Court Opinion

ID: 9784566
Source: CourtListenerOpinion
Date Created: 2023-08-30 20:48:48.22376+00
Date Added: 2024-06-11T07:35:56.280559
License: Public Domain

NEHRING, Justice,
concurring:
¶ 40 I concur in the Chief Justice’s opinion and write separately in an effort to avoid making more impenetrable the fog which has long enveloped our implied covenant of good faith and fair dealing jurisprudence. I feel a particular duty to express my views on this topic to ensure that this court’s opinion in Smith v. Grand Canyon Expeditions, 2003 UT 57, 84 P.3d 1154, which I authored, is not misread as an obituary for the implied covenant.
¶ 41 Both Smith and this case involve disputes over corporate valuation, and each featured a contract that provided that the valuation was to be conducted in accordance with generally accepted accounting principles (GAAP). In Smith, we held that the actions by the parties met the standards established by the contract and thus the implied covenant of good faith and fair dealing had no bearing on the matter. In this case, however, we have concluded that Mr. Eggett is entitled to show that Wasatch breached the implied covenant of good faith and fair dealing.
¶42 With these two holdings, this court confronts a direct challenge to our well-founded desire to bring consistency and predictability to the law. As the dissent ably reveals, the Chief Justice’s opinion is vulnerable to the charge that it fails to meet that challenge. After all, how could an express contract term setting out a clear valuation methodology fill all of the “gaps” in the understanding or expectations of the parties in Smith, but not here? How could compliance with GAAP extinguish the implied covenant in Smith, but have endured to yield a sizeable verdict for Mr. Eggett?
*204¶ 43 A simple, accurate, and incomplete answer is that the implied covenant is by its very nature a pliable doctrine. It is inherently amorphous and evades definitional precision. These traits place the implied covenant directly at odds with predictability of conduct, the most basic and cherished characteristic of the contracts which the implied covenant was created to serve. As one commentator observed, “While the varieties of good faith are not quite as infinite as those of i’eligious faith, it would be quite extraordinary if this protean concept were used in the same sense in all ... assorted instances.” Farnsworth, E. Allan, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, 30 U. Chi. L.Rev. 666, 668 (1968).
¶ 44 However, this answer is unsatisfactory to many who share the view made evident in the dissent that the implied covenant can too easily turn away from being an ally of contract law and become its antagonist. This happens when courts mishandle the subtle but important distinction between invoking the implied covenant to compel a contracting party to honor the “agreed common purpose” and “justified expectations” of another party to the contract, Restatement Second of Contracts § 205 cmt. a (1979), and injecting it to “establish new, independent rights or duties not agreed upon by the parties” or to “nullify a right granted by a contract to one of the parties.” Brehany v. Nordstrom, 812 P.2d 49, 55 (Utah 1991).
¶ 45 The parties can reduce the risk that a court will remake their contract and award one party “benefits for which it did not bargain,” see infra ¶ 51 (quoting United States ex rel. Norbeck v. Basin Elec. Power Coop., 248 F.3d 781, 798 (8th Cir.2001)) by bargaining for terms that limit the exercise of unfettered discretion by one party or that otherwise clearly articulate the purposes and expectations of the parties. In short, the parties to a contract are best served when they fill their own gaps. Still, the use of a gap filler, like GAAP here and in Smith, does not ipso facto extinguish the implied covenant. Circumstances may exist which cause even carefully drawn limitations on discretionary performance to confound justifiable expectations. One such circumstance was present here: a course of dealing between the parties which could reasonably have been interpreted to restrict the acceptable use of GAAP in valuing Wasatch.
¶ 46 We have recognized that the course of dealings between contracting parties may be considered in determining the purpose, intentions, and expectations of the parties. Brown v. Moore, 973 P.2d 950, 954 (Utah 1998). Where a history of conduct relating to a contract term that has been interposed as a “gap filler” demonstrates that one party has used the contract provision to frustrate expectations grounded in that historical conduct, the implied covenant of good faith and fair dealing properly offers a remedy. The record here establishes that Wasatch and Mr. Eggett had developed a course of conduct with respect to the manner in which Wasatch booked disputed income received from certain customers. The selected method, a one-year holding period for suspense accounts, complied with GAAP, advanced Wasatch’s legitimate business interests, and carried with it implications for the valuation of the company. Wasatch’s shift to a two-year holding period defied explanation as a legitimate business decision and was clearly targeted at depressing the company’s value and Mr. Eggett’s compensation. Such a flaw in a “gap filling” contract term should not be beyond the reach of the law, and the court of appeals and Chief Justice Durham properly ratified the implied covenant of good faith and fair dealing as the appropriate legal tool to remedy the defect.
¶ 47 Justice PARRISH concurs in the concurring opinion of Justice NEHRING.