Key Points

• The decision clarifies that a party’s using a contractual gap to “intentionally harm” the counterparty may constitute a breach of the implied covenant. The court rejected ASM’s argument that the parties had intentionally left a contractual gap with respect to the efforts ASM had to use to obtain the consents, in order to allocate the risk to the Vendor of the landlords not giving the consent for any reason. The court stated that, at the pleading stage, it was reasonably conceivable that, without a standard of efforts set forth in the agreement, ASM could have been neutral with the landlords, but, based on the implied covenant, could not use the contractual gap to “intentionally harm” the Vendor.
• The decision underscores the need for careful drafting of third party consent conditions. Parties should consider whether to specify in their agreement a standard of efforts for obtaining such consents and may wish to specify the extent to which the other party can participate in the process of seeking to obtain them. Where a standard of efforts is not set forth, the party responsible for seeking a consent should keep in mind that, depending on the specific facts and circumstances, advocating for the third party not to give the consent may be considered to be intentionally harming the counterparty and thus a breach of the implied covenant.

Background. ASM and the Vendor had entered into a Concession Agreements for each of ASM’s venues for which the Vendor was granted an exclusive right to provide concession services, and a Master Agreement covering all of the venues. Under the Master Agreement, the Vendor had the option to extend the term of each Concession Agreement. However, if ASM were sold, thereafter the consent of the respective landlords for two specified venues (the “Specified Venues”) was required to extend the Concession Agreement for that venue.

For about a decade, the Concession Agreements regularly were extended, and ASM raised no serious issues with the Vendor’s performance. Then, ASM was acquired by one of the Vendor’s competitors. When the Vendor thereafter exercised its extension rights, ASM claimed that the landlords for the Specified Venues refused to consent to the extension and the Concession Agreements for those venues therefore would expire. The Vendor brought suit, claiming that ASM had breached the implied covenant of good faith by secretly convincing the landlords not to consent, so that affiliates of ASM’s new owner could replace the Vendor in providing concession services at the Specified Venues.

Vice Chancellor J. Travis Laster rejected dismissal of the Vendor’s claim, finding that the allegations supported a reasonable inference that ASM breached the implied covenant of good faith.

Discussion

The implied covenant of good faith. Under Delaware law, the implied covenant of good faith and fair dealing adheres to every contract and cannot be waived or modified. It does not establish a requirement that a party act fairly or in some morally commendable sense. Rather, it requires that the parties act with faithfulness to the purpose and terms of their agreement. Delaware courts invoke the covenant only sparingly, as they are loath to “read in” to an agreement provisions that the parties themselves did not obtain at the bargaining table. However, the covenant may be applicable to infer contract terms when there are “gaps” in the agreement and it is clear from the agreement what the parties would have agreed on the issue if they had addressed it when they were negotiating the agreement.

When the implied covenant is, and is not, applicable. The court’s opinion provides a thorough review of the applicability of the implied covenant. It clarifies that the implied covenant does not operate when (i) the parties have addressed the issue in the agreement (i.e., there is no contractual gap); (ii) the parties considered but rejected addressing the issue in the agreement; (iii) the parties intended that (or were willing to have) default common law principles apply on the issue; or (iv) a gap was left for “strategic reasons” (for example, a party anticipated disagreement over the issue and opted to leave the issue open or the language ambiguous in order to preserve its position for future litigation). The opinion clarifies that the implied covenant will operate to fill a gap in an agreement when the provision that would fill the gap was so obvious that the parties would not have thought it had to be expressly stated in the agreement—as when it reflects such a “foundational understanding” that the parties would have considered expressing it to have been unnecessary. In this case, the court stated, the parties’ foundational understanding was that one side could not secretly try to deprive the other side of the fruits of the agreement.

The court clarified the Delaware Supreme Court’s “unable-to-anticipate” standard. The Delaware Supreme Court, in Nemec (2010), stated that the implied covenant only applies to “developments that could not be anticipated, not developments that the parties simply failed to consider” (emphasis added). The Supreme Court reaffirmed that standard in Johnson & Johnson (2026), adding that “hindsight cannot correct oversight.” In ASM, Vice Chancellor Laster observed that, as a practical matter, with enough resources and imagination, almost all future events could be anticipated. The Nemec/J&J standard, then, should not be read strictly literally, the Vice Chancellor suggested. Instead, as a practical matter, it means that the implied covenant should be used to fill a contractual gap when the parties realistically could not have addressed the contingency the occurred—including, for example, because it related to the parties’ “understandings or expectations that were so fundamental” that they did not negotiate about it.

The court found that, in this case, the implied covenant applied to prevent ASM from using a contractual gap to “consciously harm” the Vendor. The Master Agreement was silent as to ASM’s obligations to seek to obtain the consents—no general standard of efforts for obtaining the consents was set forth, and there was no express requirement to encourage the landlords to provide consent nor an express prohibition on discouraging the landlords from providing consent. AMS argued that the parties intentionally had provided no standard of efforts for obtaining the landlord consents, as their intention was to allocate to the Vendor all risk associated with the landlords not providing the consents for any reason. AMS stressed that in every other instance in the agreement where a consent was required, the parties provided that commercially reasonable efforts had to be used to obtain the consent. The court stated that AMS’s argument would have made sense if it had been in response to an argument by the Vendor that ASM had an implied obligation to use reasonable efforts to obtain the landlord consents. But, the court stressed, the Vendor had argued “only that [AMS] had an implied obligation not to intentionally undermine the landlord’s willingness to consent, such as by advocating that the landlord withhold its consent.” In other words, the Vendor was “seek[ing] only an implied term that prevents consciously harming [the Vendor].” The court wrote: “That is center-of-the-fairway for the implied covenant, which prevents a party from frustrating the fruits of the bargain that the asserting party reasonably expected.” The court stated: “When a party responds to a gap by claiming that it exists so that the party can intentionally harm its counterparty, that party—through its own argument—has identified a gap that the implied covenant can and should fill.”

The court found it reasonably conceivable that the contractual gap was created due to the parties not seeing a need to expressly set forth a “foundational understanding.” The court found it self-evident that the parties had a foundational understanding “that one side will not secretly attempt to tank the agreement, thereby depriving the other side of the fruit of its bargain.” This understanding, that ASM would not act to convince a landlord to withhold its consent to extending the Concession Agreements for the Specified Venues, was so foundational that the parties “would not have thought to add that obligation” into the agreement—indeed, it “[fell] into the category of understandings so foundational that it would be offensive to suggest during a negotiation that the counterparty should be expressly prohibited from violating them.”

The court found that the Vendor’s allegations supported a reasonable inference that ASM had encouraged the landlords to withhold their consent. The court noted, first, that ASM had excluded the Vendor from the discussions with the landlords, although the Vendor had repeatedly asked to participate. Thus, “[ASM]’s new owners had free reign to say what was necessary to induce the landlords to withhold their consents.” If ASM had been trying “at least…to remain neutral [it] would have arranged a meeting between the Vendor and the landlords or at least consulted with the Vendor about the discussions.” Second, ASM had seriously dragged its feet when presenting the extension proposals to the landlords. Third, with respect to one of the Specified Venues, ASM had sent its letter to the Vendor stating that the agreement was being terminated due to the landlord’s refusal to consent “so quickly on the heels of the [Landlord]’s email to [ASM] as to suggest it was the result [ASM] wanted and had been trying to secure.” This was particularly so because the landlord’s email to ASM was “generalized and without detail” and thus “hardly a resounding rejection of the Vendor’s proposal.” But rather than consulting with the Vendor or letting it respond, ASM “jumped at the opportunity to tell the Vendor that the [Landlord] had withheld consent.” The timing and contents of ASM’s communications “support[ed] an inference that ASM was eager to seize upon the email as a basis to deny an extension.” Fourth, in connection with refusing to extend the agreements, ASM “suddenly raised alleged concerns” about the Vendor’s performance that were “inferably pretextual.” The stated concerns reflected “picayune objections,” and, when the Vendor asked for evidence of any major issues, ASM did not provide any. Finally, ASM planned to replace the Vendor at the Specified Venues with its affiliates—which, the Vendor believed, “was [ASM]’s goal all along.”

We note as open issues: (i) Would the judicial result have been different if the agreement had provided that ASM had to use commercially reasonable efforts to obtain the landlord consents and/or if ASM had different business reasons (such as poor performance by the Vendor) for not wanting the agreements to be extended? In other words, are there different and sufficient circumstances under which it would it have been acceptable for ASM to have discouraged the landlord from providing the consent? (ii) Would the judicial result have been different if ASM had discouraged the landlord openly rather than secretly (in which case the Vendor could have weighed in and tried to convince the landlord to provide the consent)?

The court also found that ASM may have breached express provisions in the Master Agreement, including the standard “further assurances” provision. This provision required the parties to take “further actions” necessary or advisable to effectuate the contemplated transactions. The court found it reasonably conceivable that ASM breached this provision by failing to try to obtain the landlords’ consent and instead dissuading the landlords from consenting. A further assurances provision recognizes that parties “do not and cannot contemplate and draft for every contingency.” It thus “operates as a version of the implied covenant,” the court stated—serving as a “gap filler and a back stop,” but one that, unlike the implied covenant, requires some level of affirmative efforts (“further” efforts beyond those specified in the agreement) to help bring about the transactions contemplated in the agreement (i.e., extension of the Concession Agreements). The court stated that helping to bring about a transaction is synonymous with providing some level of support, which “at a minimum require[s] the party not to take action designed to obstruct the transaction….”

On a separate issue, the court found that the covenants in the Master Agreement requiring the parties to negotiate and arbitrate disputes were ambiguous. The Master Agreement provided that the parties had to start negotiating over an extension at least 15 days before a sale of ASM; and, that they had to submit any remaining disputes to an arbitrator within 45 days after closing of the sale. ASM contended that these provisions applied only if there was a contractual obligation to extend a Concession Agreement in the first place—and, ASM asserted, there was no such obligation because the landlords had withheld their consent. The Vendor contended that these provisions required that the parties had to negotiate over and agree on an extension proposal (or reach an arbitrated result), and then present that proposal to the landlord for consent—and, the Vendor asserted, ASM did not do that. The court found, at the pleading stage, that the provisions were ambiguous and both of these interpretations were reasonable; therefore, the issue could not be decided at the pleading stage. The court rejected dismissal of the claim for breach of these provisions—but noted that, even if ASM’s interpretation as to the timing sequence were correct, ASM could not rely on the landlord consents requirement because ASM had caused the consents not to be obtained.

Practice Points

• Parties to an agreement that requires third party consent for certain matters should consider expressly setting forth in the agreement: a standard of efforts for obtaining the consent, as well as the extent to which the party not obligated to seek the consent can (or must, or cannot) be involved in the process of seeking the consent. To guide the court as to their intentions, parties could consider stating in the agreement how they intend that the agreement provisions would operate to allocate risk between them in the event a third party consent is not obtained. Also, for additional clarity, parties could consider stating that the party obligated to seek a third party consent cannot discourage the third party from providing it—or, alternatively, that such party can discourage the third party from providing it (or can do so under specified circumstances). In addition, parties should consider the interrelationship between the specific provisions relating to obtaining third party consent and the agreement’s more general (usually boilerplate) “further assurances” provision.
• A party obligated under an agreement to seek a third party consent should consider carefully: what standard of efforts, if any, is set forth in the agreement governing the effort; to what extent the counterparty must or should be included in and/or kept informed about the effort; and whether its actions (in terms of timing and substance) might be considered to be discouraging the third party from providing the consent.
• Generally, parties should seek not to leave contractual gaps concerning important matters. Further, to the extent there are contractual gaps (intentional or inadvertent), to avoid the court’s invoking the implied covenant to infer terms to fill those gaps, parties could consider setting forth in the agreement a statement of intention with respect to the implied covenant. While the implied covenant cannot be waived or modified, a statement of intention could held guide the court with respect to the parties’ intentions—for example, identifying certain gaps as intentional (which the court then might be unlikely to fill via the implied covenant).