Opinion ID: 1776292
Heading Depth: 2
Heading Rank: 1

Heading: Adjustment per special statement

Text: The contract states that the purchase price was $2,249,203.00, subject to certain adjustments specified in the contract. The contract stated that the purchase price was subject to the following adjustments: SMCI must have a net worth on January 31, 1986, of $1,244,673.00, represented by a review financial statement prepared by Baumann, Fabricant & Co., P.A., Certified Public Accountants, as of January 31, 1986. The purchase price is to be increased or decreased dollar for dollar respecting any change therein as of January 31, 1986. The only review statement in the record is dated April 4, 1986. Therefore, for the purposes of increasing or decreasing the purchase price due to changes in the net worth of SMCI, the net worth of the company on January 31, 1986, was $1,209,776.00, the amount reflected on the April 4, 1986, review statement. Alfab argues that the net worth of SMCI was, by the terms of the contract, a fact question, and that that question thus was properly determined by the trial court. We do not agree that the contract terms made net worth a fact question. If a contract in its terms is plain and free from ambiguity, there is no room for construction, and it is the duty of the court to enforce it as written. McDonald v. U.S. Die Casting & Development Co., 541 So.2d 1064, 1068 (Ala.1989). Although the intent of the parties controls in construing a written contract, the law of contracts is premised upon an objective, rather than subjective, manifestation of that intent. Lilley v. Gonzales, 417 So.2d 161 (Ala.1982). The objective intent of the parties is to be derived from the contract itself, where the language is plain and unambiguous. Trimble v. Todd, 510 So.2d 810 (Ala.1987); Southern Housing Partnerships, Inc. v. Stowers Management Co., 494 So.2d 44 (Ala.1986). The contract clearly states that the net worth is that amount reflected in the financial review statement from Baumann, Fabricant. The objective intent of this provision was to set up a mechanism for arriving at the price. It is not, therefore, necessary that the price should be fixed by the contract itself, or at the very time the contract is made, provided that the parties have settled upon some method by which the price may be determined with certainty. `If the parties settle between themselves some method by which it may be ascertained at a future period, the maxim id certum est quod certum reddi potest [That is certain which can be made certain] applies, and the price when so settled shall relate to the original contract.' 1 F. Mechem, The Law of Sale of Personal Property § 210 (1901). Where the parties to a contract, before dispute and in order to avoid one, provide for a method of ascertaining the value of something related to their dealings, the provision is one for an appraisement. 5 Am.Jur.2d, Arbitration and Award § 3 (1962). Such an appraisal or evaluation product which the parties have made contractually conclusive upon themselves is therefore, equally with an arbitration result, not open to escape by either of them, except where it is capable of impeachment `for fraud, or such mistake as would imply bad faith, or a failure to exercise honest judgment.' Sanitary Farm Dairies, Inc. v. Gammel, 195 F.2d 106, 113-14 (8th Cir.1952). The Sanitary Farm Dairies case concerned Sanitary Farm Dairies' contract to repurchase, at the plaintiff's option, his shares in the company at a sum equal to 12 times the net earnings per share of stock for the preceding 12 months. The contract stated that the accounting firm of Ernst & Ernst was to be retained and hired for the purpose of auditing all books and records for the purpose of ascertaining and determining the net earnings per share. The contract also provided that the audit was to be conclusive as to the price of the shares. The plaintiff challenged the audit's finding on various grounds, including claims that it should have been computed on earnings before tax deductions. He brought suit to have the trial court determine the earnings of the corporation as an open accounting matter. On appeal, the Eighth Circuit Court of Appeals held that in this type of situation, where the ultimate purchase price is based upon the determination of an independent appraiser, whatever room there existed for reasonable difference in accountancy views or in accountants' opinion and judgment, choice of method and extent of testing, verifying or proving in the auditing task involved was such a matter [that] the parties had contracted to entrust to Ernst & Ernst's professional skill, judgment and discretion as any other factor inherent in producing an accounting-appraisal result. Judicially, therefore, the question was not whether the court or another accountant individually might think that some aspect of the processes employed by Ernst & Ernst should have been different, but whether what they did was subject to being regarded professionally as not constituting proper accounting practice in a responsible accountancy determination of the corporation's earnings. Id. at 115. Following that rationale, we conclude that the questions regarding whether the review statement of April 4 should constitute the mechanism for establishing the purchase price should address whether the review statement was subject to being regarded professionally as not constituting proper accounting practice in a responsible accountancy determination of SMCI's net worth, and not whether another accountant might think some aspect of the process employed by Baumann, Fabricant should have been different. The engagement letter from Baumann, Fabricant to Alfab stated as follows: This letter will confirm our understanding of the arrangements made by you to review the balance sheet of Specialty Maintenance & Construction, Inc. The review is made in conjunction with the potential purchase of Specialty Maintenance & Construction, Inc. by Alfab, Inc. We will review the balance sheet of [SMCI] as of January 31, 1986 in accordance with standards established by the American Institute of Certified Public Accountants. We will not perform an audit of such financial statement, the objective of which is the expression of an opinion regarding the financial statements taken as a whole, and, accordingly, we will not express such an opinion on them. Our report on this financial statement is presently expected to read as follows: We have reviewed the accompanying balance sheet of [SMCI] as of January 31, 1986, in accordance with standards established by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of [SMCI]. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an examination in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying balance sheet in order for it to be in conformity with generally accepted accounting principles. If, for any reason, we are unable to complete our review of your financial statements, we will not issue a report on such statements as a result of this engagement. It must be recognized that the usual unrestricted examination of financial statements is not designed to disclose defalcations and irregularities and cannot be relied upon for these purposes. There is much less likelihood of their discovery in an engagement such as this, where no audit is undertaken. In addition to the above described review procedures we will perform the following: 1. Obtain a schedule of in-process jobs at January 31, 1986 and perform the following: a. Verify correctness of over/under billing calculation b. For larger jobs on this schedule perform the following: determine causes and reasonableness of large over or under billed positions compare gross profits and percent complete to those at October 31, 1985, investigating large or unusual variations obtain details of unapproved change orders and discuss with management approval status discuss with management job status, with emphasis on job completion within budgeted amounts and times. 2. Obtain a schedule of activity between [SMCI] and related parties for the period October 31, 1985 to January 31, 1986 and perform the following: a. Compare to activity during the year ended October 31, 1985investigating large or unusual variations. b. Review with management, realization of amounts due to [SMCI] at January 31, 1986. Upon completion of the above procedures, we will issue a separate report detailing the above procedures and the results of our work. This report will be limited to your use and cannot be used by any other parties. There is no evidence in the record that the review financial statement was not the product of proper accounting practice in a responsible accountancy determination of the corporation's net worth. Also, there is no testimony that it was not conducted in accordance with the letter quoted above, which outlined the process to be employed. The letter was received by Robert Sanford, representing Alfab, and he indicated his agreement with the terms of the review by signing and returning to Baumann, Fabricant a copy of the letter. Some time after the review financial statement was prepared and distributed to the parties, Barr requested that certain adjustments to the review statement be made regarding the work-in-progress accounts. This additional information was provided to SMCI, with the notice that the new report was for the information of SMCI and was not to be referred to or distributed for any purpose or to anyone who is not a member of management of SMCI. The report was based upon the representations of SMCI and Alfab officers. The following were the procedures Baumann, Fabricant was asked to perform; Contracts were reviewed with respect to major covenants and original contracts amounts were agreed to job cost details. Open change orders during the period reviewed and compared to those change orders settled to determine whether or not increases in contract amounts were appropriate and realization reasonable. Contract billings were reviewed to determine contract compliance, and that amounts billed have been collected or expect to be collected. The build-up of costs-to-date was reviewed by examination of supporting documents as to job distribution and amounts. This information was traced from supporting documents to the individual job cost details. Estimated costs-to-complete were reviewed with job sponsors, contract administrator, company controller, and other management personnel, as deemed appropriate, to determine that the estimated cost-to-complete and anticipated gross profits are reasonable. The report represented the adjustments to the work in progress accounts as of July 31, 1986. Alfab contends that such adjustments were necessary to establish the net worth of SMCI and also that such adjustments were allowed for by the language of the contract. We disagree with both arguments. Alfab appears to argue throughout its brief that the purchase price established by the contract was to be adjusted by the net worth of SMCI on January 31, 1986. The contract's plain terms, however, indicate that such an adjustment was keyed to the net worth of SMCI based upon the review financial statement prepared by Baumann, Fabricant as of January 31, 1986. Therefore, this court will give effect to the plain expressed intention of the parties by determining that the objective manifestation of intent was to be bound by the review financial statement. As to the second contention, that the contract allowed Alfab to look back at the end of six months to the work-inprogress account, we find that contention to be without merit. There was testimony in the record that stated that the work-inprogress accounts, which the parties admit was an estimate in January 1986, were to be reexamined. However, as stated above, this Court is bound by the objective manifestation of intent in a written document. The contract does not allow for a look back at the work-in-progress account and specifically states that the net worth is to be determined by the Baumann, Fabricant review financial statement. Therefore, we hold that it was error for the trial court to adjust the purchase price regarding this item, as reflected on the special statement, and that, therefore, the adjustment of $377,067.00 was not properly made.