United States: Breach Of Oral Agreement Results In Punitive Damages

Last Updated: January 17 2017
Article by Craig R. Tractenberg

The closing argument featured a slide-show presentation. The closing slide was a depiction of the Taiwanese manufacturer's chairman giving a speech at a wedding banquet. The wedding was that of the daughter of the U.S. distributor's owner. The speech compared the 30-year relationship of the manufacturer with the distributor with the bride and groom, and how those present would look back on the wedding day with fondness. Instead, the jury looked back at the wedding day, for the manufacturer concealed that they decided to terminate the oral distribution agreement. The jury awarded $6.2 million in compensatory damages and $6 million in punitive damages.

In Mighty Enterprises v. She Hong Industrial, (U.S.D.C. for the C.D. Cal Nov. 23, 2016), the distributor Mighty Enterprises, Inc. brought suit against its Taiwanese manufacturer of heavy equipment, She Hong Industrial. The "largest machining center in Taiwan," She Hong has 500 employees in Taiwan, and had more than 70 distributors in 60 countries, with 300 offices worldwide. Mighty in 2013 was the fifth largest distributor of She Hong equipment in the world. The relationship was an oral distribution contract, effectively a handshake across the Pacific Ocean. Mighty would purchase new equipment and parts from She Hong, and would service its customers in the United States. This was a 33-year relationship before it was terminated by She Hong.

As a large manufacturer, She Hong was looking for the largest distributor it could find. A distributor that could stock much more in inventory and would invest in finding more downstream dealers that would advance its business and build a bigger and better service department. She Hong had decided that Mighty was no longer the distributor of the future and began secretly to search for a replacement. In communications to prospective new distributors, She Hong touted its size and stated that Mighty was not performing as expected in the U.S. market. Nevertheless, during this search period, She Hong reaffirmed the exclusive U.S. distributor relationship with Mighty built on friendship. During this secret search period, She Hong encouraged Mighty to increase its inventory and expand.

In 2014, She Hong formally terminated the relationship, and Mighty sought to wind down its inventory. As it was an oral relationship that was silent as to procedure upon termination, Mighty sought to have its inventory of parts and equipment liquidated to its dealers, to its successor, or to She Hong itself. Instead, She Hong told the former Mighty dealers not to deal with Mighty and refused to address the inventory liquidation. Moreover, She Hong usurped the dealer network that Mighty developed over 33 years and tried to alienate the dealers. The evidence suggested that She Hong invited the dealers to visit Taiwan with Mighty in 2013 in anticipation that the network would be usurped, and copied the dealer list from Mighty in order to substitute itself for Mighty in the distribution chain. She Hong later directly solicited the Mighty's dealers to distribute directly for She Hong after termination of Mighty, and refused to offer Mighty's inventory and parts to the dealers. She Hong admitted at trial that it had deleted some of the emails to the dealer which could have been evidentiary.

The jury answered four special interrogatories. The first asked whether She Hong was liable for breach of oral contract, and the second asked whether She Hong was liable for breach of implied contract. The jury answered each in the affirmative. The contract breach addressed not whether the contract could be terminated, but rather, whether She Hong had acted properly in its termination and wind down of the relationship.

The third asked whether She Hong was liable to Mighty for interference with contractual business relations. The claim was based on the usurpation of Mighty's dealership network and the advice of She Hong that the dealers not buy from Mighty in the future. The fourth asked whether She Hong was liable to Mighty for fraud, based on She Hong encouraging the purchase of additional inventory and parts at the time when She Hong knew termination was imminent and She Hong refused to repurchase and interfered with resale to the dealers. The jury again found for Mighty on each interrogatory.

The damage claim was basically for the value of the inventory, parts and future lost profits totaling $18,648,000. The jury apparently gave great weight to the value of the recently purchased inventory and parts, awarding some lost profits as well, totaling in compensatory damages of $6.2 million. Because of the special interrogatory finding that the clear and convincing evidence showed that She Hong engaged in malice, oppression or fraud, the jury awarded $6 million in punitive damages, for a total verdict of $12.2 million.

What makes this case so interesting is that the impact of good faith and fair dealing on the jury deliberations. The jury was charged that the implied covenant of good faith and fair dealing cannot replace the explicit words of the contract. Here, the contract had not expressed terms beyond the establishment of a distributor relationship with service responsibilities, so all were implied by either conduct or the duty of good faith and fair dealing. Although the certain UCC provisions were raised as a defense in the case, the UCC also implies the duty of good faith and fair dealing in all UCC dealings, and has not helped She Hong with the jury. The jury was apparently offended by the way the relationship ended, and determined that She Hong did not have the right to terminate the agreement in the manner that it did.

Originally published by The Legal Intelligencer

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Craig R. Tractenberg
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions