USA – CONNECTICUT Trends and Developments Contributed by: David I Albin and Cole Mayhew, Finn Dixon & Herling LLP
Finn Dixon & Herling 6 Landmark Square Stamford, CT 06901 USA
Tel: +1 203 325 5000 Fax: +1 203 325 5001 Email: dalbin@fdh.com Web: www.fdh.com
Recent Developments on the Implied Covenant of Good Faith and Fair Dealing and Their Implications for Connecticut Law Investors in a limited liability company (LLC), in which fiduciary obligations of controlling principals can be contractually waived, often find themselves in pre - dicaments where the controlling principals take one or more actions that the investors find unfair or to be taken in bad faith. But with no ability to make breach of fiduciary duty claims, and assuming no contrac - tual protections that specifically prohibit the unwanted actions, investors may find that their only possible remedy is to claim breach of the implied covenant of good faith and fair dealing (the “Implied Covenant”). But how much certainty can either the investor or the controlling principal(s) take from the Implied Covenant when almost by definition it is both so broad and so vague in scope? A trio of Delaware cases applying the Implied Covenant, written by three different members of the Chancery Court and published within the last two years, shed both some light and some intellec - tual boundaries around the use of the Implied Cov - enant. Using these decisions as a foundation, this article examines how these decisions have refined the Implied Covenant and how similar issues may be approached under Connecticut law. The Implied Covenant First, what is the Implied Covenant? The Delaware Supreme Court has summarised the Implied Covenant as follows: “The implied covenant is inherent in all contracts and is used to infer contract terms to handle developments or contractual gaps that […] neither party anticipated.
It applies when the party asserting the implied cov - enant proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected. The reasonable expectations of the contracting par - ties are assessed at the time of contracting.” As a gap-filler, the Implied Covenant has broad appli - cation, “attach[ing] to every contract” that is subject to Delaware law – as Vice Chancellor Laster wrote in Cal - umet , “[a]s a matter of black-letter law, every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Fair enough. So, what can a trio of recent cases tell us about that broad application to contractual arrange - ments, and – importantly – what courts may or may not view as “gaps” that are actually eligible to be filled by the Implied Covenant? The Independent Legal Significance Doctrine Looming large over the first two cases is the Inde - pendent Legal Significance Doctrine. As described by the Delaware Supreme Court, this doctrine stands for the premise “that action taken in accordance with different sections of [Delaware statutory] law are acts of independent legal significance even though the end result may be the same under different sections.” That is to say, for example, what can be accomplished via a statutory conversion may also be accomplished by a statutory merger (or vice versa, or via any other statutorily-enabled action) without having to comply with the requirements of both actions, “the mere fact that the result of actions taken under one [statutory] section may be the same as the result of action taken under another [statutory] section does not require that
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