Opinion ID: 1143765
Heading Depth: 2
Heading Rank: 2

Heading: bonus agreement

Text: The written employement agreement [3] between Beaux and the Gibsons provided that if Unit 100 ... is sold by KLONDIKE during the term of GIBSON's employment as manager of the business operating in said unit, GIBSON shall receive the following as an additional bonus ..., and that it [is] understood that to receive the benefits of this Agreement [the bonus on sale], GIBSON must remain as an employee of KLONDIKE... . The trial court held that these provisions made Pat Gibson's employment at the time of the sale of the Klondike a condition precedent to Beaux's duty to pay the bonus. [4] This holding is not disputed. As a general rule, when a party's performance is subject to a condition precedent, that party's duty to perform arises only if the condition is met or is excused. Restatement (Second) of Contracts § 224 (1981); see Norton v. Herron, 677 P.2d 877, 882 (Alaska 1984) (quoting Peterson v. Wirum, 625 P.2d 866, 873 n. 14 (Alaska 1981)) (a conditional contract involve[s] the consequences that a slight failure to perform wholly destroys all rights under the contract ...) The court found that the condition precedent to Beaux's duty to pay the bonus was not met. Pat Gibson terminated his employment under the agreement on May 21, 1982 and the Klondike was sold on February 1, 1983, following initial negotiations beginning in late August or early September 1982. Although Pat Gibson had worked for five years at the Klondike, and it sold only seven or eight months after he left, he did not meet the condition that he be employed at the time it sold. His partial performance entitles him to no part of the bonus. See, e.g., Walker v. American Optical Corp., 509 P.2d 439, 441 (Or. 1973) (bonus plan once begun, cannot be revoked by employer, but employer has no duty to pay bonus to employee who quit before bonus became payable); Schotter v. Carnegie Steel Corp., 116 A. 358, 359 (Pa. 1922), and Roberts v. Mays Mills, Inc., 114 S.E. 530, 531 (N.C. 1922) (bonus forfeit where employee quits voluntarily before it becomes payable). The trial court found that Pat Gibson quit voluntarily in part in order to return to teaching. [5] The rule requiring full performance of conditions leads to the conclusion that the Gibsons did not earn the bonus. However, the trial court held that the bonus was payable because the condition was excused. The court identified five reasons to excuse the Gibsons' performance of the condition: (1) Beaux breached the duty of good faith and fair dealing in his dealings with the Gibsons, thereby materially contributing to their non-performance (citing Restatement (Second) of Contracts (hereinafter Restatement) § 245); (2) the parties' mutual mistake as to the time needed to sell the Klondike voided the condition (citing Restatement §§ 153, 164); (3) the condition violated public policy (citing Restatement § 185); (4) the condition imposed a disproportionate forfeiture (citing Restatement, § 229); and (5) Beaux's duty to pay the bonus was not terminated by Pat's resignation, because Pat resigned as a result of Beaux's wrongful acts (citing Restatement § 230). Beaux disputes each of these rationales.
We may dismiss four of the lower court's rationales at the outset. A representation as to a future course of conduct cannot be a mistake. Restatement § 293 comment a; see Shear v. Nat'l. Rifle Assoc., 606 F.2d 1251, 1260 (D.C. Cir.1979). Even if Beaux did guarantee that the Klondike would sell within three years, [6] the Gibsons could not reasonably rely on an assertion that a property would sell at a profit within a given amount of time. In Shear, the court denied that a plaintiff could rescind a sales commission agreement due to the mutual mistake of the parties that the defendant's management committee would recommend approval of the contract procured by plaintiff. The mistake doctrine does not apply to predictions or promises of future conduct. Id. at 1260. We agree. The fact that the parties here anticipated the sale of the Klondike within three years instead of the five years and eight months that it actually took cannot, without more, justify excusing the employment at sale requirement. The Gibsons argue that the condition was not an essential part of the employment agreement; therefore, the trial court could properly excuse the agreement pursuant to Restatement § 185 (excuse of condition on grounds of public policy unless its occurrence was an essential part of the agreed exchange.) The trial court apparently held that the employment on sale condition violated public policy because it required Pat Gibson to continue to work for Beaux for an indefinite period despite personal friction between the two. The court observed that a court may refuse to specifically enforce a personal services contract where one party objects to the other. See Zannis v. Lake Shore Radiologists, Ltd., 73 Ill. App.3d 901, 29 Ill.Dec. 569, 572, 392 N.E.2d 126, 129 (Ill. App. 1979) (as a matter of public policy courts will avoid the friction that would be caused by compelling an employee to work, or an employer to hire or retain someone against their wishes.) The trial court concluded, it would similarly be contrary to public policy to have compelled, in retrospect, Pat Gibson to have continued in the employ of Wiley Beaux. As we noted earlier, bonus agreements conditioned on continued employment have been widely upheld. E.g., Walker, 509 P.2d at 441. We conclude that the condition cannot be excused on grounds of public policy. [7] The Gibsons concede that the condition of employment on sale is material to the bonus agreement, thereby precluding excuse of the condition pursuant to Restatement § 229 (a condition which will result in disproportionate forfeiture may be excused unless its occurrence was a material part of the agreed exchange.) The trial court's reliance upon Restatement § 230 to excuse the employment on sale condition also is misplaced. This section excuses conditions subsequent; that is, those events which, if they occur, terminate an otherwise existing duty. Id., comment a; J. Calamari & J. Perillo, The Law of Contracts, §§ 11-3, 11-5 at 384-86 (2d ed. 1977). The employment on sale condition at issue here was clearly a condition precedent; that is, Beaux's duty to pay the bonus did not arise at all until the employment on sale condition was met. The trial court expressly so held. Restatement § 230 cannot provide a ground for excuse of the condition at issue. [8]
The trial court found that Beaux breached his duty of good faith and fair dealing and that this breach contributed materially to Pat Gibson's failure to remain employed until the Klondike's sale. The court held that under Restatement § 245, the condition was excused, giving rise to Beaux's duty to pay the bonus. Beaux argues first that this court should not adopt § 245 in employment contract cases, and second, that the trial court's conclusion that Beaux breached the duty of good faith and fair dealing was clearly erroneous. Beaux argues that Restatement § 245 should not be applied in employment cases because its use would inhibit employers from making legitimate business decisions. We disagree, and adopt § 245. In Mitford v. de Lasala, 666 P.2d 1000, 1006-07 (Alaska 1983), we held that a condition requiring continued employment was excused when the employer fired the employee in bad faith thus preventing the employee's continued employment. See also Restatement of Contracts § 295 (1932); 3A Corbin on Contracts § 767 (1961); 5 Williston on Contracts § 677 (3d ed. 1961). Unlike the First Restatement and our Mitford rule, Restatement (Second) § 245 does not contain a prevention requirement; instead, it provides that a condition is excused if one party's breach contributes materially to the nonoccurrence of the condition. The trial court did not find that Beaux's actions prevented Pat Gibson from remaining employed; it stated that Pat quit voluntarily, after carefully considering his position. Instead, it found that Beaux's acts contributed materially to Pat's decision to resign. Proof of prevention involves speculation as to what would have happened had the defendant's conduct not taken place. Shear, 606 F.2d at 1257. Such speculation is bound to be uncertain; the less stringent standard of § 245 is simply more realistic. Moreover, the defendant whose acts constitute a significant reason for the other party's inability to perform should not be able to avoid an agreed duty merely because he can point to some other causative factor. In this case, however, we find that the trial court erred in its determination that Beaux breached his duty of good faith and fair dealing. Therefore, we must reverse the excuse of the condition under Restatement § 245. Because we have found no other reason to support excuse of the condition, we must reverse the award of the bonus. We have previously held that the duty of good faith and fair dealing implied in all contracts requires that neither party ... do anything which will injure the right of the other to receive the benefits of the agreement. Guin v. Ha, 591 P.2d 1281, 1291 (Alaska 1979). Comment a to Restatement § 205 states: Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party... . Comment (d) of the same section notes that: [s]ubterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty... . In Mitford, the employer breached the duty of good faith and fair dealing because he fired the employee for the purpose of preventing him from sharing in future profits... . 666 P.2d at 1007. Recently we suggested that evidence that an employer treated different employees differently in like circumstances would be relevant to showing a breach of the duty. Rutledge v. Alyeska Pipeline Service Co., 727 P.2d 1050, 1056 (Alaska 1986). In this case, the trial court found seven circumstances which established Beaux's breach of the duty. We will examine each of these in turn.
The trial court found that Beaux guaranteed the sale of the Klondike within three years, and that this misrepresentation led the Gibsons to enter the contract. Although Beaux disputes this finding, [9] we do not believe that the trial court's finding was clearly erroneous. However, even if this statement were a misrepresentation, [10] the record discloses that Beaux made reasonable efforts to sell the Klondike throughout the Gibsons' tenure. He listed it with real estate agents, made cash investments to upgrade the property, and worked at the Klondike himself along with his wife and children, without wage. Despite these efforts, prior to Gibsons' termination in 1982, Beaux had received only one offer on the property. That offer was unacceptable because it involved an exchange of property. Therefore, Beaux's failure to consummate a sale within three years cannot be evidence of bad faith. The trial court may have found bad faith in the fact that, after five years of allegedly trying to sell the Klondike, Beaux sold it seven months after the Gibsons left. While we agree that a deliberate manipulation of the listing price to avoid a sale until after the Gibsons were no longer employed would have constituted bad faith, the record is devoid of evidence of deliberate manipulation of the sale. Therefore, if that is the basis for the finding of bad faith, we deem it clearly erroneous.
The court also held that the work the Gibsons were required to perform was greatly in excess of anything told them in advance. The court acknowledged that they had ample opportunity before signing the agreement to become aware that much work would be required of them. However, it found that it was not until they... had taken up residence at the Inn that the nature and extent of their `management' duties became clear. The Gibsons moved into the Klondike in June, 1977 and did not sign the written employment agreement until July 28, 1977. During one month, they had ample opportunity to become aware of the hours necessary. Pat Gibson noted that in June, they each put in no less than 12 to 14 hours per day. By then, the operation was open 23 hours a day, the legal maximum. During those first few months, Pat Gibson testified, they stocked beer, cleaned the kitchen, cleaned the bar, ... rented rooms, did laundry, pulled shift[s]. However, the Gibsons were managers with substantial autonomy. They hired cooks, bartenders and waitresses. They could largely set their own hours. They took vacations to Fairbanks, Hawaii and Idaho; Pat took fishing trips and taught as a substitute at a local school. Nothing in the record indicates Beaux demanded ever-increasing work from the Gibsons. There is no allegation of a threat to fire them if they didn't work harder. In short, the record is devoid of any indication that Beaux's purpose in expecting that the Gibsons put in long hours and hard work was anything but the reasonable business purpose, evident from the beginning of their relationship, that the Gibsons put forth the necessary effort to make the Klondike succeed. We conclude that the long hours and hard work required did not breach the duty of good faith and fair dealing.
The court also found that Beaux's proposal for changes in the bonus agreement were presented on a take it or leave it basis and constituted evidence of bad faith. The record does support the finding that Beaux threatened to fire Pat Gibson, or to shut the Klondike down, if Pat refused to sign the second agreement modification. However, we find that the proposal, even if accompanied by a threat of termination, was not made in bad faith. Beaux had every right to fire Gibson, thus terminating the bonus agreement, so long as he did so for a legitimate business reason. Moreover, the proposed modification provided advantages to both parties. Under the proposal, Gibson would have received a bonus (of $50,000), even if he was not working at the time the Klondike was sold, if he worked through September 15, 1982; Beaux's advantage was that the bonus calculation would reflect an additional $83,750 in increased capital Beaux claimed he invested. [11] In addition, Beaux testified that Gibson could continue to work under the existing agreement. Finally, regardless of the nature and gravity of Beaux's threats, [12] he took no action on them. Instead, Pat Gibson quit voluntarily. He conceded that his desire to return to teaching was at least a significant reason for his quitting. Beaux's threat to fire Gibson appears to have been aggressive posturing for negotiation; when Gibson refused to knuckle under, Beaux did not carry out his threat. This threat did not rise to the level of a breach of good faith and fair dealing.
The trial court found that Beaux's questions to Pat Gibson concerning the rate of return on liquor sales were evidence of bad faith. However, the Gibsons' own expert testified that the financial records kept by the Gibsons were not entirely adequate. Beaux, as owner, had every right to question his manager concerning return on investment. The trial court did not find that Beaux's accusations were made without a business reason and nothing in the record suggests that to be the case. This finding of bad faith is clearly erroneous.
The trial court also found bad faith in Beaux's failure to advise Pat Gibson that a large balloon payment came due on the Klondike in September 1982, making sale of the property imperative, and that he intended to re-list the property. This failure, however, is not bad faith. First, Gibson knew or should have known of the terms of the note. Beaux testified without contradiction that he told Gibson of it; furthermore, Gibson was responsible for making the payments on the note, and he had contact with the holder of the note. Finally, the note was ultimately renegotiated anyway; thus, its significance to the sale is speculative. In any event, Beaux's acts regarding the loan cannot be considered inherently unfair to the Gibsons. The property was essentially always for sale; it had been listed frequently. Further, the record does not support the view that Beaux had a buyer already lined up before Gibson quit. Therefore, Beaux's failure specifically to mention the balloon payment is not evidence of bad faith.
The trial court held that Beaux's drastic change of image for the Klondike, from `family' style to rock, or country rock was additional evidence of his bad faith dealings with Pat. We disagree. Beaux, as owner, had every right to order changes in the Klondike's music to attract a larger clientele. See Kirchof v. Friedman, 10 Ariz. App. 220, 457 P.2d 760 (1969) (restaurant owner's decision to change the menu, advertising and entertainment was held to be a matter of policy making properly subject to the owner's control, not day-to-day management which was the domain of the manager. Therefore, the court denied the manager the right to recover for breach of two-year employment contract.) See also Annotation, Reduction in Rank or Authority or Change of Duties as Breach of Employment Contract, 63 A.L.R.3d 539 (1975). Therefore, Pat's discomfort with the new format, even if Beaux was aware of his reaction, is not legally sufficient to constitute evidence that Beaux acted in bad faith.
The trial court found that Pat had a close family relationship with his cousin Beaux and that Pat, educated as a teacher and lacking business acumen, put his faith in Beaux, a wily real estate developer. The court concluded that the employment agreements were not arms length business transactions. We agree that these factors could play a part in a bad faith determination. However, we note that the trial court also found that the Gibsons reviewed the agreements overnight, that both Pat and Bernice had been involved in sales and that Pat was ten years older than Beaux. We hold that the personal relationship between the parties does not mandate a higher standard of good faith than that mandated by the employer-employee relationship. We conclude that none of Beaux's acts injured the right of the Gibsons to receive the bonus; rather, his conduct was either relatively neutral or was designed to produce a profitable sale of the Klondike. Here, the totality of the circumstances did not evidence bad faith. We therefore hold that Beaux's dealings with the Gibsons did not constitute a breach of his duty of good faith and fair dealing. We conclude that the trial court erred in excusing the employment-on-sale condition, and accordingly reverse the bonus award.