he Burton Corp. v. ViQuest Precision Industries Co.
Facts: Burton is a Vermont-based designer, manufacturer, and seller of snowboards. ViQuest is a manufacturer of injection-molded products based in Shanghai, China. Burton and ViQuest contracted for ViQuest to manufacture Burtonâ€™s snowboard bindings.
The agreement also contained the following provisions:
- The agreementâ€™s initial term was one year, with automatic successive one-year renewals.
- Burton could terminate the Agreement at any time if it determined that â€œViQuest’s financial position posed a risk to Burtonâ€™s business.â€
- Any dispute between the parties would go to arbitration.
The agreement automatically renewed for a second one-year period. Things appeared to be going well until, two months later, when Burton unexpectedly terminated the agreement, claiming that â€œViQuestâ€™s financial positionâ€ was too risky. However, the opposite seemed to be true: Burton owed ViQuest approximately $1.8 million in unpaid purchase orders, which it refused to pay.
An arbitration panel ruled for ViQuest after it determined that Burtonâ€™s reasons for terminating the contract lacked any basis in fact and was in bad faith. Burton asked that the court vacate the award, claiming the arbitrators misconstrued the contract by imposing an additional duty to prove that ViQuest was indeed risky. A court reviewed the panelâ€™s decision.
You Be the Judge:Did Burtonâ€™s terminate the contract in bad faith?
Argument for Burton: Business is business. Contracts are contracts. And the contract language is clear: Burton had the right to terminate at any time if it determined that â€œViQuestâ€™s financial position posed a risk.â€ Burton had no duty to prove how it reached this conclusion or whether it was reasonable. It was simply a business decisionâ€”an area where courts and arbitrators should not meddle. The arbitrators exceeded their authority by reading into the contract a requirement to prove that ViQuest was financially challenged. This decision was based what the arbitrators thought the contract should have said, not on the actual terms of the deal. Stick to the contract.
Argument for ViQuest: The UCC imposes a covenant of good faith and fair dealing in the performance and enforcement of every contractâ€”including this one. This duty is implicit. Burton argues that the contract allowed it to terminate if it unilaterally determined ViQuestâ€™s financial position was riskyâ€”a determination it reached based on . . . nothing. In effect, Burton is saying that it could, at its whim, terminate the contract at any time just by saying so, without producing any reason or evidence. But that is not what the contract said. And it should not be interpreted that way. Burton terminated the contract in bad faith and, as such, is sledding on very thin ice.
Holding: Judgment for ViQuest. The district court found that Burton did not provide an adequate basis to vacate the arbitral panelâ€™s conclusion. Burton did not have reasonable grounds to terminate the Agreement and breached its duty of good faith and fair dealing under the UCC.
Question: 1 In general, what does â€œgood faithâ€ mean?
Question: 2 What does â€œgood faithâ€ mean between merchants?
Question: 3 Did Burtion Corp operate in Good Faith? Why or Why not?