Delaware law implies a covenant of good faith and fair dealing into every contract. The Delaware Supreme Court’s recent opinion in Nationwide Emerging Managers LLC v. NorthPointe Holdings LLC, No. 441, 2014 (Del. Supr., Mar. 18, 2015), makes clear, however, that the contours of the clause are quite narrow, particularly with respect to a negotiated written agreement between sophisticated parties. It may not be used by a party to obtain in court what it could not obtain at the bargaining table.

In NorthPointe, the Delaware Supreme Court reversed a post-trial decision of the Superior Court awarding $15.1 million in overpayment damages to a buyer who paid $25 million to acquire a 65 percent interest in an investment advisory firm. The investment advisory firm managed 70 accounts for institutional investors under investor-specific agreements, and provided sub-advisory services for seven investment funds. The buyer persuaded the Superior Court that it would not have paid that sum but for the expectancy that it would be able to manage the seven funds for three or more years. Shortly after buying the investment advisory firm, the seller withdrew a majority of the assets from the largest fund and deposited them in a competing fund newly created by the seller. The seller then also terminated under a contractual performance standard the buyer’s investment advisory contract for the remaining funds. These seven funds represented only about 20 percent of the assets acquired by the buyer in the transaction, and their termination was subject to a heavily negotiated liquidated damages termination clause that enabled the seller to terminate the buyer’s right to manage the funds for no good reason as long as it paid a termination fee under the contract capped at $3.5 million. The seller claimed that it owed no termination fee because the buyer had failed to meet the performance standard.

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