May 30, 2024

Carolina Beverage Corp. v. Fiji Water Company

In what appears to be a decision on an issue of first impression, the California Court of Appeal has rejected application of “constructive termination” in a commercial contract dispute.

From the Court of Appeal’s opinion:
“A manufacturer entered into a contract with a third-party
distributor granting the distributor an “exclusive” right to
distribute the manufacturer’s product to retailers within the
distributor’s geographic territory. That right was a qualified one,
because the agreement (1) granted the manufacturer the right to
invade the distributor’s territory by selling and delivering its
product directly to retailers in that territory as long as it paid the
distributor an “invasion fee,” and (2) granted the manufacturer
the right to terminate the contract “for any reason in its sole
discretion” upon giving written notice as long as it paid the
distributor a higher “termination payment.” The manufacturer
ended up invading around 85 percent of the distributor’s territory
but never invoked its right to terminate under the contract.
The distributor sued and went to trial on two contract-related claims
on the theory that the manufacturer had constructively
terminated the contract.” (Opinion, p.2.)

The jury returned a verdict for the distributor in the amount of the “termination payment” in the contract. The trial court denied the manufacturer’s motion for judgment notwithstanding the verdict, and the manufacturer appealed.

The Court of Appeal reversed, holding that “constructivetermination” of a distribution contract is not a viable theory of recoveryunder California common law. The court also held that, in any event, the contract here was not constructively terminated because the distributor continued to operate under the contract, and thus did not satisfy one of the requirements for a constructive termination.

Horvitz & Levy LLP represented the prevailing defendant on appeal.