Eggert v. Wasatch Energy Corp.

WILKINS, Justice,

concurring in part, dissenting in part:

¶48 I concur in section III, and dissent from sections I and II of the majority opinion. I would reverse the court of appeals’ affirmance of the trial court’s award of $135,671 to Eggett as book value for his shares in Wasatch.

¶ 49 As a matter of law, Eggett’s claim for a breach of the implied covenant of good faith and fair dealing cannot be premised on an adjusted measure of the book value of *205 Wasatch because the parties agreed that the company’s book value would be determined with reference to the company’s audited financial statements, prepared in accordance with GAAP. The parties further agreed that that value would be “binding and conclusive upon the parties.” Because no claim for a breach of the covenant of good faith and fair dealing could be based on Wasatch’s choices, so long as those choices satisfied GAAP, the admission of evidence to prove such a claim was error. Given such a resolution, section II’s discussion of the trial court’s clarification of the jury’s verdict is unnecessary.

¶ 50 Recently, in Smith v. Grand Canyon Expeditions Co., 2003 UT 57, ¶ 22 , 84 P.3d 1154 , we noted that the covenant of good faith and fair dealing is an implied covenant that will not apply “[wjhere ... the express contract term defines and limits discretionary performance.” Although its application to a buy/sell agreement governed by GAAP was new, this court has previously recognized this principle. In Brehany v. Nordstrom, Inc., 812 P.2d 49, 55 (Utah 1991), we observed that the implied covenant of good faith and fair dealing “cannot be construed ... to establish new, independent rights or duties not agreed upon by the parties.” Proper application of this rule is demonstrated by the case of United States ex rel. Norbeck v. Basin Elec. Power Coop., 248 F.3d 781 (8th Cir.2001), wherein the Eighth Circuit, applying federal common law, was confronted with the application of the implied covenant of good faith and fair dealing to a contract term defined in part by GAAP. Id. at 794-97 .

¶ 51 In Basin Electric, one dispute between the parties revolved around Basin’s amortization of certain costs over a ten-year period instead of the twenty-year period used in other contracts to which it was a party. Id. at 794 . The amortization over ten years instead of twenty resulted in the other party to the contract paying an additional $3.6 million under the contract. Id. at 794-95 . The contract mandated no specific amortization provision, but was instead governed by GAAP and Rural Utilities Service System of Accounts rules, neither of which were violated by choosing a shorter amortization period. Id. at 795 . The Eighth Circuit reversed a portion of the district court’s judgment granted for a breach of the implied covenant of good faith and fair dealing, noting that the covenant “does not imply ‘an everflowing cornucopia of wished-for legal duties,’ ” and “does not impose a general requirement that a party act reasonably[;][r]ather, the covenant acts as a gap filler to deal with circumstances not contemplated by the parties at the time of contracting.” Id. at 796 (internal citations omitted). The court noted that applying the implied covenant would necessitate rewriting the contract to give one party “benefits for which it did not bargain.” Id. at 797-98 . The majority in this case would do the same for Eggett.

¶ 52 The covenant ought not to be used to assess damages against Wasatch merely because it made certain choices allowed it under the Shareholder Agreement. The Shareholder Agreement defines the scope of Wasatch’s responsibility with regard to the book value of the company. The agreement provides that the company’s audited financial statement, so long as it comports with GAAP, will be the binding measure of book value. Neither party has argued that Wasatch’s audited financial statement was not prepared in accordance with GAAP. Thus, the bargained-for contract defines and limits Wasatch’s discretion in determining book value, and Wasatch exercised its discretion within the limits set by the parties. Evidence presented at trial indicates that the holding period for suspense accounts was changed from one to two years to bring Wasatch in line with the industry standard. Other evidence suggested that Eggett advocated the change before his departure. There is, quite simply, no gap to be filled by the implied covenant of good faith and fair dealing. This court ought not to deviate from the parties’ clearly expressed intention to allow and require valuation based on GAAP.

¶ 53 Associate Chief Justice DURRANT concurs in the concurring and dissenting opinion of Justice WILKINS.