Standards for Implied Covenant of Good Fiath and Fair Dealing. Armisaleh v. Board of Trade (Del Ch. 2008)

In a recent case involving the implementation of a merger agreement, the Delaware Court of Chancery discussed the standards for determining whether a party had breached of the implied covenant of good faith and fair dealing.  Armisaleh v. Board of Trade, C.A. No. 2822-CC (Del. Ch. September 11, 2008) (Mem. Op.) (Chandler, C.).  The deadline for electing the form of compensation to be received in the merger was January 5, 2007, but the parties accepted late elections through January 17.  Plaintiff's election was received one day later, on January 18.  Because the parties chose to extend the deadline, the court treated the deadline as one to be set in the discretion of the parties.  The court found that there was a fact question as to the breach of the implied covenant, and denied a motion for summary judgment.

Chancellor began by noting the linkage between the inherent incompleteness of all contracts and the implied covenant:

No contract, regardless of how tightly or precisely drafted it may be, can wholly account for every possible contingency. In fact, contracting parties often explicitly defer key decisions when constructing their written agreement, and instead endow one side or the other with the discretion and authority to make those decisions during the course of performance. Such a course of action is undoubtedly a risk-shifting device, but the law presumes that parties never accept the risk that their counterparties will exercise their contractual discretion in bad faith. Consequently, in every contract there exists an implied covenant of good faith and fair dealing.

Id. at 1.  That said, Chancellor Chandler recognized that

While the existence and applicability of the implied covenant are well established, its substance and defining contours remain somewhat imprecise.

Id. at 19.  While both parties recognized that the question turned on denying another the benefit of the contract, Defendant argued that the use of "oppressive and underhanded tactics" was required, id., while plaintiff argued that only "arbitrary and unreasonable" conduct was required.  Id. at 20.

Chancellor Chandler indicated that the appropriate focus was whether a party

[A party's] conduct frustrate[d] the "overarching purpose’ of the contract by taking advantage of [its] position to control implementation of the agreement’s terms..."

Id.  at 23 (internal quotation marks and citations omitted).  That language seems to take a more objective approach to the breach of the covenant.  On the other hand, Chancellor Chandler noted that

there is a genuine issue of material fact as to whether [the partie’s] clandestine and unexplained decision to stop accepting late forms frustrated the purpose of the Merger Agreement’s election provision....

Id.  That language seems to shift the focus towards a more subjective, bad motive, approach.

It will be interesting to watch Armisaleh, and other Delaware opinions for further development of the contours of a breach of the implied covenant of good faith and fair dealing.

Hat tip to Francis G.X. Pileggi.