USA – CONNECTICUT Trends and Developments Contributed by: David I Albin and Cole Mayhew, Finn Dixon & Herling LLP
right of first offer to draw out the loan placement pro - cess for the bad faith purpose of interfering with the Lender’s ability to offer the opportunity to third par - ties. Vice Chancellor Laster engaged in a very detailed discussion of when the Implied Covenant is and is not violated. While the Implied Covenant arises to infer contract terms that were not and could not have been anticipated, Vice Chancellor Laster makes clear that you cannot read the requirement that circumstances “could not have been anticipated” literally, as any - thing, especially in hindsight, could be reasonably anticipated. Rather, Vice Chancellor Laster makes clear that the Implied Covenant comes into play “[w]hen parties could not have realistically addressed a gap – either because of the circumstances they faced or their implicit understanding […].” The fact that a party has the ability to exercise a right in its sole discretion, he explains, does not eliminate the Implied Covenant. Rather, it remains implicit that the “sole discretion” contractual right be exercised in good faith – not “loy - alty to the contractual counterparty [which would be reading in a fiduciary obligation] but rather faithfulness to the scope, purpose and terms of the parties’ con - tract.” The key takeaway is that even sole discretion “must be exercised ‘consistently with what reasonable parties would have agreed to at signing.’” Connecticut’s applications Connecticut also believes in the Implied Covenant, though with apparently fewer examples and detail than Delaware (and without the Independent Signifi - cance Doctrine coming into play, though that does not necessarily mean that Connecticut would or would not give it the broad deference that Delaware does). In what may be the seminal Connecticut case of De La Concha of Hartford, Inc. v Aetna Life Insurance Co. , the Connecticut Supreme Court upheld a lower court decision that found no violation of the Implied Cov - enant. The basic facts were not extraordinary within the world of commercial real estate: a landlord who owned a shopping mall (that was part of the Hartford Civic Center complex) would not renew the lease of a defaulting tenant, and the defaulting tenant wanted the landlord to spend more money promoting the Civic
Center complex (though the landlord spent far more on promotion than was required under the lease). While acknowledging the existence of the Implied Covenant (“the [landlord] was obligated to conduct itself in good faith and in a manner consistent with the reasonable expectations of the parties in view of the provisions of the lease” and could not engage “in pur - poseful conduct that is inimical to the material terms of the lease”), the Court noted that, under Connecticut law, there must be an element of bad faith involved in the actions of the party being accused of violating the Implied Covenant – merely acting in a manner that tries to achieve the legitimate, predictable interests of the party (in this case, trying to make money on the property it owns within the bounds of the contract) will not be sufficient. Similarly, in both Renaissance Management Co. v Connecticut Housing Finance Authority and Capstone Building Corp. v American Motorists Insurance Co. (although not as clear in this latter case as the court seemed to go back and forth between the Implied Covenant and bad faith conduct as if they were syn - onymous), the Court failed to overturn lower court rul - ings that found no violations of the Implied Covenant where the charged party was using contractually del - egated discretion (as in Calumet ) without an element of bad faith. So, what do the recent Delaware cases tell us about what Connecticut might do with similar cases? With regard to Delaware’s apparent overriding position (not expressed this way) that the Independent Legal Signif - icance Doctrine will save actions that might otherwise be candidates for violations of the Implied Covenant, Connecticut has yet to confront a case with similar facts. That said, one can easily argue that eliminat - ing contractually agreed-to minority protective pro - visions by some type of reorganisational sleight of hand is exactly what the Implied Covenant should be protecting against. Otherwise, while the stated tests are far from identical, Connecticut might very well be influenced by a decision such as Calumet , as both Delaware and Connecticut seem to require some type of bad faith – an effort to undermine the agreed-upon mutual arrangement as opposed to simply maximising one party’s benefit from it.
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