Legal Memorandum: Good Faith and Fair Dealing Covenant in DE

Issue: Under what conditions would a Breach of Implied Covenant of Good Faith and Fair Dealing come into play under Delaware law?

Area of Law: Business Organizations & Contracts
Keywords: Breach of covenant; Covenant of good faith and fair dealing
Jurisdiction: Delaware
Cited Cases: 624 A.2d 1199; 735 A.2d 912; 878 A.2d 434; 971 A.2d 872; 997 A.2d 1
Cited Statutes: None
Date: 03/01/2014

Under Delaware law, the implied covenant of good faith and fair dealing (“implied covenant”) inheres in every contract and “requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain.”  Kuroda v. SPJS Hldgs., L.L.C., 971 A.2d 872, 888–89 (Del. Ch. 2009).  Significantly, the implied covenant comes into play only where the express language of the contract is silent as to the particular issue in dispute.  QVT Fund LP v. Eurohypo Capital Funding, No. 5881 (Del. Ch. Jul. 8, 2011); Nacco Indus., Inc. v. Applica Inc., 997 A.2d 1, 20 (Del. Ch. 2009).  That is, the covenant does not apply when the subject at issue is expressly covered by the contract.  Id.  If the contract clearly delineates the parties’ rights, then there is “no room for the implied covenant because it cannot override the express terms of a contract.”  Id.

“Rather than constituting a free-floating duty imposed on a contracting party” the implied covenant is only applied “to insure that the parties’ reasonable expectations are fulfilled.”  See QVT Fund LP, supra (citing Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 441 (Del. 2005)).  “The Court must focus on ‘what the parties likely would have done if they had considered the issues involved.”  It must be “clear from what […]