Visiting Scholar Looks at the Implied Contractual Covenant in Delaware Law
Web Editor - Published: September 24, 2012
“So, it’s an important doctrine, but I’ve found a confusing one,” said University of Oregon School of Law Assistant Professor Mohsen Manesh of the implied contractual covenant in remarks to students from the Delaware Journal of Corporate Law and members of the faculty in the Barrister’s Club on Thursday, September 20th, 2012.

Manesh, the Institute of Delaware Corporate and Business Law's 2012 annual visiting scholar in residence in business and corporate law, also delivered his talk, titled “Express Contract Terms and the Implied Contractual Covenant of Delaware Law,” later in the afternoon to members of the bench and bar at a gathering held at The Wilmington Club on North Market Street in downtown Wilmington. The Delaware Counsel Group LLP, Attorneys at Law – a Wilmington-based law firm that represents clients internationally on the Delaware law aspects of complex transactional and governance matters – sponsored Professor Manesh’s visit.

Following opening remarks and an introduction from Ruby R. Vale Professor of Corporate and Business Law Lawrence A. Hamermesh, Manesh began his talk by looking briefly at the differences between corporations and alternative entities under Delaware corporate law, and he noted that roughly one in seven contracts is governed by Delaware contract law. He then moved into a consideration of how the Delaware Supreme Court ruled regarding the implied contractual covenant in two prominent cases, Dunlap v. State Farm and Nemec v. Shrader.

In the State Farm case, Manesh noted that the Court found that the implied contractual covenant required more than just literal compliance and that the company could only deny a claim to advance its own interests and not simply to injure the other party. In Nemec, however, the court found in favor of Booz, Allen & Hamilton Inc., ruling that it’s directors did not breach either the express or implied contractual obligations when selling the stock of the plaintiffs at a lower value than they might have received in relation to another pending transaction because the contract specifically covered the timing of the transaction.

Professor Manesh also discussed how the courts fill gaps through the use of negative inference and observed that the courts reject the idea of rewriting contracts and are also unwilling to give parties what was expressly excluded during negotiations. He also touched on “limited foresight” of human beings and presented some possible approaches to improving doctrinal clarity.

He concluded that the “Court has tremendous discretion about when to invoke the implied covenant of good faith,” but also pointed out that such discretion has not extended to overriding express contractual rights.