Legal Alert

Implied Covenant Prohibits Bad Faith Interference With Commission Opportunity

by David J. Margules, Elizabeth A. Sloan, and Tyler B. Burns
January 10, 2022

Delaware’s Superior Court recently held that commission-agreement parties stated a claim for breach of the implied good faith and fair dealing covenant when they alleged their counter-party acted “to destroy promising business opportunities” that would have generated commissions. Light Years Ahead, Inc. v. Valve Acquisition, LLC, C.A. No. N20C-12-181 (Del. Super. Dec. 22, 2021). 

Defendant Valve Acquisition, LLC, bought the assets of Plaintiff Light Years Ahead, Inc., which was pursuing an opportunity with a UK company. Valve signed an agreement under which Light Years and its then-CEO, Kevin Murphy, would help exploit the opportunity, earning a commission if it matured. The agreement “disclaim[ed] any express or implied warranties as to ‘any potential success,’” and was silent on whether Valve had obligations regarding exploitation. Light Years alleged Valve violated the implied covenant by “purposeful acts that would damage the business,” including “unreasonably delay[ing] additional product testing” requested by the UK company.

The implied covenant “inheres in every contract,” but only applies where the contract is “truly silent on the matter at hand.” Where it applies, “the Court will effectuate the parties’ reasonable expectations as expressed by the contract by implying terms that the parties would have agreed to had they thought to consider them.” The court found “a provision barring bad faith conduct” regarding the opportunity was “so obvious that had the parties considered it, they would have included the provision.” The court found the complaint, which is taken as true on a dismissal motion, supported a finding of bad faith. It rejected Valve’s argument that the success disclaimer addressed the issue at hand.

The Light Years decision exemplifies scenarios in which the implied covenant may arise and underscores the need for contracting parties to carefully consider the need for express representations, warranties and disclaimers.

Ballard Spahr’s Securities Enforcement and Corporate Governance Litigation attorneys can assist businesses in reviewing and drafting contracts to minimize the risk of unintended obligations and, where necessary, in resolving disputes under such contracts through litigation or ADR.

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