The implied covenant of good faith and fair dealing inheres in all contracts governed by Delaware law. In some circumstances, the implied covenant may apply to fill “gaps” in an agreement consistent with the parties’ reasonable expectations at the time of contracting. Delaware courts have held, however, that implying terms in this manner should be a cautious enterprise.
The Delaware Supreme Court’s recent decision in Oxbow Carbon & Minerals Holdings v. Crestview-Oxbow Acquisition, __ A.3d __, 2019 WL 237360 (Del. Jan. 17, 2019) emphasizes that implying terms as a “gap filler” is “a limited and extraordinary remedy” that does not protect sophisticated parties from the harsh operation of contract provisions in circumstances the parties could have anticipated. Specifically, the Supreme Court held that minority members of a limited liability company had no recourse to the implied covenant when the admission of new members reset certain capital return requirements that had to be satisfied before the minority members had the right to liquidate their investments through a sale of the company. The Supreme Court did so notwithstanding the Delaware Court of Chancery’s finding that, had the issue been identified and addressed at the time the new members were admitted, the minority members would not have agreed to that result.
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