Centronics Corp. v. Genicom Corp.
1989 N.H. LEXIS 77, 132 N.H. 133, 562 A.2d 187 (1989)
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Rule of Law:
The implied covenant of good faith and fair dealing cannot be invoked to contradict or add to the express terms of a contract. It applies to limit a party's discretion in performance only when that discretion is broad enough to potentially deprive the other party of a substantial portion of the agreement's value.
Facts:
- Centronics Corporation (Centronics) sold business assets to Genicom Corporation (Genicom), with the final purchase price to be determined by the assets' consolidated closing net book value (CCNBV).
- Per the agreement, Genicom made a partial payment at closing and deposited $5,000,000 into an escrow account.
- Centronics later delivered a revised, higher CCNBV, which required Genicom to deposit an additional $10,867,000 into the escrow account.
- Genicom's accountants disputed the revised figure, proposing downward adjustments that created a conflict over approximately $10.2 million of the final price.
- As stipulated in the agreement, the parties submitted their dispute over the final CCNBV to a designated accounting firm for binding arbitration.
- During the arbitration process, Centronics requested that Genicom agree to release $5,653,836 from the escrow fund, which Centronics claimed was the portion not in dispute.
- Genicom refused to authorize any partial distribution from the escrow fund, insisting that the entire fund remain intact until the arbitration was complete, as per the contract's terms for final payment.
Procedural Posture:
- Centronics Corporation filed a two-count action against Genicom Corporation in the New Hampshire Superior Court, alleging breach of contract and breach of the implied covenant of good faith.
- Both parties filed cross-motions for summary judgment.
- The trial court (Superior Court) granted summary judgment in favor of the defendant, Genicom.
- The plaintiff, Centronics, as appellant, appealed the summary judgment ruling to the Supreme Court of New Hampshire.
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Issue:
Does a party to a contract breach the implied covenant of good faith and fair dealing by refusing to consent to an interim distribution of escrowed funds when the contract's express terms only provide for distribution after a final price determination through arbitration?
Opinions:
Majority - Souter, J.
No. A party does not breach the implied covenant of good faith by adhering to the express terms of an agreement, even if that refusal seems commercially unreasonable to the other party. The court reasoned that the implied covenant of good faith serves to limit a party's discretion in performance when the contract grants such broad discretion that one party could deprive the other of the agreement's value. In this case, however, Genicom did not have discretion over the timing of the payment. The contract was explicit and unequivocal, stating that final payment from the escrow fund would occur within ten days after the final determination of the purchase price by the arbitrator. The agreement contained no provision for interim payments. Therefore, Genicom's refusal was not an exercise of discretion but an adherence to the contract's express terms. Centronics's lawsuit was an attempt to rewrite the contract to include a provision for partial payments that it had failed to negotiate initially, not an effort to enforce an existing obligation.
Analysis:
This case significantly clarifies the scope of the implied covenant of good faith and fair dealing under New Hampshire law. It establishes that the covenant acts as a 'gap-filler' for contractual discretion but cannot override or contradict express, unambiguous terms. The decision reinforces the principle that courts will not use the doctrine of good faith to rescue a party from a disadvantageous contract or to impose obligations that the parties did not agree to. For future litigants, this means a claim of bad faith is unlikely to succeed where the defendant's challenged action is explicitly governed by the contract's language; the claim is viable primarily where a contract grants one party broad discretion that is then allegedly abused.
