MEMORANDUM OPINION
TERRY JENNINGS, Justice.
Appellant, Thomas E. Swonke, challenges the trial court's judgment in favor of appellee, Patrick L. Swonke, denying Thomas's application for a court order suspending arbitration, disqualifying an arbitrator, and setting aside any action by the arbitrator. In a single issue, Thomas contends that the evidence is legally and factually insufficient to support the trial court's implied finding that the arbitrator should not be disqualified for "evident partiality."
See TEX. CIV. PRAC. REM. CODE ANN. § 171.088(a)(2) (Vernon 2005).
We affirm.
Background
Thomas and Patrick Swonke, who are brothers, jointly ran a dental practice through an entity named "SLSS, LLC." After the brothers decided to separate their practices they were unable to agree regarding the distribution of income and expenses from SLSS. Patrick sued Thomas, asserting that the income and expenses had not been allocated according to their oral agreement. Ultimately, in lieu of pursuing his lawsuit, Patrick agreed to arbitrate the dispute. Thomas and another brother, Terry Swonke, proposed to Patrick that the arbitrator be James Roberston, who had eighteen years of experience brokering dental practices. Patrick knew about Robertson, but he had had no prior "business dealings" with him before the brothers agreed on him as their arbitrator.
As a part of the negotiation of their arbitration agreement, the brothers contemplated that Robertson would provide "transition services" for the potential sale of either brother's portion of SLSS to the other or to a third party. On January 22, 2007, Robertson sent to Patrick and Thomas an "engagement of services" letter, in which he stated, "Thank you for selecting me to provide arbitration and transition services" and "the standard fees for the transition of a dental practice through a Buy/Sell is ten per cent for the seller and $6,000.00 for the buyer." Patrick signed his agreement to the terms of Robertson's engagement as a broker.
On March 22, 2007, Thomas signed the separate Arbitration Agreement (the "Agreement"), which provided that Robertson, who had "no other or prior business or other relationship of any kind" with either brother or their attorneys, would be the arbitrator. The brothers would "forego a trial" of Patrick's claims against Thomas and submit to binding arbitration the issue of "the proper balancing of accounts between [Patrick] and [Thomas] related to their combined dental practice based on their prior agreements as to the manner in which income and expenses would be allocated." The Agreement did not include a provision regarding transition or brokerage services.
On April 3, 2007, Robertson sent to Thomas an "engagement of services" letter (the "Engagement Letter"), in which he stated, "Thank you for selecting me to provide arbitration and transition services" and "the standard fees for the transition of a dental practice through a Buy/Sell is ten per cent for the seller and $6,000.00 for the buyer. These fees would apply should either doctor choose to buy or sell their practice or a portion thereof as a part of a buyout of the other party or to a third party." Thomas signed the Engagement Letter, indicating his agreement to Robertson's engagement as a broker.
In December 2007, Robertson brokered Patrick's "equity" portion of SLSS to a third party for a maximum sales price of $139,000. Patrick was to "earn" the sales price by receiving monthly fifty percent of the revenue that he generated for the third party for twelve months after the sale. The terms of sale provided Patrick an initial $39,000 "production payment," but he had to earn the payment by monthly crediting towards the "production payment" thirty-five percent of the revenue that he generated until the amount was reduced to zero. The remaining fifteen percent of his revenue would be credited towards the outstanding $100,000 of the sales price. After the $39,000 "production payment" was reduced to zero, the full fifty percent of the revenue that Patrick generated would be credited towards the sales price until it reached $139,000 or twelve months had elapsed. Patrick, as the seller, agreed to pay to Robertson his ten percent broker's fee not as a lump sum but on a "contingency" basis, i.e., based on the final sales price that the third party actually paid using the above calculation. At a maximum, Robertson's broker's fee would be $13,900.
In February 2008, Robertson informed Thomas of the actual sale of Patrick's portion of SLSS and that he was preparing to make a ruling in the arbitration, which would likely go against Thomas. Thomas immediately responded with a letter requesting that Robertson withdraw as arbitrator because, by brokering Patrick's practice to a third party, he had "engaged in a previously undisclosed separate business relationship and transaction with [Patrick], after undertaking to be arbitrator in this matter." Robertson refused to withdraw.
On March 9, 2008, Robertson sent Thomas a letter informing Thomas that he was prepared to include in his findings a judgment against Thomas in the amount of $100,000 because Thomas had claimed the "corporate asset" telephone number of SLSS as a "personal asset" and had been using it for ninety days for his sole benefit. He stated that Thomas could avoid the finding by transferring the phone number to Patrick's control for ninety days and then utilizing it as a "neutral asset" for the benefit of both brothers after that time. Thomas released the telephone number to Patrick and wrote several more letters objecting to Robertson's continued service as arbitrator.
On May 20, 2008, Thomas filed with the trial court an application for a court order suspending arbitration and disqualifying Robertson. Thomas alleged that Robertson should be removed for his "evident partiality and bias" because Robertson, while serving as a neutral arbitrator in the brothers' dispute, engaged a "previously undisclosed" "separate brokerage or other business transaction" with Patrick and then refused to disclose to Thomas the detail of the brokerage fee paid by Patrick to Robertson. During discovery, Robertson disclosed that his brokerage fee was to be paid by Patrick based on the amount of dental services revenue that Patrick generated for the third party in the year after the sale.
On October 29, 2008, Robertson issued his findings and awards in the arbitration. He determined that Thomas owed Patrick $117,590.00 to correct an "imbalance in the accounts" of SLSS. He further assessed punitive damages against Thomas in the amount of $161,180.00 because "the amount owed of $117,590.00 or even a portion thereof should have been paid without requiring [Patrick] to resort to the courts."
The trial court heard Thomas's application on January 8, 2009. Thomas testified that during the arbitration, Robertson had repeatedly inquired as to whether Thomas would purchase Patrick's portion of SLSS. He denied that Robertson "ever disclosed" before February 2008 that he might broker Patrick's portion of SLSS to a third party. Thomas admitted that Robertson "would be providing brokerage services," but explained that "the only sale that was ever discussed was a sale" between the brothers. Thomas agreed that, at a meeting in February 2008, Robertson informed him that Patrick's portion of SLSS had been sold to a third party and Robertson was "ready to issue an award."
Robertson testified that he thought that the best solution to the brothers' dispute was for Thomas to purchase Patrick's portion of SLSS, but Thomas refused. Robertson explained that he had made Thomas aware "from the very beginning" and "multiple times" during the arbitration that sale to a third party was an option. In June 2007, Robertson first apprised Thomas of an "interested third party." Thomas never objected to Robertson's negotiating with a third party for the sale of Patrick's portion of SLSS. A few days before the sale to the third party, Robertson called Thomas to tell him the sale to the third party was "moving forward" and offered Thomas one last opportunity to buy Patrick's portion of SLSS. Thomas again refused. Robertson admitted that he initially refused to disclose the terms of the sale to Thomas, explaining that the terms were "privileged and confidential" to the buyer.
The trial court orally found that
[T]he Agreement allowed the arbitrator to do exactly what he did. That may be a little unusual but it's nevertheless the agreement they made. The [A]greement . . . allowed [Robertson] to be a broker in the . . . matter to sell the practice of either doctor and that it would go without saying that he was going to get a fee for that. In fact, I think somewhere in there even says how the fee will be figured. . . . [The trial court does] not believe that [Thomas] did not know that [Robertson] was acting . . . as a broker for [Patrick] at the same time that he was acting as an arbitrator. [The trial court believes] that [Thomas] did know . . . [but] did not necessarily know exactly who the buyer was . . . [and] the arbitrator did not disclose the sale or the amount of the broker's fee that he would get, but [the trial court does] not consider those to be facts that anybody has to have in this particular case since they're all agreeing to this unusual situation where they're allowing [Robertson] to be a broker and an arbitrator at the same time. . . . [The trial court does] not believe that [evident partiality has been established] . . . [or] that [Robertson] was partial or biased or that partiality or bias has been shown.
The trial court then entered its order denying Thomas's application, but the order did not include the trial court's oral recitals.
Standard of Review
Whether a trial court should have vacated an arbitration award is a question of law we review de novo. Henry v. Halliburton Energy Servs., Inc., 100 S.W.3d 505, 508 (Tex. App.-Dallas 2003, pet. denied); Thomas James Assocs., Inc. v. Owens, 1 S.W.3d 315, 319-20 (Tex. App.-Dallas 1999, no pet.). In doing so, in a case such as this where the litigants do not request findings of fact or conclusions of law, we imply all findings necessary to support the trial court's judgment. Worford v. Stamper, 801 S.W.2d 108, 109 (Tex. 1990); Henry, 100 S.W.3d at 508.
Our review of an arbitration decision is "extremely narrow" because Texas law favors arbitration. IPCO-G.C. Joint Venture v. A.B. Chance Co., 65 S.W.3d 252, 256 (Tex. App.-Houston [1st] 2001, pet. denied). An arbitration award has the same effect as a judgment of a court of last resort, and a reviewing court may not substitute its judgment for that of the arbitrator merely because it would have reached a different result. J.J. Gregory Gourmet Servs., Inc. v. Antone's Imp. Co., 927 S.W.2d 31, 33 (Tex. App.-Houston [1st] 1995, no writ). Because arbitration is favored as a means of dispute resolution, every reasonable presumption must be indulged to uphold an arbitrator's decision, and none is indulged against it. CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex. 2002). Review is limited such that a trial court may not vacate an arbitration award even if it is based upon a mistake of fact or law. Universal Computer Sys., Inc. v. Dealer Solutions, L.L.C., 183 S.W.3d 741, 752 (Tex. App.-Houston [1st] 2005, pet. denied). In the absence of a statutory or common law ground to vacate or modify an arbitration award, a reviewing court lacks jurisdiction to review other complaints, including the sufficiency of the evidence to support the award. J.J. Gregory Gourmet Servs., 927 S.W.2d at 33. A trial court must confirm an arbitrator's award unless, on application of a party, grounds are offered for vacating the award. TEX. CIV. PRAC. REM. CODE ANN. § 171.087 (Vernon 2005); see Delgado, 95 S.W.3d at 245.
Evident Partiality
In his sole issue, Thomas argues that the evidence is legally and factually insufficient to support the trial court's implied finding that Robertson "should not be disqualified for `evident partiality'" because Robertson "failed to disclose that during the pendency of the arbitration, [he] brokered the sale of [Patrick's] dental practice and retained as a brokerage fee a financial interest in the success of [Patrick's] practice." He further argues that he did not waive his evident partiality objection because he objected to Robertson's continuing to serve as arbitrator right after Robertson disclosed that he had sold Patrick's portion of SLSS to a third party and Robertson had not yet disclosed the terms of the sale until after Thomas had filed his application to disqualify Robertson.
"On application of a party, the court shall vacate an award if . . . the rights of a party were prejudiced by . . . evident partiality by an arbitrator appointed as a neutral arbitrator. . . ." TEX. CIV. PRAC REM. CODE ANN. § 171.088(a)(2) (Vernon 2005). A neutral arbitrator exhibits evident partiality if he "does not disclose facts which might, to an objective observer, create a reasonable impression of the arbitrator's partiality." Burlington N. R.R. Co. v. TUCO Inc., 960 S.W.2d 629, 630 (Tex. 1997). Evident partiality is established from the nondisclosure itself, regardless of whether the nondisclosed information necessarily establishes partiality or bias. Id. at 636. In adopting a broad concept of evident partiality, the Texas Supreme Court has explained that where parties agree to select an arbitrator, they can do so intelligently only if they have access to all information, such as a professional, familial, or close social relationships, that might reasonably affect the arbitrator's partiality. TUCO, 960 S.W.2d at 635-37. When the arbitrator discloses such information, the parties can evaluate any bias at the outset, "rather than shifting the burden to the courts to do so when a dissatisfied party challenges an award." Id. at 635.
Determining "evident partiality" is a fact intensive inquiry, dependent on the particular facts of each case. Mariner Fin. Group, Inc. v. Bossley, 79 S.W.3d 30, 32 (Tex. 2002). Additionally, the TUCO test is an objective test under which the consequences for nondisclosure are directly tied to the materiality of the undisclosed information. Id.
Thomas asserts that Robertson failed to disclose that he had sold Patrick's portion of SLSS to a third party and the terms of sale provided that his brokerage fee was "contingent," which gave Robertson a "financial interest in the continued success of Patrick's practice" during the arbitration. We must determine whether these non-disclosures might, to an objective observer, create a reasonable impression of Robertson's partiality. See TUCO, 960 S.W.2d at 636.
Failure to Disclose the Actual Sale
At the time Thomas suggested Robertson to Patrick as the neutral arbitrator for their dispute over "dividing the accounts and assets of the joint practice," Thomas knew that Robertson was a broker of dental practices. Thomas additionally signed the Engagement Letter in which he acknowledged, despite his testimony at the hearing, that Robertson might broker either brother's portion of SLSS to a third party. The Engagement Letter further disclosed that "the standard fee for the transition of a dental practice through a Buy/Sell is ten percent for the seller." As the trial court stated, allowing Robertson to serve as arbitrator in the dispute and broker either brother's portion of SLSS might be a "little unusual"; nevertheless, it is the agreement that Thomas and Patrick made.
Because the terms of the Engagement Letter contemplated a third-party sale, the actual sale of Patrick's portion of SLSS to a third party was not, for Thomas, an unexpected outcome. We hold that the evidence supports the trial court's implied finding that the fact that Robertson failed to disclose to Thomas that he had done what the Engagement Letter allowed him to do did not create a reasonable impression of Robertson's partiality in his role as a neutral arbitrator. See id.
Nature of Robertson's Broker's Fee
Although the Engagement Letter disclosed that Robertson was to be paid by the seller a ten percent broker's fee, it did not disclose that the fee might be contingent. Thomas asserts that the contingent broker's fee that Robertson received created in him "a financial stake in the success of Patrick's practice" in the year after the sale to the third party and this stake affected his neutrality. Thomas had agreed that Robertson was to provide not only arbitration services but also transition services. Thomas had further agreed that Robertson, as broker, could sell either brother's practice to a third party and Robertson, as arbitrator, was "charged with dividing the accounts and assets of the joint practice once held by the brothers." Robertson's "financial stake" was not related to Robertson's role as arbitrator but as broker, and represented his ten percent broker's fee, which Thomas had already acknowledged Robertson would be paid if he brokered the sale of either brother's portion of SLSS. Moreover, Robertson's broker's fee was only "contingent" up to a maximum sales price of $139,000. If Patrick generated for the third party more than $278,000 in revenue (two times $139,000) in the twelve months after the sale, Robertson's broker's fee could still not exceed $13,900, ten percent of the maximum sales price to which Patrick had agreed. An objective observer could reasonably conclude that the contingent nature of Robertson's broker's fee did not create a reasonable impression of Robertson's partiality as arbitrator.
Thomas additionally asserts that Robertson's partiality was shown by his "threat to award Patrick $100,000 if Thomas refused to transfer the telephone number for the joint practice [to Patrick] within 2 weeks of Thomas objecting to Robertson's continued participation," and this threat showed Robertson's understanding that "he had [a] vested interest in Patrick's ability to bring patients to [the third party]." In his letter to Thomas regarding the SLSS telephone number, Robertson ordered that "full control [of the telephone number] must be given to Dr. Pat Swonke for the next 90 days, the same amount of time it has been controlled exclusively by Dr. Tom Swonke. After about 90 days, it must have a neutral recording that refers patients to each doctor for the next 18 months. The costs will be equally shared by each doctor." Robertson would certainly have benefitted from Patrick's exclusive control of the SLSS telephone number after the sale because that would likely have increased the revenue generated by Patrick for the third party, and, thus, increased Robertson's broker's fee. However, Robertson issued his order to Thomas to transfer the telephone number to Patrick, not immediately after the sale in December 2007, when it would have most positively impacted Patrick's revenue generation, but approximately four months later. Moreover, Thomas brought no evidence to dispute that he had been, as asserted by Robertson, using the SLSS telephone number for his sole benefit. An objective observer could reasonably conclude that the motivation for Robertson's order was to equalize access to the SLSS telephone number and not to maximize his broker's fee.
Thomas further asserts that Robertson's issuance of an award in favor of Patrick in October 2008, "at the very end of the contingent payment period," demonstrated that he "was acutely aware that resolution of [the arbitration] could impact Patrick's ability to generate revenue during the payment period and consequently impact Robertson's ability to maximize his brokerage fee." We are unable to discern how any decision in the arbitration could have impacted Patrick's ability to generate revenue in the year after the sale. Patrick had already been separately practicing and generating revenue during the pendency of arbitration and before the sale. Even if Robertson had ruled against Patrick, that would not have affected Patrick's ability to generate revenue because the arbitration dealt with balancing the accounts of the no longer operational SLSS, not Patrick's current practice. An objective observer could reasonably conclude that Robertson's decision to issue an award against Thomas was not affected by the contingent nature of his broker's fee.
We hold that the evidence supports the trial court's implied finding that Robertson's failure to disclose the contingent nature of his broker's fee, given that the brothers had agreed that Robertson would act both as arbitrator and broker, would not, to an objective observer, create a reasonable impression of Robertson's partiality in his role as a neutral arbitrator. See TUCO, 960 S.W.2d at 636.
We overrule Thomas's sole issue.
Conclusion
We affirm the judgment of the trial court.
a clearly erroneous factual finding."
Id; see also Regan-Touhy v. Walgreen Co., 526 F.3d 641, 647 (10th Cir. 2008).
Preliminary injunctions are, of course, "extraordinary equitable remedies," Westar Energy, 552 F.3d at 1224, and to win one a "moving party must demonstrate that four equitable factors weigh in favor of the injunction." Id. The moving party must show (1) a substantial likelihood that it will ultimately succeed on the merits of its suit; (2) it is likely to be irreparably injured without an injunction; (3) this threatened harm outweighs the harm a preliminary injunction may pose to the opposing party; and, (4) the injunction, if issued, will not adversely affect the public interest. Gen. Motors Corp. v. Urban Gorilla, LLC, 500 F.3d 1222, 1226 (10th Cir. 2007).
Generally, where the three latter harm factors weigh in favor of the movant, the probability of success factor is relaxed. Nova Health Syst. v. Edmondson, 460 F.3d 1295, 1298 n. 6 (10th Cir. 2006). But this rule has its exceptions, and three "disfavored" types of preliminary injunctions (those altering the status quo, "mandatory" preliminary injunctions, and those granting the moving party all the relief it could achieve at trial) require "strong showing of the likelihood of success on the merits and the balance of harms." Westar Energy, 552 F.3d at 1224. In its opening brief on appeal ClearOne doesn't argue that any of these exceptions pertain here, so we review its appeal under the usual and generally applicable legal standards adduced in the text. We decline to entertain the company's effort to suggest to us for the first time in its reply brief that the district court's injunction was a mandatory one subject to a heightened degree of scrutiny. See Hill v. Kemp, 478 F.3d 1236, 1250 (10th Cir. 2007) ("It is our general rule" that "arguments and issues presented at such a late stage are waived.").
While federal law governs the procedural questions when a preliminary injunction may issue and what standards of review we apply, because the district court heard this case only by virtue of its diversity jurisdiction, and because the parties have opted in their contract for Utah state law to govern the interpretation of their contract, we analyze the substantive legal questions associated with their dispute under, and in light of, that state's law. See 28 U.S.C. § 1332; Salt Lake Tribune Publ'g Co. v. Mgmt. Planning, Inc., 390 F.3d 684, 692 (10th Cir. 2004); Appellant's Amended Appendix at 40 (ESA provides for application of Utah law). And where, as here, the parties call on us to resolve "[questions of contract interpretation which are confined to the language of the contract itself — questions that don't implicate ambiguous provisions where resort to extrinsic evidence may be necessary — these "are questions of law" for the court to review de novo under Utah and federal law alike. Mellor v. Wasatch Crest Mut. Ins. Co., 201 P.3d 1004, 1007 (Utah 2009).
B
When it took up the question whether to grant a preliminary injunction, the district court began by assessing Ms. Flood's likelihood of success on her breach of contract claim, leaving aside her other claims. Ultimately, the court held that Ms. Flood was likely to succeed on the merits of that contract claim. And this holding formed the foundation 6n which the court eventually rested its preliminary injunction order. As it happens, however, the district court's holding rests on a legal error, a misinterpretation of the contract's terms. In reaching this conclusion, we don't mean to suggest that Ms. Flood isn't likely to succeed on the merits of her underlying contract claim — or that she is. Neither do we mean to suggest that no preliminary injunction order could possibly be issued in this case. All we mean to suggest is that the district court's preliminary injunction order, as it comes to us, rests on a legal error and so constitutes an abuse of discretion that it is our duty to remedy.
Before the district court, ClearOne argued in its motion to dismiss and for summary judgment that it was actually the party likely to succeed on the merits of Ms. Flood's contract claim. The company noted that the ESA conditioned the company's advancement obligations on a "determination" by its Board (or another authorized entity) that "the facts then known to" it "would not preclude indemnification." Appellant's Amended Appendix at 61 (bylaws Section 5.2(c)). Yet, the company submitted, the known facts did preclude indemnification under Section 5.1(a)(2) of the bylaws. And this was because, among other things, the company faced difficult economic times and significant liquidity problems — problems that Section 5.1(a)(2) anticipated and permitted the company to avoid by ceasing advancement to Ms. Flood. Simply put, in the company's view, its promise to advance defense costs wasn't an unconditional guarantee. The contract contained conditions — conditions that permitted the company to stop paying under the circumstances it faced.
The district court disagreed. In assessing the parties' competing chances of success on the merits of Ms. Flood's breach of contract claim, the court held that
giving effect to the bylaw provisions cited by ClearOne would render ClearOne's indemnification and advancement obligations illusory. In essence, ClearOne argues that it is only required to indemnify or advance funds so long as the company has the financial ability to do so and/or does not have a better use for the money. Were a court to give effect to these provisions, there appears to be no intelligible standard of performance to which the Company would be held.
Appellant's Amended Appendix at 132-33. Essentially, the district court worried that enforcing Section 5.1(a)(2)'s advancement conditions would render ClearOne's advancement promise "illusory." To avoid this result, the district court refused to "give effect" to those conditions — essentially deeming them null and void. The district court then proceeded to hold that, in the conditions' absence, Ms. Flood would likely succeed on the merits of her breach of contract claim. This analysis, however, suffers from two related legal errors, which we address in turn.
1
The district court acknowledged that the parties' contract expressly incorporates conditions to advancement contained in the company's bylaws. But proceeding from this premise, and from the district court's premise that Section 5.1(a)(2)'s conditions render the company's advancement promise illusory, the only possible outcome could be a holding that the company was never obligated to provide advancement. An illusory promise, after all, is but a "facade" that imposes no performance obligations on the promisor and affords no consideration to the promisee; the putative promise "neither binds the person making it, nor functions as consideration for a return promise." Peirce v. Peirce, 994 P.2d 193, 199 (Utah 2000) (internal quotation marks omitted); Res. Mgmt. Co. v. Weston Ranch Livestock Co., 706 P.2d 1028, 1036 (Utah 1985); 17 C.J.S. Contracts, §§ 36, 84; 3 Samuel Williston Richard A. Lord, A Treatise on the Law of Contracts § 7:7 (4th ed. 2008) (an illusory promise "cannot serve as consideration" and "impose[s] no obligation"); Restatement (Second) of Contracts § 77 (1981). Put differently, if its advancement promise really was illusory, as the district court surmised, ClearOne had no duty to advance Ms. Flood's fees and costs and she was never entitled to receive any. So it is that, if the district court were correct in calling, the parties' agreement illusory, the company was the party likely to succeed on the merits of Ms. Flood's contract claim, not the other way around.
Of course, the district court took a different view. While acknowledging that the ESA premised advancement on the conditions set forth in the bylaws, the district court declared that it would not "give effect" to those conditions. In this way, the district court sought to reform what it considered an illusory, and thus unenforceable, advancement promise into a more concrete, and thus enforceable, one. Yet, in the process, the court upended the parties' agreement. Far from requiring ClearOne to advance defense costs contingent on (among other things) the financial health of the company, the new promise the district court enforced imposed on the company an unconditional, absolute, and irrevocable promise to advance all reasonable defense costs. The court thus bound ClearOne to provide advancement regardless of the company's financial condition — even if and when its financial condition became extremely precarious. Only on the basis of this new and different advancement promise did (or could) the district court then proceed to hold Ms. Flood the party likely to succeed on the merits of her contract claim.
This was error. The proper response to an illusory promise isn't to reform it into an enforceable one. See, e.g., Restatement (Second) of Contracts § 184 cmt. b (1981) (noting court's power to refuse enforcement of a term "is not a power of reformation, however, and it will not, in the course of determining what part of the term to enforce, add to the scope of the term in any way"). When a party's promise is genuinely illusory, the court must decline to enforce it; the court may not impose on the parties a new deal to which they've never assented.
2
This observation leads us to an even more fundamental legal problem with the district court's contract interpretation. Though we agree with the district court that the ESA incorporates conditions to advancement set forth in the bylaws, including those found in Section 5.1(a)(2), we can't agree that those conditions render ClearOne's advancement promise illusory.
"By the phrase `illusory promise' is meant words in promissory form that promise nothing." Peirce, 994 P.2d at 199 n. 5 (quoting 2 Joseph M. Perillo Helen Hadjiyannakis Bender, Corbin on Contracts § 5.28, at 142 (rev. ed. 1995)). "One of the most common types of promises that is too indefinite for legal enforcement," and apparently the kind the district court thought it had before it, is one "where the promisor retains an unlimited right to decide later the nature or extent of his or her performance. This unlimited choice in effect destroys the promise and makes it illusory." 1 Samuel Williston Richard A. Lord, A Treatise on the Law of Contracts § 4:27, at 804-05 (4th ed. 2007) (emphasis added); see also Res. Mgmt, 706 P.2d at 1038 (when the promisor retains "an unlimited right to decide the nature or extent of his performance," that promise is "too indefinite for legal enforcement" (emphasis added)).
None of this, however, describes the agreement before us. The parties didn't just recite a series of words that amounted to nothing. And they didn't leave the question whether to advance fees to ClearOne's unfettered whim. Instead, the company agreed to advance fees subject to certain express contractual conditions. One such condition required a finding that, on "the facts then known" to the Board, Ms. Flood was eligible for indemnification. Appellant's Amended Appendix at 61 (bylaws § 5.2(c)). In turn, eligibility for indemnification depended on a Board finding, under Section 5.1(a)(2), that "the expenses are reasonable, the corporation has the financial ability to make the payment, and the financial resources of the corporation should be devoted to this use." Appellant's Amended Appendix at 60. In the contract before us, then, the company's right to refuse or terminate advancement wasn't left to the company's unlimited choice, but was restricted by the parties' agreement, tied to considerations associated with (among other things) the reasonableness of Ms. Flood's expenses and the company's financial health.
Another restriction on the company's discretion existed, too. When ClearOne set about to determine whether or not the parties' contractual conditions to advancement were met, it bore a duty to do so only in good faith. After all, "[t]he law generally imposes a duty to perform contractual obligations in good faith." Res. Mgmt, 706 P.2d at 1037. This legally implied contractual covenant "forbids arbitrary action by one party that disadvantages the other." Id. So where, as here, "one party reserves the right to terminate a contract upon the occurrence of a condition subsequent," rather than reserving the right to its unlimited discretion, "the contract is not unenforceable ab initio for lack of mutuality of consideration." Id. This remains the case even where, again as here, "the promisor is himself to be the judge of the cause or condition," because "he must use good faith and an honest judgment" in assessing whether that cause or condition has been met. Id. at 1038 (quoting 1A Arthur L. Corbin, Corbin on Contracts § 165, at 86-87 (1963)). In this way, ClearOne was free to invoke the various contractual conditions allowing it to discontinue advancement but only in a "reasonable" manner. Markham v. Bradley, 173 P.3d 865, 871 (Utah Ct.App. 2007).
Admittedly, the question whether ClearOne invoked the contractually specified conditions permitting it to discontinue advancement in good faith isn't susceptible to mathematical proof. We readily concede that "any but the most vacuous general definition of good faith will . . . fail to cover all the many and varied specific meanings that it is possible to assign to the phrase." Robert S. Summers, "Good Faith" In General Contract Law and the Sales Provisions of the Uniform Commercial Code, 54 Va. L. Rev. 195, 206 (1968); see also Howard O. Hunter, Incomplete Agreements, Contextual Approach § 8.8 in Modern Law of Contracts (2010) (noting various views on use of good faith). Because of this, detailed factual findings about the parties' expectations and the facts leading it to invoke a conditional termination clause are sometimes necessary before the covenant's proper application can be assured. This, in turn, is because the covenant is "an `excluder.' It is a phrase without general meaning (or meanings) of its own and serves to exclude a wide range of heterogeneous forms of bad faith. In a particular context the phrase takes on specific meaning." Summers supra, at 201. As much was acknowledged long ago in the opinions that helped shape our contemporary doctrine. See, e.g., Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214, 214 (N.Y. 1917) (Cardozo, J.) (finding that an agreement that didn't recite a particular duty was nonetheless "instinct with an obligation, imperfectly expressed" (internal quotation marks omitted)).
But the well known challenges often associated with applying the covenant to particular cases have never been accepted, at least in Utah law, as a basis for failing to consider or appreciate the covenant's potential usefulness in helping to supply an intelligible and judicially manageable standard for assessing the parties' performance. No doubt other advancement agreements are written in ways that offer executives greater, more air-tight assurances than the one before us. But every advance agreement, like every contract, must be enforced according to its own terms. It is not the place of the courts to transform a contingent promise to pay into an absolute one, or to treat a contingent promise as one investing unenforceable discretion in the promisor, or to refuse to enforce altogether a contingent promise simply because deciding whether or not the contingency was triggered may require detailed fact-finding. Instead, we must take the cases and contracts as they come to us.
None of this is to say that the implied covenant of good faith and fair dealing is a magic wand that, once waved about, can always rescue a contractual term from being held illusory. Or that the covenant may be used as a subtler way to rewrite the parties' deal and decline to give effect to express contractual terms. Just as we may not revise an illusory contract into a different one we think more suitable, we must also take care to ensure that we don't use the covenant as another means for substituting a different deal from the one the parties contemplated. The point of the covenant, as with the process of contract interpretation itself, is to honor "the reasonable expectations created by the autonomous expressions of the contracting parties," not paternalistically to foist new ones on them. Tymshare, Inc. v. Covell, 727 F.2d 1145, 1152 (D.C. Cir. 1984). The covenant is not about "establishing] new, independent rights or duties to which the parties did not agree ex ante," "creat[ing] new rights and duties inconsistent with express contractual terms," or "achieving] an outcome in harmony with the court's sense of justice but inconsistent with the express terms of the applicable contract." Oakwood Village LLC v. Albertsons, Inc., 104 P.3d 1226, 1240 (Utah 2004). Instead, the covenant is about securing to the parties the sort of good faith performance that, in the particular circumstances of the case at hand, they reasonably thought they were securing at the time they entered the bargain. So where the parties agree to afford one of them the right to determine whether contractual conditions to a certain benefit (or its termination) are satisfied, the covenant steps in simply to ensure that the deciding party's determination isn't infected with any of the "wide range of heterogeneous forms of bad faith," Summers supra, at 201, that the two sides hardly could have inventoried and reduced to writing but surely didn't intend to be part of their bargain at the time of contracting.
It is for exactly this reason that where the promisor does retain "an unlimited right to decide the nature or extent of his performance," that promise must be respected for what it is, even though it means the contract must then be held insusceptible to judicial enforcement. Res. Mgmt., 706 P.2d at 1038 (emphasis added). Likewise, we must be mindful to the possibility that the parties to a contract may have agreed to make the issue of good faith irrelevant to their deal — after all, "[w]hat the intent of the parties was in making the contract must control; it is possible to so draw a contract as to leave [certain] decisions absolutely to the uncontrolled discretion of one of the parties and in such a case the issue of good faith is irrelevant." Tymshare Inc. v. Covell, ill F.2d 1145, 1153 (D.C. Cir. 1984) (Scalia, J.) (internal quotation marks omitted) (discussing demand notes and explaining that "[i]n the understood nature of human arrangements, a loan of money in exchange for a promise to repay on demand does not import an obligation to make the demand only if the money is really needed, or only without the purpose and effect of inconveniencing the obligor"). The "trick is to tell when a contract has been so drawn — and surely the mere recitation of an express power is not always the test. Sometimes it may suffice, depending on the nature of the expressed power. . . . But to say that every expressly conferred contractual power is of this nature [that is, expressly disavowing any covenant] is virtually to read the doctrine of good faith'. . . out of existence." Id. at 1153-54. In the case before us, however, no party to these proceedings suggests that the contract in this case meant to exclude application of the covenant.
The facts before us find a close parallel in Resource Management. The contract before the Utah Supreme Court in that case gave Resource Management the right, "in its sole discretion," to terminate a royalty rights agreement if the company determined there wasn't a likelihood of discovering minerals of commercial value sufficient to justify further expenditures of its time or money. Res. Mgmt, 706 P.2d at 1034. The defendant argued that Resource Management's promise was illusory because it permitted the company to avoid its obligations, under the contract, at whim. Id. at 1037. But the Utah Supreme Court disagreed. Had the contract stopped with the phrase "in its sole discretion," no doubt it would've been respected for what it was, an unenforceable illusory promise in which performance was left to the company's unfettered discretion. See, e.g., id. at 1038 (citing by way of example Davis v. General Foods Corp., 21 F.Supp. 445, 446 (S.D.N.Y. 1937), where the contract stated, "We shall be glad to examine your idea for a new food product, but only with the understanding that the use to be made of it by us, and the compensation, if any, to be therefor, are matters resting solely in our discretion" (quotation marks omitted) (emphasis added)).
But the contract didn't stop there. Instead, the Resource Management agreement added that it could be terminated only if the company, exercising the discretion entrusted to it by the parties, determined there was no likelihood of discovering minerals of commercial value worth further expenditures of its time and money. Id. at 1038. While this condition surely left much for the parties to argue over, and while the company was contractually assigned the task of judging whether it was met, neither did the contract "leave the promisor free to do as [it] may choose. [The company had] in good faith [to] make an honest estimate" on the specified condition entrusted to its determination. Id. at 1039 (quoting 1 Samuel Williston, The Law of Contracts § 43, at 140-41 (3d ed. 1957)). In this way, the Utah Supreme Court held, the contract presented a meaningful promise enforceable at law.
Likewise, in the case before us the promise to advance fees is not left to ClearOne's unfettered discretion. Although the determination ultimately rests with the judgment of the company, that judgment is cabined by three separate conditions in Section 5.1(a)(2) alone, conditions that may be invoked only in good faith. To be sure, evaluating whether the company found in good faith that "the financial resources of the company should be devoted" to uses other than Ms. Flood's defense may be a more taxing enterprise than assessing its view that her fees weren't reasonable or that the company couldn't afford to pay them. But even this condition finds a parallel in Resource Management — where the company could stop performing if, in its sole discretion, it deemed continuing with the mining operation no longer worth its bother financially, though the contract specified no particular rate of return at which the condition might be satisfied. 706 P.2d at 1034. Other parallels can be found as well in conditions long understood to be enforceable with aid of the good faith covenant. See, e.g., 1 Samuel Williston, The Law of Contracts § 43, at 140-41 (3d ed. 1957) ("Thus an agreement to pay such wages as the employer wishes is invalid, though an agreement to pay such wages as the employer considers "right and proper" is not too uncertain, since performance of such a promise does not leave the promisor free to do as he may choose. He must in good faith make an honest estimate of what is proper."). After all, a court can examine the process ClearOne employed when invoking the "financial resources" condition. If the company is able to present evidence that it invoked the condition only after honestly and reasonably considering its financial options, the court could well conclude the condition was invoked in good faith. If the company lacks such evidence, a very different result might obtain. Neither is it obviously the case that a company will in all circumstances conclude that its resources are better spent on things other than defending its executives against criminal charges. Often it will share an executive's interest in mounting a vigorous defense. There are powerful incentives, after all, to take steps to avoid the stigma (and possible liability) associated with having top company officers convicted of crimes. And any company that promises its executives benefits such as advancement of defense fees, only then to pull the rug out from under them for insufficiently compelling reasons, is likely to make itself less competitive in attracting talented applicants in the future. In light of these considerations (and others), ClearOne was contractually obliged to make an "honest estimate," not a perfect one, about the company's financial interests before invoking the condition. If the company didn't do so, it can and will be said to have broken its promise to Ms. Flood and will be financially responsible for that breach. In this way, it is possible to respect the express terms of the parties' agreement, both without mistaking it as no agreement at all and without imposing more robust terms on the parties than they themselves agreed. See generally Peirce, 994 P.2d at 199 (noting the preference of Utah law that, "[t]hrough a process of interpretation, in the absence of express restrictions," and, of course, only when fairly possible, courts will "find implied promises [of good faith and fair dealing] to prevent a party's promise from being performable merely at the whim of the promisor" and thus illusory (internal quotation marks omitted)); see also id. (noting "reasonable, lawful, and effective" contract interpretations are "preferred" to ones that render agreements "of no effect").
It appears the concurrence would collapse the contract's "financial resources" condition into its separate "ability to pay" condition in order to save the advancement and indemnification promise from being illusory. See Concurrence at 1. But this reading of the parties' agreement is at odds with the plain language and structure of Section 5.1(a)(2), which presents three separate, conditions as independent prerequisites to advancement. We are not free to revise a contract's plain terms to save it. Neither, in any event, is doing so necessary to save this contract; as we have explained, even the "financial resources" condition, taken on its own terms, isn't illusory.
C
Our conclusion — that the district court's contract interpretation rests on legal error requiring remedy on appeal — is confirmed by Ms. Flood's own complaint. There, she brought an independent cause of action in (count VII of her complaint, not yet adjudicated), alleging that the company breached the covenant of good faith and fair dealing when it stopped advancing her fees and expenses. Surely this indicates that (at least at one point) she thought the covenant helped impose an enforceable advancement agreement in this case. Neither, of course, does ClearOne dispute that its advancement promise is enforceable, subject to and bounded meaningfully by the covenant of good faith and fair dealing. Instead, the company argues before us that it is likely to succeed on the merits of Ms. Flood's contract and good faith claims because its actions were always consistent with the covenant.
Whether the company is right or wrong on that particular score, we can't tell. Because the district court rested its preliminary injunction order on a legally erroneous reading of the contract, it never reached the question. Of course, even when a district court has failed "to analyze the factors necessary to justify a preliminary injunction," we may proceed to assess the preliminary injunction factors ourselves if "the record is sufficiently developed" to enable us to do so. Westar Energy, 552 F.3d at 1224. Ours, however, isn't such a case. Understandably given the nature of the district court's holding, the preliminary injunction record before us hasn't been developed on the question whether ClearOne's decision to terminate advancement at its September 2008 Board meeting pursuant to the conditions set forth in the ESA and bylaws was or wasn't made in good faith. Neither is it clear from the record now before us whether and to what extent the company can defend its failure to advance fees prior to the September 2008 Board meeting. And these are just a few of the many unanswered questions on which we would expect the parties to join issue once the contract's terms are given their proper legal effect.
All this is to say that, from the record before us, we can't say which side is likely to prevail on the merits of Ms. Flood's breach of contract or other claims, or even predict all the arguments they may make on those claims. With certainty we can say only that the contract interpretation the district court offered in its initial preliminary injunction order, and which formed the foundation for that order, is legally erroneous. For this reason, we must vacate the January 12, 2009 preliminary injunction order and remand the case to the district court for further proceedings. In doing so, we offer no views on whether a new and different order should or shouldn't be entered on whatever record may be developed by the parties and district court.
With the preliminary injunction now vacated, mootness doctrine reenters the picture we face. It does so because ClearOne's appeal of the district court's subsequent March 31, 2009 order declining to modify the terms of the preliminary injunction no longer matters; our decision has left no injunction to modify. It follows that the various questions raised by the company's motion to modify the injunction — including whether the company could properly cease advancement under the ESA and Utah law once the jury returned its verdict, or whether its obligations continued to, say, a final judgment — we need not decide.
D
Seeking to avoid all this, Ms. Flood submits that, even if the district court's legal analysis was erroneous, its ultimate conclusion — that the company had an unconditional obligation to advance fees, making Ms. Flood likely to succeed on the merits of her contract claim — remains sound and should be affirmed for a different reason. This is because, in her view, the ESA doesn't incorporate any of the bylaws' conditions to advancement. Ms. Flood argues that the phrase "foregoing limitation" as it appears in the last sentence of the ESA paragraph, see supra Part LA, refers only to the immediately preceding limitation discussed in the paragraph — namely, the duty to cooperate with the company and its counsel. Under her view, then, the company's promise to advance was contingent only on her cooperation, not on compliance with the conditions set forth in the corporate bylaws.
The district court, however, did not read the ESA in this fashion, and neither do we. The intention of the parties to a contract "must be gleaned from a consideration of the whole instrument." Caine v. Hagenbarth, 37 Utah 69, 106 P. 945, 948 (1910) (internal quotation marks and citations omitted). And in seeking that intention, "an interpretation which gives a reasonable, lawful, and effective meaning to all the terms is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect." Peirce, 994 P.2d at 199 (quoting Restatement (Second) of Contracts § 203 (1981)). Ms. Flood's proffered interpretation fails these standards in several ways.
First, the phrase "foregoing limitation" could just as easily refer not only to the preceding sentence, but to the totality of paragraph 8. Appellant's Amended Appendix at 38. Second, and further suggestive of this possibility, is the fact that the sentence immediately preceding the advancement sentence provides that ClearOne's "duty to indemnify Flood is further conditioned" on her cooperation, and in this way appears to refer the reader to the various preceding limitations on the company's obligations, including compliance with its bylaws. Appellant's Amended Appendix at 38 (emphasis added). Third, under Ms. Flood's interpretation the company issued a contract obliging it to provide advancement absolutely (subject only to her cooperation), even when its bylaws clearly forbid unconditional advancement. Ms. Flood would thus force us to accept the unlikely proposition that the ClearOne officials who approved the ESA violated the company's bylaws, and so, at least possibly, violated their fiduciary duty of care to the corporation. See 8 William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations § 4197, at 802-04 (Rev. Vol. 2010) ("Bylaws are defined as private laws of the corporation, and when valid, these self-imposed private laws . . . are in effect written into the charter, and in this sense, they become a part of the fundamental law of the corporation. The corporation, and its directors and officers, are bound by and must comply with them."). Fourth, and finally, under Ms. Flood's reading of the ESA, the company reserved the right to limit indemnification under Section 5.1 of its bylaws in a variety of ways; yet, the company's corresponding duty to advance fees is not cabined by any of these things, but is instead absolute, so long as Ms. Flood cooperates. This, too, is most unlikely. Advancement is a "subsidiary element of the right to ultimate indemnification," often having a "narrower scope," and usually provided only where the costs at issue are at least potentially indemnifiable. Kaung v. Cole, 884 A.2d 500, 509-10 (Del. 2005).
In light of all these considerations, pointing as they do uniformly toward the same conclusion, we cannot accept Ms. Flood's reading of the ESA as plausible. And from this it follows that the district court's preliminary injunction order cannot be saved.
IV
Beyond the error we've identified with the district court's preliminary injunction order, ClearOne purports to identify still other problems, arguing, for example, that the preliminary injunction violates Utah public policy or disregards still other contractual or statutory contingencies. But having already determined that the district court's challenged orders must be vacated, we decline to pass on those arguments at this time. Whether the district court might grant a new injunction on remand, what the record supporting it might look like, and what the terms of such an injunction might be, are at this stage no more than matters of speculation.
Separately, ClearOne tasks the district court for failing to consider whether Ms. Flood should've been required to post security when the injunction issued. See Fed.R.Civ.P. 65(c); Coquina Oil Corp. v. Transwestern Pipeline Co., 825 F.2d 1461, 1462 (10th Cir. 1987); Corning, Inc. v. PicVue Elecs., Ltd., 365 F.3d 156, 158 (2d Cir. 2004); The Rathmann Group v. Tanenbaum, 889 F.2d 787, 789 (8th Cir. 1989). But the company never raised this argument before the district court. ClearOne seeks to excuse this omission by noting that the district court issued its injunction sua sponte after considering the parties' dispositive motions and before any briefing on the question of an injunction. But ClearOne moved for modification or dissolution of the injunction, and the district court considered that motion. While ClearOne raised many other arguments in support of its motion, it failed to bring the bond issue to the district court's attention. At the very least, this failure forfeited the argument. See, e.g., Aoude v. Mobil Oil Corp., 862 F.2d 890, 895 (1st Cir. 1988) ("Because posting of a bond is not a jurisdictional prerequisite to the validity of a preliminary injunction, and because appellant did not raise the matter below, we reject the assignment of error as untimely.").
The district court's January 12, 2009 order granting a preliminary injunction is vacated. ClearOne's appeal of the district court's March 31, 2009 order declining to modify the injunction is moot. By its terms, this court's May 21, 2009 stay order expires with the conclusion of this appeal. The case is remanded to the district court for further proceedings consistent with this opinion.
TYMKOVICH, J., concurring.
I agree with the majority's assessment of the second clause at issue in ClearOne's bylaws. As the majority concludes, the "financial ability to make the payment," while not subject to precise definition, is not so vague as to be illusory. For that reason, the judgment should be reversed and the district court on remand should assess whether ClearOne's management in good faith denied Flood indemnification based on the company's financial ability to pay.
But I must disagree with the majority's assessment of the third clause — "the financial resources of the corporation should be devoted to this use rather than some other use. . . ." I read that clause to complement the "financial ability" clause. Any other reading of the "financial resources" clause, I believe, gives ClearOne unfettered discretion to decide whether and how to perform, and thus renders the contract illusory. 3 RICHARD A. LORD, WIL-LISTON ON CONTRACTS § 7:7 (4th ed. 1989)("Where an illusory promise is made, that is, a promise merely in form, but in actuality not promising anything, it cannot serve as consideration.").
At first blush, the "financial resources" clause appears to give ClearOne unlimited authority to determine whether to indemnify Flood. The clause by its own terms does not place any substantive limits on the company's decision whether or not to indemnify Flood, instead stating the company may indemnify Flood if the company's finances "should" be used to indemnify Flood. That tautology begs the questions: On what basis may ClearOne decide it "should" indemnify Flood? And if ClearOne may choose any basis on which to refuse indemnification, what — if anything — was Flood bargaining for?
The majority works around this problem with the "financial resources" clause by claiming Flood was bargaining for process. I agree that process can count as valid consideration for a contract. Or, put differently, Flood could have bargained for the right to have ClearOne consider whether to indemnify her at some point in the future, so long as there were some objective constraints — however vague — on ClearOne's decision process.
The primary Utah case, Res. Mgmt. Co. v. Weston Ranch Livestock Co., 706 P.2d 1028 (Utah 1985), which the majority correctly relies on, is on point. There, one party could terminate the contract at "its sole discretion" with "reasonable belief that the commercial and mineral value of the property would not justify further performance. . . ." 706 P.2d at 1038. Although the majority notes the Resource Management contract did not specify a "particular rate of return" below which the contract could be terminated, that is a problem of degree not of kind. Trying to judge whether the Resource Management party terminated in good faith based on mineral value would be difficult, but at least the parties' financial interests were somewhat aligned — motivating the parties to perform using their best efforts — and the reviewing court would have an object at which to direct its good faith analysis (i.e., the projected mineral value and whether it was low enough to justify a good faith termination). Here, there is no substantive basis on which to judge whether ClearOne exercised the clause in good faith.
In practice, then, the majority makes the good faith requirement do double duty: it supplies both the clause's substantive and procedural bases. But the majority does not make explicit the substantive restraints the good faith requirement imposes, and besides, good faith is usually a procedural review to determine whether a party is honestly trying to live up to its substantive obligations. See RESTATEMENT (SECOND) OF CONTRACTS § 205 (1981) ("Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party. . . .") (emphasis added).
I therefore respectfully concur.