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O'Tool v. Genmar Holdings, Inc. - 387 F.3d 1188 (10th Cir. 2004)

Rule:

Under Delaware law, an implied covenant of good faith and fair dealing inheres in every contract. As such, a party to a contract has made an implied covenant to interpret and to act reasonably upon contractual language that is on its face reasonable. This implied covenant is a judicial convention designed to protect the spirit of an agreement when, without violating an express term of the agreement, one side uses oppressive or underhanded tactics to deny the other side the fruits of the parties' bargain. It requires the finder of fact to extrapolate the spirit of the agreement from its express terms and based on that "spirit," determine the terms that the parties would have bargained for to govern the dispute had they foreseen the circumstances under which their dispute arose. The "extrapolated term" is then implied into the express agreement as an implied covenant, and its breach is treated as a breach of the contract. The implied covenant cannot contravene the parties' express agreement and cannot be used to forge a new agreement beyond the scope of the written contract. 

Facts:

The purchasers, Genmar Holdings, Inc., and Genmar Industries, Inc., (Genmar), were the world's largest recreational boat manufacturer. The purchase agreement for the Sellers' business, Cassandra and John O'Tool, was comprised of two consideration components: cash upon closing and earn-out consideration, based upon the business, which would become a subsidiary of Genmar, meeting or exceeding certain gross revenue goals. The business's gross revenues and production were far under budget. Plaintiff O'Tools filed this action, claiming that defendant Genmar breached an implied covenant of good faith and fair dealing by intentionally impairing the Sellers' realization of the earn-out. 

Issue:

Did the district court err in refusing to award post-judgment interest at a rate set in the underlying contract?

Answer:

No

Conclusion:

The court concluded: (1) the district court's summary of the evidence was accurate and sufficient to rebut Genmar’s assertion that there was no evidence they intended to harm the sellers; (2) the district court's jury instructions were consistent with Delaware law; (3) Delaware law did not require strict application of the "new business" rule; thus the evidence was sufficient to support the jury's damage award for lost earn-out consideration; and (4) the district court's awarding of post-judgment interest under the statutory rate rather than the rate in the purchase agreement was not an abuse of discretion.

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