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NIAGARA MOHAWK POWER CORP. v. GRAVER TANK & MFG. C

March 12, 1979

NIAGARA MOHAWK POWER CORPORATION, Plaintiff,
v.
GRAVER TANK & MANUFACTURING CO., and Aerojet-General Corporation, Defendants. GRAVER TANK & MANUFACTURING CO., division of Aerojet-General Corporation,Plaintiff, v. NIAGARA MOHAWK POWER CORPORATION, Stone & Webster, Incorporated, Stone& Webster Engineering Corporation, and Chicago Bridge & Iron Company, Defendants



The opinion of the court was delivered by: MUNSON

MEMORANDUM-DECISION

Niagara Mohawk Power Corporation ("Niagara Mohawk") and Graver Tank & Manufacturing Co. ("Graver"), a division of Aerojet-General Corporation, entered into a contract on January 4, 1974, for the fabrication and erection by Graver of the reactor primary containment steel plate liner for the Nine Mile Point Unit 2, nuclear power plant, located near Scriba, New York. (Pl. Ex. 1). *fn1" This plant is owned by Niagara Mohawk and four other New York public utilities as co-tenants. (Rhode, Tr. 347-48). Stone & Webster Engineering Corporation ("Stone & Webster") is the architect-engineer for the project, and serves as Niagara Mohawk's agent at the job site. (Pl. Ex. 1 at Article VII of Agreement of January 4, 1974; Manno, Tr. 100-01).

On December 29, 1978, Niagara Mohawk notified Graver that it was terminating, effective two days thereafter, the contract for fabrication and erection of the containment liner for the Nine Mile Point 2 power plant. (Pl. Ex. 9). On the same day, Niagara Mohawk signed a contract with Chicago Bridge & Iron Company ("CB&I") for the completion of the liner (Franklin, TRO-Tr. 141; Albertson, Dep. 125-26), and commenced an action in the Northern District of New York against Graver and Aerojet-General Corporation, seeking specific performance of the termination clause of the contract, the recovery of materials fabricated for the project, and the award of damages for faulty performance.

 Graver filed an action against Niagara Mohawk, Stone & Webster, Stone & Webster's parent corporation, and CB&I in the Southern District of New York, seeking the entry of an Order enjoining the termination of the contract and directing specific performance of the provisions of the contract, other than the termination clause. This lawsuit was filed on November 20, 1978, more than a month before the notice of termination was actually given, but the Complaint was not served at that time. Upon receiving notice of termination, Graver filed an amended Complaint which was served shortly thereafter. This action was transferred to the United States District Court for the Northern District of New York by an Order of the Honorable Lloyd F. MacMahon, dated January 5, 1979.

 Niagara Mohawk has moved for an Order of Seizure, and Niagara Mohawk and Graver have each moved for a preliminary injunction, seeking specific performance as demanded in their respective Complaints. *fn2" The parties have compiled an extensive record for the Court on the present motions. A hearing was held from January 16, 1979 to January 19, 1979 and from January 23, 1979 to January 26, 1979. Numerous exhibits, including a number of depositions, were received in evidence at that time. *fn3"

 On January 29, 1979, the Court issued an Order, denying Graver's motion for a preliminary injunction and Niagara Mohawk's motion for an Order of Seizure, and granting Niagara Mohawk's motion for a preliminary injunction. This Memorandum-Decision is being issued in accordance with that Order.

 I.

 Subject matter jurisdiction is based upon diversity of citizenship, 28 U.S.C. § 1332, and, therefore, state law must be applied to the substantive issues involved here. The parties agree that the applicable state law is that of New York.

 Nevertheless, the standard for determining whether to grant a preliminary injunction has been regarded as a procedural matter, and, therefore, the federal standard is controlling. See American Brands, Inc. v. Playgirl, Inc., 498 F.2d 947 (2d Cir. 1974); Joneil Fifth Avenue Ltd. v. Ebeling & Reuss Co., 458 F. Supp. 1197 (S.D.N.Y.1978); Ali v. Playgirl, Inc., 447 F. Supp. 723, 726 n. 6 (S.D.N.Y.1978); Factors Etc., Inc. v. Creative Card Co., 444 F. Supp. 279 (S.D.N.Y.1977). *fn4"

 Sonesta International Hotels Corporation v. Wellington Associates, 483 F.2d 247, 250 (2d Cir. 1973) sets forth the standard for granting a preliminary injunction in this circuit:

 
a preliminary injunction should issue only upon a clear showing of either (1) probable success on the merits And possible irreparable injury, Or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation And a balance of hardships tipping decidedly toward the party requesting the preliminary relief.

 See also Selchow & Righter Co. v. McGraw-Hill Book Co., 580 F.2d 25, 27 (2d Cir. 1978); Jacobson & Co., Inc. v. Armstrong Cork Co., 548 F.2d 438, 441 n. 2 (2d Cir. 1977); Missouri Portland Cement Co. v. Cargill, Inc., 498 F.2d 851, 866 (2d Cir.), Cert. denied, 419 U.S. 883, 95 S. Ct. 150, 42 L. Ed. 2d 123 (1974); Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319, 323 (2d Cir.), Cert. denied, 394 U.S. 999, 89 S. Ct. 1595, 22 L. Ed. 2d 777 (1969). A showing of possible irreparable injury must be made by the moving party as part of the balancing of hardships under the second prong of the Sonesta test. Selchow & Righter Co. v. McGraw-Hill Book Co., supra, 580 F.2d at 27; New York Association of Homes for Aging v. Toia, 559 F.2d 876, 880 (2d Cir. 1977).

 II.

 Article 22 of the contract between Niagara Mohawk and Graver sets forth the circumstances under which the agreement can be terminated. Subdivision A of this article deals with termination for cause while subdivision B is a convenience termination clause. Under Article 22A, Niagara Mohawk is allowed to terminate the agreement if Graver becomes insolvent or if Stone & Webster certifies that Graver is failing to perform the required work or is not prosecuting the work with promptness and diligence. On the other hand, under Article 22B, Niagara Mohawk has the right to terminate the contract "at any time for any reason" by giving Graver two days' prior written notice to such effect. *fn5" In terminating the contract in the present case, Niagara Mohawk did so pursuant to Article 22B. (Franklin, TRO-Tr. 138; Rhode, Dep. 62-63).

 A.

 Graver argues that a convenience termination clause such as that contained in Article 22B can only be exercised in good faith. Niagara Mohawk disputes this contention, and argues that it has an unrestricted right to terminate the contract.

 The Court is not aware of any New York cases which have considered the question of applying a requirement of good faith to the exercise of an unrestricted unilateral termination clause. Therefore, the Court must make its own determination as to what it thinks a state court would probably do if it were faced with the same case. Ricciuti v. Voltarc Tubes, Inc., 277 F.2d 809, 812 (2d Cir. 1960); Holdridge v. Heyer-Schulte Corp., 440 F. Supp. 1088, 1099 (N.D.N.Y.1977).

 However, while there are no New York precedents directly on point, there are a number of cases which are instructive. In A. S. Rampell, Inc. v. Hyster Co., 3 N.Y.2d 369, 165 N.Y.S.2d 475, 144 N.E.2d 371 (1957), the New York Court of Appeals considered whether a requirement of reasonable notice should be implied in a contract provision allowing either party to terminate the agreement "at any time." The contract in question was to be construed in accordance with the laws of Oregon, but the case does, nonetheless, appear to have some relevance in determining what a New York court would probably do if it had to decide the present case since the Court of Appeals in Rampell found no Oregon cases to be applicable and discussed what it regarded the general state of the law on this matter to be. The court concluded that a requirement of reasonable notice would not be read into the parties' written agreement, and stated that "where as here the parties have agreed to a termination clause, the clause has been enforced as written." 3 N.Y.2d at 382, 165 N.Y.S.2d at 486, 144 N.E.2d at 379. For this latter proposition, the court cited a number of cases, three of which held that an unrestricted termination clause was not subject to a requirement of good faith. Bushwick-Decatur Motors, Inc. v. Ford Motor Co., 116 F.2d 675 (2d Cir. 1940); Biever Motor Car Co. v. Chrysler Corp., 108 F. Supp. 948 (D.Conn.), Aff'd, 199 F.2d 758 (2d Cir. 1952); Sharpe v. Great Lakes Steel Corp., 9 F.R.D. 691 (S.D.N.Y.1950). *fn6"

 Another case which is instructive is Noah v. L. Daitch & Co., 22 Misc.2d 649, 192 N.Y.S.2d 380 (S. Ct.N.Y.Co. 1959). That action was brought by the owners of a retail dairy and grocery store to enjoin their supplier of dairy products from terminating their distributorship agreement. The parties' agreement contained a unilateral termination clause allowing the defendant to terminate the contract, with thirty days' notice, at any time after one year from the contract's effective date. The court in that case did not specifically consider whether the power to effect termination was limited by good faith, but it did reject the plaintiffs' argument that they had been granted exclusive rights for an unlimited time and that the defendant had the right to terminate only for cause. While a distinction can be made between implying a requirement of cause and implying a requirement of good faith, the language of the decision would appear to have a bearing on the latter consideration as well as the former since the court stated, "where the parties have agreed to a termination clause, it must be enforced as written." 192 N.Y.S.2d at 385.

 Another relevant case is Division of Triple T Service, Inc. v. Mobil Oil Corp., 60 Misc.2d 720, 304 N.Y.S.2d 191 (S. Ct. Westchester Co. 1969), Aff'd, 34 A.D.2d 618, 311 N.Y.S.2d 961 (2d Dept.), Mot. for lv. to app. den., 26 N.Y.2d 614, 311 N.Y.S.2d 1025, 259 N.E.2d 926 (1970). In Triple T Service, the plaintiff, the lessee of certain premises operated as an automobile service station, brought an action to enjoin the defendant from terminating a franchise agreement based upon a retail dealer contract and a service station lease. The contract and lease each provided that the original term of the agreements was to be for three years and was automatically renewable for successive three-year periods, but that either party had the right to terminate at the end of any current period, by giving ninety days' notice. Pursuant to these provisions, the plaintiff received a notice of termination. He argued that the defendant's action was arbitrary and not taken in good faith since the plaintiff's performance had been more than satisfactory during the latest three-year period. Nonetheless, the court held that the termination was valid whether it was considered under general principles of contract law or under the Uniform Commercial Code.

 With respect to general contract principles, the court in Triple T Service stated that a court of equity will not interfere with a bargain merely because it is hard and unreasonable, and that where a contract gives either party the absolute unqualified right to terminate upon notice, "the court is precluded from inquiring whether such termination was actuated by an ulterior motive." 304 N.Y.S.2d at 198. The court further stated that

 
although every commercial contract carries with it the implicit obligation of good faith and fair dealing so as not to place one party at the mercy of the other . . . the implied obligations of good faith and fair dealing merely relate to obligations incurred by the parties during the term of the contract unless the relationship is continued beyond the expiration date. . . .

 304 N.Y.S.2d at 198-99.

 Another case that should be considered is Rubinger v. International Telephone & Telegraph Corp., 193 F. Supp. 711 (S.D.N.Y.1961), Aff'd, 310 F.2d 552 (2d Cir. 1962), Cert. denied, 375 U.S. 820, 84 S. Ct. 57, 11 L. Ed. 2d 54 (1963), a diversity case in which New York law was being construed. The court in Rubinger held that a regional merchandising agreement did not oblige a manufacturer to give its distributor the first opportunity to purchase the manufacturer's inventory upon its sale of the entire business to a third party. The court stated that the manufacturer was not required by the merchandising agreement to remain in business at all, and that, in any event, the agreement was terminable at will by either party on ten days' notice. According to the court, this power of termination "was unqualified and not even good faith was required." 193 F. Supp. at 718. Thus, the manufacturer could end its relationship with the distributor without any further liability on its part by exercising its rights under the termination clause.

 This Court recognizes that the termination provisions in Triple T Service and Rubinger were mutual in nature while the termination clause in the present case is a unilateral one. However, as indicated subsequently, this Court doubts the significance of this distinction.

 Other cases which tend to indicate that the New York courts will enforce a termination clause as written include Texaco, Inc. v. A. A. Gold, Inc., 78 Misc.2d 1050, 357 N.Y.S.2d 951 (S. Ct. Kings Co.), Aff'd, 45 A.D.2d 1054, 358 N.Y.S.2d 973 (2d Dept. 1974); Mobil Oil Corp. v. Lione, 66 Misc.2d 599, 322 N.Y.S.2d 82 (Dist.Ct. Suffolk Co. 1971); Sinkoff Beverage Co. v. Joseph Schlitz Brewing Co., 51 Misc.2d 446, 273 N.Y.S.2d 364 (S. Ct. Suffolk Co. 1966); and Fleischmann Distilling Corp. v. Distillers Co., 395 F. Supp. 221 (S.D.N.Y.1975). See also New York Telephone Co. v. Jamestown Telephone Corp., 282 N.Y. 365, 26 N.E.2d 295 (1940); Mohawk Agency, Inc. v. American Casualty Co., 227 F. Supp. 745, 748 (N.D.N.Y.1964).

 The cases relied upon by Graver do not support the proposition that an unrestricted termination clause is limited by a requirement of good faith. Cycleway, Inc. v. Kawasaki Motors Corp., 77 Misc.2d 829, 354 N.Y.S.2d 812 (S. Ct. Oneida Co. 1974) is distinguishable from the present case. In Cycleway, the court upheld a distributor's right to terminate a franchise held by a motorcycle dealer, and based its ruling upon two separate grounds. First, the court indicated that the franchise agreement permitted either party to terminate the contract, with or without cause, on thirty days' notice, and ruled that "where the parties have agreed to a termination clause, it must be enforced as written." 354 N.Y.S.2d at 816. Secondly, the court found that there was no lack of cause or lack of good faith on the part of the defendant. It is clear that the court felt it was necessary to make these latter determinations, because §§ 197, 197-a of the New York General Business Law impose a requirement of cause and good faith upon the exercise of a termination provision in a motor vehicle distributorship. This Court is not aware of any statutory provisions that would impose a similar requirement in the present case.

 In addition, Zimmer v. Wells Management Corp., 348 F. Supp. 540 (S.D.N.Y.1972) is not controlling here. First, there is no indication in the court's decision that the employment contract, the alleged breach of which formed the basis of the plaintiff's causes of action, contained an unrestricted termination clause. Second, in discussing the requirement of good faith, the court was specifically concerned that the employee's discharge would result in a forfeiture of stock benefits which had constituted part of the consideration for the employment agreement. The plaintiff's right to these benefits was to vest only if his initial employment term were completed and if new employment agreements were, thereafter, executed and performed. The court in Zimmer stated that, after a trial, it might "well conclude that the bad faith of defendants . . . (was) such that they should not be permitted to gain the benefit of the forfeiture of the Wells stock which plaintiff bought and paid for." 348 F. Supp. at 542. Termination in the present case will not result in a forfeiture since Graver has been paid for the work it has already performed.

 Furthermore, Board of Education v. Port Jefferson Station Teachers Association, 88 Misc.2d 27, 387 N.Y.S.2d 515 (S. Ct. Suffolk Co. 1976) is inapposite. In that case, the plaintiff sought a judgment declaring that the collective bargaining agreement between the parties was invalid because it bound the board of education in perpetuity. The court agreed that a contract binding the board indefinitely would be against public policy, but rejected the plaintiff's argument that, under the parties' agreement, the teachers' association had the sole power to terminate the contract and, instead, found that the board had a reciprocal right of termination. The court in Port Jefferson did not consider whether the right to terminate could only be exercised in good faith, and, furthermore, the termination clause in question there was not of the unrestricted type involved in the present suit.

 This Court recognizes that it is a well-settled principle of New York law that every contract contains an implied covenant of good faith and fair dealing. See, e.g., Lowell v. Twin Disc, Inc., 527 F.2d 767, 770-71 (2d Cir. 1975); Van Valkenburgh, Nooger & Neville, Inc. v. Hayden Publishing Co., 30 N.Y.2d 34, 45, 330 N.Y.S.2d 329, 333, 281 N.E.2d 142, 144, Cert. denied, 409 U.S. 875, 93 S. Ct. 125, 34 L. Ed. 2d 128 (1972); Kirke La Shelle Co. v. Paul Armstrong Co., 263 N.Y. 79, 87, 188 N.E. 163, 167 (1933); Rochester Park, Inc. v. City of Rochester, 38 Misc.2d 714, 238 N.Y.S.2d 822, 827 (S. Ct. Monroe Co.), Aff'd, 19 A.D.2d 776, 241 N.Y.S.2d 763 (4th Dept. 1963). However, while this principle has been applied by the New York courts to the exercise of obligations which parties owe to each other during the ...


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