Express Contract Terms and the Implied Contractual Covenant of Delaware Law
52 Pages Posted: 25 Sep 2012 Last revised: 23 Aug 2013
Date Written: September 27, 2012
Delaware law conceives of the implied contractual covenant of good faith and fair dealing (the “Implied Covenant”) in contradictory terms. It is both a gap filler subject to the express terms of a contract and an overriding obligation notwithstanding the express terms of a contract. It is not a judicial license to equitably rewrite bargained for agreements, yet courts may invoke the doctrine to limit express contractual rights when fairness dictates. How can these conflicting conceptions coexist?
To be sure, these doctrinal conflicts are neither new nor Delaware’s alone. Confusion as to the interaction between express terms and the Implied Covenant abounds in all states. But this question is one of particular concern in Delaware because of the significant role the state’s law plays in the world of business.
To make sense of the Implied Covenant, this Article focuses on an inescapable reality that is all but unacknowledged by Delaware law: the express terms of every contract must be judicially construed. By eliding this reality, the law obscures the control that Delaware courts exercise over bargained for agreements. Acknowledging the judicial role in contract construction not only harmonizes the Implied Covenant’s conflicting conceptions, but because judicial construction inevitably implicates a court’s idiosyncratic principles of equity and reason, it also reveals a degree of indeterminate judicial discretion inherent in the enforcement of express contractual rights and obligations.
Keywords: Delaware, Contracts, Implied Covenant of Good Faith and Fair Dealing, Mergers and Acquisitions, LLCs, Limited Liability Companies, Limited Partnerships, Alternative Entities
JEL Classification: K12, K22
Suggested Citation: Suggested Citation