Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 27

FACTS Optus Software, Inc. (Optus), a small computer software company, hired Michael Silvestri as its director of support services at an annual salary of $70,000. Silvestri was responsible for supervising technical customer support services. More specifically, Silvestri was charged with supervision of the support services staff, responsibility for communication with resellers of the Optus computer software, and coordination of ongoing training for support staff and resellers. Silvestri's two-year employment contract began on January 4, 1999, and contained a satisfaction clause that reserved to the company the right to terminate his employment for ''failure or refusal to perform faithfully, diligently or completely his duties … to the satisfaction'' of the company. Termination under that clause relieved the company of any further payment obligation to Silvestri.
During the first six months of his employment Silvestri enjoyed the full support of Joseph Avellino, the CEO of Optus. Avellino's attitude started to change during the summer months of 1999, when several clients and resellers communicated to Avellino their disappointment with the performance and attitude of the support services staff generally, and several complaints targeted Silvestri specifically. Avellino informed Silvestri of those criticisms. On September 17, 1999, Avellino terminated Silvestri under the satisfaction clause.
Silvestri filed an action for breach of contract. Silvestri did not assert that there was any reason for his termination other than Avellino's genuine dissatisfaction with his performance. Rather, Silvestri challenged the reasonableness of that dissatisfaction. He portrayed Avellino as a meddling micromanager who overreacted to any customer criticism and thus could not reasonably be satisfied.
The trial court granted summary judgment in favor of Optus, refusing to substitute its judgment for that of the president and CEO of Optus. The Appellate Division reversed, holding that an employer must meet an objective, reasonable-person test when invoking a satisfaction clause permitting termination of employment. The Supreme Court of New Jersey granted review.
DECISION The judgment of the Appellate Division is reversed, and the case remanded for entry of summary judgment in favor of Optus.
OPINION LaVecchia, J. Agreements containing a promise to perform in a manner satisfactory to another *** are a common form of enforceable contract. [Citation.] Such ''satisfaction'' contracts are generally divided into two categories for purposes of review: (1) contracts that involve matters of personal taste, sensibility, judgment, or convenience; and (2) contracts that contain a requirement of satisfaction as to mechanical fitness, utility, or marketability. [Citation.] The standard for evaluating satisfaction depends on the type of contract. Satisfaction contracts of the first type are interpreted on a subjective basis, with satisfaction dependent on the personal, honest evaluation of the party to be satisfied. [Citation] Absent language to the contrary, however, contracts of the second type- involving operative fitness or mechanical utility-are subject to an objective test of reasonableness, because in those cases the extent and quality of performance can be measured by objective tests. [Citation]; Restatement (Second) of Contracts § 228; [citation].
A subjective standard typically is applied to satisfaction clauses in employment contracts because ''there is greater reason and a greater tendency to interpret [the contract] as involving personal satisfaction,'' rather than the satisfaction of a hypothetical ''reasonable'' person. [Citations.]
In the case of a high-level business manager, a subjective test is particularly appropriate to the flexibility needed by the owners and higher-level officers operating a competitive enterprise. [Citation.] When a manager has been hired to share responsibility for the success of a business entity, an employer is entitled to be highly personal and idiosyncratic in judging the employee's satisfactory performance in advancing the enterprise. [Citations.]
The subjective standard obliges the employer to act ''honestly in accordance with his duty of good faith and fair dealing,'' [citation], but genuine dissatisfaction of the employer, honestly held, is sufficient for discharge. [Citation.]
Although broadly discretionary, a satisfaction-clause employment relationship is not to be confused with an employment-at-will relationship in which an employer is entitled to terminate an employee for any reason, or no reason, unless prohibited by law or public policy. [Citation.] In a satisfaction clause employment setting, there must be honest dissatisfaction with the employee's performance. *** If *** the employer's dissatisfaction is honest and genuine, even if idiosyncratic, its reasonableness is not subject to second guessing under a reasonableperson standard. In other words, standing alone, mere dissatisfaction is sufficient so long as it does not mask any other reason for the adverse employment action.
***
We hold that a subjective test of performance governs the employer's resort to a satisfaction clause in an employment contract unless there is some language in the contract to suggest that the parties intended an objective standard. There is no such language here. ***
Turning then to application of the subjective test in this setting, *** we conclude that the entry of summary judgment in favor of defendants was appropriate. The only issue available to Silvestri is whether the dissatisfaction with his performance was genuine, and he has failed to make a prima facie showing that it was not.
INTERPRETATION A subjective test of performance governs an employer's use of a satisfaction clause in an employment contract unless language in the contract suggests that the parties intended an objective standard.
CRITICAL THINKING QUESTION Could an employee discharged under a satisfaction clause demonstrate that the employer was not honestly dissatisfied? Explain.