A federal jury in Kansas City, Kan., awarded the verdict to Horizon Marine in December 2002, finding that Minneapolis-based Genmar Holdings Inc. had breached purchase and employment agreements with the Junction City, Kan., company.

Genmar, the world's largest recreational boat maker, bought Horizon Marine in December 1998 for $2.3 million in cash and promises of additional “earn-outs” linked to Horizon Marine's profits. It also entered into multiyear employment agreements with Horizon Marine's principals, Geoffrey Pepper, his daughter and his son-in-law.

Fifteen months later, Genmar fired the three. About two years after that, Genmar shut down Horizon Marine's plant in Junction City and let go of its 119 employees.

In its lawsuit, Horizon Marine contended that Genmar breached the law's implied covenant of good faith and fair dealing by frustrating the purchase agreement's earn-out provision. On appeal, Genmar argued that its actions, including discontinuing Horizon Marine's line of boats and shutting down the Junction City facility, were contemplated under the terms of the agreement.

The 10th U.S. Circuit Court of Appeals disagreed. It said Genmar violated “the obvious spirit” of the earn-out provision.

Genmar also argued that the trial court wrongly failed to instruct the jury that, to find in favor of Horizon Marine, it had to find that Genmar acted in bad faith. Genmar cited three Delaware cases for the proposition that “fraud, deceit or misrepresentation” is a necessary element of a plaintiff's claim for breach of fair dealing.

The 10th Circuit rejected that argument as well. It noted that, unlike Horizon Marine's commercial contract dispute, the Delaware cases dealt with employment-at-will situations, which are not subject to good-faith standards. Imposing a “fraud, deceit or misrepresentation” standard in the context of a commercial contract dispute, the court concluded, “would render a breach of implied covenant claim nearly indistinguishable from a fraud claim.”

Stueve Siegel Hanson Woody of Kansas City represented Horizon Marine. Lathrop & Gage of Kansas City and a Minneapolis firm represented Genmar.