The Implied Covenant: A Delaware Perspective

David C. Tingstad, Edmonds Lawyer

In last week’s post, I discussed Washington’s perspective on the implied duty of good faith and fair dealing, specifically in the context of the iCap NW case. Because of the relative lack of Washington guidance on business issues, Washington courts regularly look to Delaware for guidance. This week, I continue the exploration of the implied duty of good faith and fair dealing from a Delaware perspective.

In a far reaching 2014 opinion, Vice Chancellor Laster summarized the Delaware standard for a claim for violation of the implied covenant of good faith and fair dealing. In the Allen v. El Paso case, Vice Chancellor Laster provided the following standards:

  1. Delaware courts will “cautiously” supply terms to fill gaps in the express terms of a specific contract.
  2. The terms “good faith” and “fair dealing” do not establish a requirement that a party act “in some morally commendable sense,” nor does satisfying the implied covenant “necessarily require that a party have acted in subjective good faith.”
  3. The term “good faith,” when used in reference to the implied covenant, contemplates “faithfulness to the scope, purpose and terms of the parties contract.”

The opinion goes on to provide a step-by-step analysis for an implied covenant claim. 

While an implied covenant claim can be a gap filler in a contract, courts will apply such a gap filler sparingly. Care must be taken to maintain the terms and spirt of the contract and the implied covenant cannot be used to vary the express terms. In general, if you are relying on the “implied covenant” to support your claims, you need something more. Rarely does the implied covenant solve all the unforeseen problems arising out of a contract.

To learn more about the implied contractual duty of good faith and fair dealing, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.

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