Mind the Gap: Delaware Court of Chancery’s Clarification of the Implied Covenant’s Contractual Gap-Filling Role

Although the implied covenant of good faith and fair dealing applies to nearly every contract governed under Delaware law, many claims alleging its breach fail at the earliest stages of litigation. Even when an implied covenant claim survives such preliminary stages, Delaware courts remain reluctant to permit it to proceed absent a genuine contractual gap. In fact, earlier this year in Johnson & Johnson v. Fortis Advisors – an implied covenant claim that survived through trial intact – the Delaware Supreme Court reversed on appeal, concluding there was no genuine contractual gap to be filled where the contract “repeatedly and expressly conditioned” the earnouts at issue. There, Justice LeGrow explained that the implied covenant applies in two narrow circumstances: (1) when a contract allocates discretionary authority to one party over a central aspect of the contract, and (2) to address unforeseen developments that threatened the bargained-for expectation in the contract, as the Delaware Supreme Court had set forth in Nemec v. Shrader.

It is against this backdrop that the Delaware Court of Chancery recently clarified the limited circumstances where an implied covenant claim can proceed. In Facilities Holdings, LLC v. ASM Global Parent, LLC, Vice Chancellor Laster held that the claim could survive a motion to dismiss where Facilities Holdings (the “Vendor”) alleged that ASM Global Parent (the “Operator”) weaponized a third-party consent requirement in the parties’ Master Agreement. The Vendor’s implied covenant claim rested on the allegation that the Operator affirmatively advocated that certain venue landlords should withhold their consent for the parties to extend their concession agreements – a contractual requirement for extension under the parties’ Master Agreement. The Court found that the Operator’s actions as pled fit within the contractual gaps that would allow the Operator to deprive the Vendor of the benefit of what they bargained for.

The Master Agreement made the Vendor the exclusive food and beverage provider for the Operator’s venues and permitted the Vendor to extend these concession agreements. However, the Master Agreement stated that if the Operator were to be sold, extensions of the agreements for certain venues would require landlord consent. Thus, when Legends Hospitality – a direct competitor of the Vendor in the concessions industry – acquired the Operator in August 2024, the parties executed a memorandum of understanding, contemplating extensions consistent with the Master Agreement. Negotiations between the parties to extend the agreements ultimately failed when the Operator stated that the landlords of the at-issue venues withheld consent. The Vendor alleged the Operator acted in bad faith by excluding the Vendor from communications with the landlords, delaying transmission of relevant agreements, and failing to make meaningful efforts to obtain landlord approval. The Vendor asserted claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The Court of Chancery dismissed certain breach of contract claims but allowed the implied covenant claim to proceed.

In reaching this conclusion, the Court of Chancery conducted a three-step analysis in determining whether the implied covenant could supply an omitted term: identify a gap, decide whether to fill it, and supply the omitted term.

First, the Court found that the Master Agreement contained a gap by failing to address to what extent the Operator and Vendor were involved in obtaining third-party approvals. Specifically, the Court drew attention to the fact that other provisions of the Master Agreement explicitly addressed third-party approvals. In fact, some of those other provisions imposed an obligation on the Operator to use “commercially reasonable efforts to obtain necessary third party consents.” Because the Master Agreement was silent as to the involvement of both the Operator and the Vendor in third-party approvals, there was a gap.

Second, the Court rejected the Operator’s argument that the silence was an intentional gap for the purpose of allocating the risk of a landlord’s non-consent to the Vendor. Rather, it held that the Vendor’s implied term sought only to prevent the Operator from “consciously harming” the Vendor. The Court drew a distinction regarding an implied term that requires (1) affirmative help, (2) a neutral stance, and (3) conscious harm, noting that there are “obvious differences” among the three. The Court stated that an implied term preventing a party from “consciously harming” the Vendor was “center-of-the-fairway for the implied covenant”; a contractual gap that would allow a party to intentionally harm its counterparty is precisely the type of gap the implied covenant is designed to fill.

In its discussion of this element, the Court analyzed the nuances of Johnson & Johnson, clarifying that the “anticipated circumstances” standard was not to be construed “literally,” as it would be impossible for parties to consider and contract for every possible scenario. The Court highlighted the implied covenant’s utility in filling a gap that was “both anticipated and known” but was not drafted into the contract because the circumstances “were so basic that no one would have thought to include them in the agreement.” Using the Old English concept of the “officious bystander,” the Court emphasized that, had someone suggested that the parties expressly prohibit the Operator from advocating for a landlord to withhold consent, both parties would have dismissed such a suggestion as so self-evident that no reasonable counterparty would need to spell it out. Accordingly, the Court found that including a provision prohibiting the Operator from intentionally persuading landlords not to consent seemed so implicit to the provision it was a proper use for the implied covenant.

Finally, the Court determined that the Vendor’s implied term was reasonably conceivable; otherwise, the Court would have to find that a party must negotiate a provision that would expressly prohibit its counterparty from “consciously harming” it to be protected from such a harm. Based on the facts as pled, the Court found that it was reasonably conceivable that the Operator orchestrated an interference with the landlords and denied the Operator’s motion to dismiss the implied covenant claim.

Facilities Holdings does not change the well-established Delaware precedent that the implied covenant is not an invitation to rewrite the contract one bargained for – whether that bargain was good or bad. Nor does it change the implied covenant’s narrow application across Delaware jurisprudence. Rather, it demonstrates the specific, fact-dependent circumstances where a plaintiff may successfully plead facts that fit within the confines of the doctrine, and it reinforces that the implied covenant serves as a useful check on parties that deliberately exploit contractual silence to the detriment of the overarching bargain.

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