STEPHENS, Chief Judge.
This is a diversity case dealing with an output contract. Appellant, Oregon Plywood Sales Corporation, purchases plywood from plywood manufacturers,
Appellee, Sutherlin Plywood Corporation, had completed construction of a "plywood lay-up mill" at Sutherlin, Oregon, in October, 1953, but lacked working capital when the mill was completed. Robert F. Hofheins, Vice-President, Treasurer and a Director of Oregon Plywood Corporation, and Secretary, Treasurer and a Director of appellant Oregon Plywood Sales Corporation, discussed with Sutherlin its problem of lack of working capital. As a result of such discussions, certain documents were executed on December 17, 1953. The main document was a sales contract which provided in part as follows:
Other pertinent paragraphs of the sales contract we cite in the margin.
In January, 1954, Sutherlin commenced to operate its newly constructed mill and to sell to appellant 80% of its actual output. However, operations were unprofitable from the beginning; and by April 21, 1954, Sutherlin had lost more than $110,000, had exhausted its working capital and credit and had twice failed to meet its payroll on time. Because of the cash depletion, Sutherlin terminated production on April 21, 1954, and thereafter had no output. Efforts were made to obtain additional financing but with no success. In June, 1954, the stockholders authorized the directors to sell or lease the mill; on July 28, 1954, the directors (at a meeting attended by appellant's officer and director, Robert F. Hofheins) recommended a sale or lease of substantially all the assets of the corporation. In August, 1954, the corporation accepted an offer from J. R. Adams and Norman Jacobson for the sale and purchase of its physical assets. Adams and Jacobson caused appellee, Nordic Plywood, Inc., to be incorporated, and sale was made to Nordic in September, 1954, for $660,000, payable $20,000 down and $5,500 a month without interest. Installments on the purchase price were to be paid into escrow and distributed to creditors with any remaining sums distributed to Sutherlin and its stockholders. The loans from Oregon Plywood Corporation were paid and a new mortgage taken by a bank. There is no organizational relationship between Sutherlin and Nordic.
Appellant brought this action against Sutherlin for breach of the sales contract and also against Nordic for unlawfully interfering and inducing the breach thereof. The District Court held that appellant failed to sustain the burden of proving that Sutherlin promised or represented to appellant that it would continue in operation for at least 50 months or for any other period of time. The court held that under the agreements Sutherlin could dispose of its physical assets in the event it should determine to do so in good faith and in the exercise of honest business judgment or in the event conditions made it unprofitable to continue or it was prevented from continuing production of plywood. The court further held that bad faith was not shown in Sutherlin's ceasing operations or selling its mill, and therefore Sutherlin was excused from further production by reason of its financial losses, insolvency and inability to produce further. The District Court also held that appellee Nordic did not induce a breach of the sales contract and was privileged to purchase the physical assets of Sutherlin. Appellant appeals from that judgment.
Appellant cites twenty specifications of error, but the case can be boiled down to two basic questions.
indicates that the parties intended that the conditions enumerated in Paragraph XIII were not to excuse Sutherlin from performance. Appellant then presupposes a situation where fire damage to the mill causes a temporary inability to produce. Appellant argues that in such a situation, Paragraph XIII is applicable and the contract would remain in full force. From this premise, appellant then argues if temporary inability to produce was not to relieve Sutherlin from continuing production, a fortiori, it was not to be excused where fire, earthquake, etc., had not prevented production. We find the argument without merit. Implied conditions are not lightly to be presumed. Paragraph XIII does not permit us to imply a condition that there will be a continued output. Suppose we assume that a fire completely destroyed the mill. Paragraph XIII states the contract is still in force "until the mortgage heretofore mentioned is paid in full." It is obvious that there would be no output in such a situation. It appears that Paragraph XIII is nothing more than an inartfully drawn paragraph which was inserted to protect the mortgage involved. Any other intent is not clear.
Appellant cites other paragraphs of the sales contract in support of its argument that a continued output is required. We have examined each such paragraph and hold that in and of themselves, they do not expressly bind Sutherlin to have an output.
We now consider the case as an ordinary output contract. Output and requirements contracts are today normally held to be enforceable even though the promisor does not promise to sell or buy any specific amount. A legal detriment is found in the relinquishment of the promisor's right to have output or requirements and yet not sell or buy the same to or from the promisee. 1 Williston on Contracts, Rev.Ed., § 104a, p. 353.
Many cases have considered the duties or obligations of the parties under an output or requirements contract. Each case appears to turn on its own facts. We hold the following quotation found in In re United Cigar Stores, 2 Cir., 72 F.2d 673, 674, is applicable to the instant case:
This Court, in William S. Gray & Co. v. Western Borax Co., 9 Cir., 99 F.2d 239, 242, adopted the so-called "good faith" test. That case involved an agreement whereby a manufacturer appointed another company "its sole and exclusive agent for the sale in the United States of all the borax * * * boric acid and other products produced by the" manufacturer. (Italics supplied.) The manufacturer discontinued production because "it would be impossible for it to continue in the business operating its mining properties and producing its products and marketing the same, either at a profit or without accumulating further losses and indebtedness which ultimately would force a cessation of operations in the production of refined borax." This Court held that there was no breach in the contract even though the agreement contained a provision that it would continue in effect for a definite period. This Court refused to imply a promise that the manufacturer would retain the borax producing property during the whole of the period irrespective of whatever circumstances might arise. We also cited In re United Cigar Stores Co., supra.
Appellant in the instant case argues, though, that the United Cigar cases and William S. Gray & Co. v. Western Borax Co., supra, are not applicable under the facts of the instant case and that Diamond Alkali Co. v. P. C. Tomson & Co., 3 Cir., 35 F.2d 117, 119, is controlling. We do not agree and hold the case is limited to its own facts. The Diamond Alkali case involved an agreement whereby plaintiff agreed to manufacture and sell, and defendant to purchase the entire requirements of defendant for a period of five years. But, significantly, the defendant agreed "not to sell, lease or enter into any contract for the operation of its manufacturing plant at Fairport without the consent of the Alkali Company during the continuance of this agreement." The Third Circuit implied a continuance of the contract under the circumstances of the case. We also note that the defendant in the Diamond Alkali case intended to operate for the full five years "until an unexpected opportunity to make `an advantageous sale' presented itself."
We likewise hold that Texas Industries v. Brown, 5 Cir., 218 F.2d 510, 512,
From what we have heretofore said, we hold that it need be shown only that Sutherlin ceased operations in good faith.
The District Court, in Finding of Fact VIII, states that Robert F. Hofheins, who conducted the original negotiations on behalf of appellant, knew the financial condition of Sutherlin and that it was in weak financial condition and in dire need of working capital. The Court further found that appellant knew Sutherlin might not be able to operate profitably and might be compelled to shut down.
Finding of Fact XIII states in part:
Other findings we need not set forth, but suffice it to say that they clearly support the conclusion that Sutherlin discontinued output in good faith. We have made an exhaustive search of the transcript and find ample evidence to support each and every finding of fact. To answer every argument of appellant would needlessly lengthen this opinion and serve no useful purpose. The evidence as to good faith is so strong that it is the only conclusion that could have been reached by the District Court. We cite in the margin a statement made by the trial judge with which we find support in the record and with which we agree.
Because we hold that Sutherlin is not in breach of contract, it becomes unnecessary to discuss the second issue of the case as to whether Nordic Plywood, Inc., induced a breach of the contract. Suffice it to say that the District Court's
"Party of the Second Part covenants to advance to Party of the First Part 80% of mill value on each car promptly upon receipt of invoice and original bill of lading, balance within ten days after arrival of car at destination, all less 2% cash discount. Value of veneer paid for by Party of the Second Part in each car to be deducted from the payment."
"Party of the First Part agrees as compensation for service by Party of the Second Part that an additional 5% of the Mill Value of product shall be retained by Party of the Second Part."
"Party of the Second Part covenants to use its best effort to maintain with Party of the First Part a thirty days' order file at the Mill."
"It is agreed that there is a mortgage on the mill property of the Party of the First Part to Oregon Plywood Corporation, with certain monthly and annual payments to be made, but in the event Party of the Second Part shall not, at any time or times during the term of said mortgage, furnish sufficient orders to Party of the First Part which would enable Party of the First Part to dispose of 80% of the product of said mill, and for such reason said mill does not operate, then during such period or periods the payments stipulated to be made on said mortgage shall be deferred until Party of the Second Part shall have furnished Party of the First Part orders which shall enable Party of the First Part to operate its mill continuously for the period of at least two weeks, whereupon the regular payments on the mortgage indebtedness shall resume, and the term of said mortgage shall be extended accordingly."
"Party of the First Part shall have the right to reject any orders placed with it by Party of the Second Part, provided specifications are not up to production conditions, nor if unprofitable. * * *"
"This sales contract shall be in full force and effect from the beginning of production by Party of the First Part and continue for at least 50 months, but under no circumstance shall expire until the mortgage by Party of the First Part to Oregon Plywood Corporation shall be paid in full."
"It is understood and agreed that if the Party of the First Part is unable to produce because of fire, earthquake, disaster or act of God, this contract shall continue in full force until the mortgage heretofore mentioned is paid in full."
"It is further agreed that Party of the Second Part shall acquire one share of stock in Party of the First Part, and Party of the First Part shall keep a representative of Party of the Second Part upon its Board of Directors until the mortgage given by Party of the First Part to Oregon Plywood Corporation shall be paid in full, at which time said share of stock shall be surrendered to Party of the First Part upon Party of the Second Part being paid the original purchase price therefor."
Central States Power & Light Corp. v. United States Zinc Co., 10 Cir., 60 F.2d 832, is not strong authority for any position. The concurring opinion of Judge Lewis interpreted the contract involved as not being a requirements contract. We note that the dissenting opinion by Judge McDermott is more or less in accord with the view we herein adopt.
A recent comment found in New York University 12 Intramural Law Review 146, we find of no assistance since the article makes statements much too broad and qualified by cases other than those mentioned.