Must parties exercise contractual discretion objectively under Utah law? Markham v. Bradley Explained

In Markham v. Bradley, the Utah Court of Appeals addressed when parties must exercise contractual discretion objectively, even when contracts appear to grant subjective decision-making authority. This decision provides crucial guidance for practitioners drafting and litigating contracts involving discretionary performance rights.

Background and Facts

The Markhams entered into a real estate purchase contract with the Bradleys for property in St. George, Utah. The contract included seller financing and required the buyers to provide financial information by September 13, 2004. When the buyers arrived for a scheduled September 12 meeting with their financial documentation, Mr. Bradley angrily refused to review any materials, stating he would “deal with it in a couple of weeks.” The sellers subsequently canceled the contract, claiming the buyers failed to meet the deadline and that their financial information was inadequate.

Key Legal Issues

The central issue was whether the covenant of good faith and fair dealing imposed an objective reasonableness standard on the sellers’ discretion to reject the buyers’ financial information. The contract’s Seller Financing Addendum stated that if the buyer disclosures were “not acceptable to Seller,” the seller could cancel the contract. The sellers argued this language granted them purely subjective discretion to reject the information for any reason.

Court’s Analysis and Holding

The Court of Appeals ruled that objective reasonableness governs the exercise of contractual discretion when contracts do not specify the criteria for exercising that discretion. The court emphasized that the implied covenant of good faith and fair dealing prevents parties from exercising discretionary rights for purposes outside the contemplated range of the contract. Here, the trial court found the sellers used the missed deadline and financial concerns as a pretext because they had already decided not to sell the property due to marital issues. The court also held that sellers could not rely on the missed deadline because their own conduct interfered with the buyers’ ability to perform.

Practice Implications

This decision highlights the importance of carefully drafting discretionary provisions in contracts. When parties want truly subjective decision-making authority, they must include express language establishing specific criteria or explicitly stating that decisions may be made for any reason or no reason. Without such clarity, courts will impose objective reasonableness standards through the covenant of good faith and fair dealing. The decision also demonstrates that parties cannot create performance obstacles and then claim non-performance as grounds for cancellation.