE OF SOUTH CAROLINA
In The Supreme Court


 

Thermal Engineering Corp. Respondent/Appellant,

v.

Rasmussen Iron Works, Inc.; Southeastern Marketing Group, LLC;  Timothy K. Wood; Vari-Fuel Specialty Products, Inc.; Gary C. Freeland; Champion Marketing Group, Inc; and John E. Pell, Jr. Defendants,

of whom Rasmussen Iron Works, Inc.; Southeastern Marketing Group, LLC; Vari-Fuel Specialty Products, Inc.; and Champion Marketing Group, Inc., are Appellants/Respondents.


Appeal From Richland County
G. Thomas Cooper, Jr., Circuit Court Judge


Memorandum Opinion No. 2004-MO-050
Heard March 17, 2004 – Filed September 15, 2004


REVERSED


Robert Y. Knowlton, Franklin H. Turner, III, and B. Eric Shytle of Haynsworth Sinkler Boyd, PA, of Columbia, for Appellant/  Respondent Rasmussen Iron Works, Inc.

Frank R. Ellerbe, III, and Bonnie D. Shealy of Robinson, McFadden & Moore, PC, of Columbia, for Appellants/Respondents Southeastern Marketing Group, LLC, Vari-Fuel Specialty Products, Inc., and Champion Marketing Group, Inc.

W. Duvall Spruill of Turner, Padget, Graham & Laney, P.A., of Columbia, for Respondent/Appellant Thermal Engineering Corp.


JUSTICE BURNETT:  Thermal Engineering Corp. (TEC) brought breach of contract, unfair trade practice, and related actions against Rasmussen Iron Works, Inc. (Rasmussen); Southeastern Marketing Group, LLC (Southeastern); Vari-Fuel Specialty Products, Inc. (Vari-Fuel); and Champion Marketing Group (Champion).  The jury returned verdicts against all defendants.

Rasmussen appealed.  Southeastern, Vari-Fuel, and Champion jointly appealed.  TEC cross-appealed.  The three appeals were consolidated for review pursuant to Rule 214, SCACR.  We reverse.

FACTS

TEC, a manufacturer of infrared gas barbecue grills based in Columbia, markets its grills primarily through independent dealer representatives who sell them to specialty retailers in the United States.   TEC entered into a contract in May 1999 with Rasmussen, a California manufacturer of gas logs.  The contract, drafted by TEC, originally granted Rasmussen the exclusive right to distribute TEC grills in California and later was expanded to include Arizona and Nevada.  The contract stated Rasmussen would use its “best efforts” to distribute the TEC grill and “diligently promote” its sale to dealers and other retailers in California.  The contract further provided that “[Rasmussen] will handle no other consumer gas grills for which the manufacturer’s suggested retail prices for the highest priced unit exceed 70 percent of the suggested retail for TEC’s lower priced unit.”

TEC’s three primary dealer representatives in 1999-2000 were Southeastern, Vari-Fuel, and Champion (collectively, “the Representatives”).  Each essentially was a one-person company serving designated regions of the United States:  Tim Wood at Southeastern, Gary Freeland at Vari-Fuel, and John Pell at Champion.  The sale of TEC grills accounted for the majority of each representative’s business in 1999-2000, and together the three representatives accounted for half of TEC’s annual grill sales. 

Each dealer representative in January 2000 signed an eighteen-month contract, drafted by TEC, which stated the representative will “do all things reasonable, necessary, and appropriate to maximize sales of TEC’s Infra-red Gas Grill line.”  Each contract set forth expected sales goals in specified territories, which the representative was “committed to achieving . . . at a minimum.”  Each contract further stated the representative “is free to handle other products or lines.”

TEC alleged at trial that from March to September 2000, Rasmussen took various steps to secretly develop and begin manufacturing its own new grill to compete with TEC’s grill; that  Rasmussen solicited and met with Wood, Freeland, and Pell to recruit them to sell Rasmussen’s grill; and that Wood, Freeland, and Pell actively participated in the planning and development of Rasmussen’s grill.  The events were described primarily through the testimony of Ted and Rett Rasmussen, Jim Griffin, Wood, Freeland, and Pell, all of whom are principals and managers of the defendant companies.

TEC first heard of Rasmussen’s new grill in August 2000.  Rasmussen owners and managers, Wood, Freeland, and Pell did not inform TEC of the planning, development, and expected manufacture of Rasmussen’s new grill.  TEC terminated the contract by giving a six-month notice of termination to Rasmussen as allowed by the contract.  Rasmussen, in response, agreed to an immediate termination of the contract in September 2000. [1]   TEC terminated its contracts with Wood, Freeland, and Pell soon afterward.  No Rasmussen grills were sold or distributed until after the contracts were terminated.

TEC contends the contracts prohibited Rasmussen and the Representatives from developing or handling Rasmussen’s new grill.  The actions of Rasmussen and the Representatives were in direct violation of the parties’ contracts and constituted deceptive, unfair, and intolerable tactics under the South Carolina Unfair Trade Practices Act (UTPA). [2]

Rasmussen and the Representatives each denied breaching their respective contracts with TEC, testifying they continued to use their best efforts to promote and sell the TEC grill even while preparing and discussing Rasmussen’s grill.  Their primary defenses were that no breach of contract or unfair trade practice had occurred; the contracts did not prohibit them from developing or handling a competing grill; all were separate companies and everything that occurred was done in the name of competition and free enterprise; TEC’s change in marketing efforts did not bode well for the future; and any lack of sales of TEC grills in 2000 was attributable TEC’s shipping and quality problems, an economic downturn, and increasing competition from other grill makers.  Rasmussen presented evidence sales of TEC grills increased in California after it became a distributor.

TEC’s chief financial officer David O’Kelly, qualified as an expert on corporate financial records, explained the method he used to determine expected sales goals for each defendant, as well as the formula he used to calculate lost profits.  The sales goals were the bases of TEC’s alleged damages.  TEC alleged lost profits in 2000 due to Rasmussen’s, Southeastern’s, Vari-Fuel’s and Champion’s respective breaches of contract.

The jury returned verdicts against Rasmussen for breach of contract and violation of the South Carolina Unfair Trade Practices Act; and against Southeastern, Vari-Fuel, and Champion for breach of contract and breach of contract accompanied by a fraudulent act.

LAW / ANALYSIS

Rasmussen and the Representatives each challenge the trial court’s rulings relating to issues of liability and damages.  We find it necessary to address only the liability issue:

Rasmussen:  Did the trial court err in rejecting Rasmussen’s argument that as a matter of law TEC failed to prove a breach of contract because the contract allowed Rasmussen to engage in the above-described acts without violating the prohibition on “handling” a competing grill?

The Representatives:  Did the trial court err in rejecting the Representatives’ argument that as a matter of law TEC failed to prove a breach of contract because their contracts, which stated they were “free to handle other products or lines,” allowed them to engage in the above-described acts?

Rasmussen and the Representatives both contend the trial court erred in not ruling as a matter of law that the definition of “handle,” as used in their respective contracts, is limited to selling or distributing a competing grill, not planning or developing a competing grill.  We agree.

We conclude under the facts and circumstances presented in this case the term “handle,” as used in the respective contracts, is not ambiguous.  Therefore, the trial court erred in not ruling as a matter of law that “handle” means “sell or distribute.”  See South Carolina Dep’t of Natural Resources v. Town of McClellanville, 345 S.C. 617, 550 S.E.2d 299 (2001) (whether contract is ambiguous initially is question of law for the court); Conner v. Alvarez, 285 S.C. 97, 328 S.E.2d 334 (1985) (when contract is plain and capable of legal construction, the language itself determines the full force and effect of the document); Myrtle Beach Lumber Co., Inc. v. Willoughby, 276 S.C. 3, 274 S.E.2d 423 (1981) (any ambiguity in written contract should be construed liberally and most strongly in favor of the party who did not write or prepare the contract and is not responsible for its ambiguity; any uncertainty as to its meaning should be resolved against the party who prepared the contract or is responsible for its wording).

Rasmussen in its contract agreed not to “handle,” i.e., sell or distribute, a competing grill, but remained free to plan and develop its own grill.  The Representatives’ contracts are drafted more broadly, affirmatively providing they were “free to handle other products or lines.”  Thus, the Representatives were free to assist in the planning and development of Rasmussen’s new grill while distributing TEC’s grill. These provisions allowed both Rasmussen and the Representatives to engage in the above-described acts without breaching their respective contracts with TEC.

The contracts did not prohibit Rasmussen and the Representatives from engaging in preparatory acts necessary to develop a competing gas grill in the future.  Rasmussen and the Representatives did not promote, market, sell, or distribute Rasmussen’s new grill to the public until after the termination of their contracts with TEC; therefore, none of the defendant companies breached their contracts.

With regard to Rasmussen’s contract, this interpretation of the term “handle” is further buttressed by the fact the contract specifically focused on retail price levels by prohibiting Rasmussen from handling “consumer gas grills for which the suggested retail prices for the highest priced unit exceed 70 percent of the suggested retail for TEC’s lowest priced unit.”  The focus on price indicates the parties intended for this clause to prevent Rasmussen from selling or distributing competing gas grills, not from planning the development and manufacture of a grill that might be sold in the future when Rasmussen would be contractually free to do so.

Our resolution of this liability issue necessarily means the other causes of actions asserted by TEC must fail.  If the Representatives did not commit a breach of contract, they cannot be found to have committed a breach of contract accompanied by a fraudulent act.  Similarly, if the above-described acts were allowed under the parties’ contracts, those same acts in this instance cannot be deemed to constitute unfair or deceptive acts under the UTPA.  We do not conclude that in every case a UTPA action must fail when an accompanying breach of contract action fails.  However, such a conclusion is appropriate under the facts and circumstances presented in this case.

Chief Justice Toal, dissenting, agrees the Representatives did not breach their contract with TEC under the plain terms of the contract.  The chief justice believes Rasmussen, by its actions, breached the implied covenant of good faith and fair dealing contained in every contract and would uphold damages awarded against it.  We certainly agree this covenant is an inherent part of every contract, regardless of whether it is explicitly set forth or embraced by the parties in a written document or verbal agreement.  See Adams v. G.J. Creel and Sons, Inc., 320 S.C. 274, 277, 465 S.E.2d 84, 85 (1995) (“[t]here exists in every contract an implied covenant of good faith and fair dealing”); Tharpe v. G.E. Moore Co., 254 S.C. 196, 174 S.E.2d 397 (1970) (same).  “However, there is no breach of an implied covenant of good faith where a party to a contract has done what provisions of the contract expressly gave him the right to do.”  Adams, 320 S.C. at 277, 465 S.E.2d at 85.  Under the facts of this case, we do not believe the implied covenant should apply in a manner that defeats the proper interpretation of an important contractual term.  Rasmussen acted in good faith and dealt fairly with TEC by refraining from selling or distributing its competing grill, as required by its contract, until termination of that contract.  See also RoTec Services, Inc. v. Encompass Services, Inc., 359 S.C. 467, 597  S.E.2d 881 (Ct. App. 2004) (implied covenant of good faith and fair dealing is not an independent cause of action separate from the claim for breach of contract).

CONCLUSION

We conclude that neither Rasmussen nor the Representatives breached their respective contracts with TEC.  This result makes it unnecessary to address the remaining issues presented by Rasmussen, the Representatives, or TEC.  We reverse the jury’s verdict and remand this matter to the circuit court for entry of judgment in accordance with this opinion.

REVERSED.

WALLER and PLEICONES, JJ., concur.  TOAL, C.J., dissenting in a separate opinion in which MOORE, J., concurs.

CHIEF JUSTICE TOAL: I agree with the majority that the Representatives -- Southeastern Marketing Group, LLC, Vari-Fuel Specialty Products, Inc., and Champion Marketing Group -- did not breach their contract with TEC because the contractual provision stating that the Representatives were “free to handle other products or lines” did not prohibit the Representatives’ conduct in question. 

I disagree with the majority’s conclusion that Rasmussen did not breach its exclusive distributorship contract with TEC.  As TEC’s exclusive distributor for California, Rasmussen was contractually forbidden to concurrently and surreptitiously design, construct, test, and contract with a third party to produce its own high-end, infrared grill.  This activity constituted a clear breach of the covenant of good faith and fair dealing that is embedded in every contract.  Since I would find Rasmussen in breach of its exclusive distributorship contract with TEC, I would affirm the damages verdict as to Rasmussen only.  I respectfully dissent.  

Factual Background

TEC manufactures high-end infrared grills, which sell for a minimum retail price of $1,500.  TEC’s grill heats food using infrared radiation, which is energy efficient and does not dry out food as rapidly as a convection or conduction grill. [3]   

In May 1999, Rasmussen’s president and his son came to Columbia to express their interest in distributing TEC’s infrared grill in California. [4]    As a result of the meeting, TEC and Rasmussen entered into the exclusive distributor agreement covering the state of California.

The Exclusive Distributorship Contract

The Rasmussen-TEC agreement contains various key provisions:

(1) Rasmussen “is to become the wholesale distributor of TEC’s consumer Infra-red gas grills, accessories and replacement parts for the state of California….”

(2) Rasmussen “will then be the sole distributor for the wholesale distribution of the grills in California.  [Rasmussen] will use its best efforts to develop a retail dealership system within the state for the sale of TEC grills.”

(3) “In accepting the benefits and the responsibilities of being the exclusive wholesale distributor for the grills, [Rasmussen] understands that there are some limits beyond which TEC may not go in limiting dealers or distributors from outside the state of California from sending grills into the state.” 

(4) Rasmussen “will diligently promote the sale of TEC Consumer grills and accessories.”

(5) Rasmussen “will handle no other consumer gas grills for which the manufacturer’s suggested retail prices for the highest price unit exceed 70 percent of the suggested retail for TEC’s lowest priced unit.”

(6)  “The prices at which Consumer grills and related components will be sold to Distributor will be 48.95 percent of the suggested retail price published by TEC from time to time.”

(7)  “This Agreement will terminate six months after either party gives to the other party written notice of a desire to terminate this Agreement, or if both parties agree in writing.”

(emphasis added).  Under this agreement, Rasmussen obtained two major benefits: (1) the exclusive right to distribute high-end, TEC infrared grills in California and (2) the right to purchase the grills at less than 50% of the retail price.  In return, Rasmussen agreed to (1) diligently promote the infrared grills, (2) use its “best efforts” to establish a retail dealership network within California, and (3) refrain from “handling” other high-end consumer gas grills. 

Within the first four months of signing the contract, Rasmussen ordered $400,000 worth of TEC grills, but soon thereafter, Rasmussen’s purchases dissipated. 

At a Baltimore trade show in March 2000, Rasmussen approached ESP-2000, a California manufacturer, to discuss ESP-2000’s interest in manufacturing a high-end, infrared grill. [5]   Rasmussen and ESP-2000 had a follow-up meeting in California, and by May 2000, they had a working prototype of the new infrared grill. [6]   One month later, the two parties signed a contract whereby ESP-2000 would manufacture up to 6,000 high-end, infrared grills per year for $200,000. 

Concurrently, Rasmussen contacted the three TEC Representatives to discuss whether they would be interested in selling Rasmussen’s new grill, and in July 2000, the Representatives went to California for a two-day meeting where they tested the grill, suggested improvements for the grill, and developed marketing and pricing strategies for the grill.

TEC first heard rumors of Rasmussen’s “Solaire” grill in August 2000, and on September 8, 2000, TEC and Rasmussen mutually agreed to terminate the exclusive distributorship agreement. [7]  

Law/Analysis

“[E]very contract contains an implied obligation of good faith and fair dealing in its performance and enforcement.”  Arthur L. Corbin, Corbin on Contracts vol. 2 § 5.27, 139 (Rev. ed., West 1995) (emphasis added); see e.g. Charleston Dry Cleaners & Laundry, Inc. v. Zurich American Ins. Co., 355 S.C. 614, 617-618, 586 S.E.2d 586, 588 (2003) (recognizing that an insurer owes the insured the duty of good faith and fair dealing, which arises from the insurance contract).

The duty [of good faith and fair dealing] embraces, among other things, an implied obligation that neither party shall do anything to injure or destroy the right of the other party to receive the benefits of the agreement. 

[A] party who “evades the spirit of the contract, willfully renders imperfect performance, or interferes with performance by the other party, … may be liable for breach of the implied obligation of good faith and fair dealing.”

Samuel Williston, A Treatise on the Law of Contracts vol. 23 § 63:22, 506-508 (4th ed., West 2003) (citation omitted).

Rasmussen’s surreptitious efforts to develop, test, market, and most importantly, contract with a third party to build 6,000 high-end, infrared grills, while under an exclusive distributorship agreement to promote a competing product, violate the “spirit of the contract” and clearly breach the covenant of good faith and fair dealing.  Rasmussen’s calculated plan to roll out 6,000 units of the high-end grill completely interferes with the contractual benefit that TEC was entitled to: an exclusive distributor’s diligent effort to promote TEC’s infrared grill. [8]  

Accordingly, I would find Rasmussen in breach of the exclusive dealership contract and would affirm the judgment of damages against Rasmussen only.

MOORE, J., concurs.


[1]   TEC, in a letter dated August 24, 2000, notified Rasmussen it was giving a “six-month notice of termination” as allowed in the parties’ contract and offered to negotiate an earlier termination date.  Rasmussen, in a letter dated September 8, 2000, agreed to terminate the contract immediately.  Neither party explicitly reserved or abandoned any rights relating to alleged breaches of contract prior to the termination date.

[2]   S.C. Code Ann. §§ 39-5-10 to -170 (1985 & Supp. 2003).

[3] A convection grill or oven cooks the food by heating the air around it, while a conduction grill cooks the food by heating an object, like an iron skillet.

[4] Rasmussen’s primary business was manufacturing gas logs for gas fireplaces.

[5] TEC’s patent on the infrared grill technology was to expire in April 2000. 

[6] TEC’s national sales manager met with Rasmussen in May 2000, and asked whether Rasmussen had considered producing its own grill.  Rasmussen denied having any such intention and gave reasons why they would not pursue that option.

[7] The contract provided that either party could terminate the agreement after giving six-months written notice or by mutual agreement.  On August 24, 2000, TEC wrote Rasmussen, giving the requisite six-month termination notice and urging a more immediate, mutual termination.  Rasmussen responded on September 8, 2000, giving its consent to terminate the agreement effective that day.

TEC’s August 24 letter giving notice of termination gave lack of interest and lack of sales by Rasmussen as justification for termination.  While TEC’s CEO testified that by the time this letter was written, he had been told that Rasmussen was working on an infrared grill, the August 24 letter gave no indication that TEC was terminating the agreement because of Rasmussen’s efforts to promote its own grill.

[8] I respectfully disagree with the majority’s decision to hinge its entire decision on the meaning of one word -- “handle” -- and give it a definition -- “sell or distribute” -- in concluding that Rasmussen’s efforts to bring its own infrared grill to market did not breach the exclusive distributorship contract with TEC.  The spirit of the TEC-Rasmussen exclusive distributorship agreement was much broader than the single contractual provision upon which the majority relies, and included, among others, the implied covenant of good faith and fair dealing.