Contract law was established for the primary purpose of safeguarding the rights and interests of the parties involved in a contractual agreement (Elliot and Quinn, 2013). This law defines the rights and obligations of the parties and specifies the attributes that an agreement must possess to be regarded as a contract. Contract law is important for business as it creates an environment where parties can transact with mutual trust and the confidence that all parties will honor their obligations (Mitchell, 2014). In situations where the provisions of contract law are violated, parties approach the courts for arbitration. This was the case in Macy’s Inc. v Martha Stewart Living Omnimedia Inc. This paper explores this case. Among other things, the paper examines the nature, the facts of the case and the ruling of the court.
Nature of case
This case involved a breach of contract. The case appeared before the Appellate Division of the New York Supreme Court. When two parties enter into a contract, they commit to honoring the terms of the contract. Should one party violate the terms, the other party may turn to the courts for arbitration. The case involved three parties: JC Penny, Macy’s and Martha Stewart Living Omnimedia Inc. (MSLO) ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). The latter two were the direct participants while JC Penny was merely dragged into the case. Macy’s initiated the legal action against JC Penny and MSLO for breach of contract. The specific details of the case including the areas of disagreement are provided in the discussion below.
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Facts of case
Macy’s had entered into a contract with MSLO. In this contract, it was agreed that Macy’s would be the sole seller of products made by MSLO ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). The contract forbade MSLO from entering into any agreement with another company that would allow the company to sell the products that Macy’s held exclusive rights to. The term for the contract was set at five years and it granted Macy’s the right to renew it. MSLO needed to raise funds and it approached JC Penny ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). MSLO did this despite the provision of its contract with Macy’s which forbade it from entering into contracts with other companies through which it could sell the exclusive products. MSLO and JC Penny agreed to establish an arrangement where the former would manufacture goods that would be sold at outlets owned by the latter ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). This was in violation of the terms of MSLO’s contract with Macy’s. JC Penny also demanded that it be issued with copies of the contract that MSLO entered into with Macy’s. Macy’s held that the new contract between MSLO and JC Penny amounted to a violation of the confidentiality clause in the contract that it entered into with MSLO ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). Additionally, Macy’s argued that JC Penny engaged in behavior that amounted to unfair competition.
Court holding and rationale
As it heard and set out to issue a determination on the case, the court had to establish a number of issues. First, it had to be determined that there existed a valid contract that brought Macy’s and MSLO together ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). Secondly, it had to be established that JC Penny understood that Macy’s had entered into a contract with MSLO. Thirdly, the court had to establish that JC Penny encouraged MSLO to violate its contract with Macy’s. The fourth issue that the court had to examine was whether MSLO violated the contract it had entered into with Macy’s ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). Macy’s also had to demonstrate to the court that it had sustained damages.
The court held that the contract between Macy’s and MSLO was indeed valid and that MSLO had violated its provisions and blamed this violation on the actions of JC Penny ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). It was also determined that JC Penny’s actions forced Macy’s to violate the confidentiality provisions in the contract between MSLO and Macy’s. The court also held that the actions of JC Penny constituted unfair competition ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). Macy’s had appealed to the court for punitive damages. The court refused to award the damages.
As they make judgments, courts are guided by the law and legal principles. The court hearing the case above based its decision on rationale that was composed of a number of arguments. To arrive at the conclusion that Macy’s contract with MSLO was valid, the court examined the contract itself. The terms of the contract make it clear that the contract was valid and binding ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). The court also explored the conduct of JC Penny to establish the binding nature and validity of the contract. The court argued that JC penny understood that the contract was ‘tight’ and that they would need to ‘break’ it ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). This suggests that the contract was binding. In addition to relying on the terms of the contract and examining the conduct of JC Penny, the court employed precedent in its ruling. It referred to such cases as Innophos, Inc. v Rhodia, S. A., 38 AD3d368, 369 [1st Dept 2007], affd 10 NY3d 25 [2008]) ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015).
As noted above, the court found that a violation of the confidentiality clause in the contract occurred. It based this decision on the fact that the contract used unambiguous language and that the information that MSLO shared with JC Penny was not exempted from the confidentiality provision ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). The other ruling that the court made was that Macy’s was not entitled to punitive damages. The court cited the purpose of punitive damages to defend its position. It argued that punitive damages are intended to serve as an example for social remedies and should never be used solely to compensate a private entity ( Macy's Inc. v Martha Stewart Living Omnimedia, Inc. , 2015). This means that the court did not think that the public suffered harm and therefore, punitive damages were not warranted. The court also argued that the arguments that Macy’s presented in its request for punitive damages fell below the threshold.
The case was heard by just a single judge. Therefore, there was no dissenting opinion. I agree with some aspects of the ruling issued by the court. I find that the contract between Macy’s and MSLO was binding and that its provisions were violated. I also agree with the position of the court that the actions of JC Penny amounted to unfair competition. It is clearly unfair for a company to poach the partners of its competitors (Fouquet, 2014). The court found that Macy’s did not deserve to be awarded punitive damages. I do not support this position. I think that JC Penny acted recklessly and with malice. It should have been punished. The primary purpose of punitive damages is to punish wrongdoers and to discourage wrong doing (Gaughan, 2009). By asking JC Penny to pay punitive damages, the court would be punishing JC Penny for the wrongs that it committed and it would discourage the company from repeating the wrongs.
Conclusion
The case involving MSLO, JC Penny and Macy’s is a textbook example of the need for parties to honor the terms of contracts that they enter into. In this case, MSLO violated the provisions of its contract with Macy’s. JC Penny was to blame for this. This case underscores the damage that can result from breach of contract. Strategic partnerships can be threatened resulting in losses. To ensure that business is conducted smoothly, companies need to remain faithful to their partners and honor their obligations as set out in contracts.
References
Elliot, C., & Quinn, F. (2013). Contract Law. New York: Pearson Education.
Fouquet, J. (2014). Does the Creation of a Competing Company by Employees Constitute Unfair
Competition ? Retrieved 27 th November 2016 from
http://www.globalworkplaceinsider.com/2014/06/does-the-creation-of-a-competing-company-by-employees-constitute-unfair-competition/
Gaughan, P. A. (2009). Measuring Business Interruption Losses and other Commercial
Damages. Hoboken, NJ: John Wiley & Sons.
Macy's Inc. v Martha Stewart Living Omnimedia, Inc., NY Slip Op 01728 (2015).
Mitchell, C. (2014). Contract Law and Contract Practice: Bridging the Gap between Legal
Reasoning and Commercial Expectation. London: A&C Black.
