Court defines good faith contract rules

The Delaware Court of Chancery issued a ruling that clarifies how courts should apply the implied covenant of good faith and fair dealing. This legal principle addresses gaps in contracts when parties overlook specific situations.

In Facilities Holdings, LLC v. ASM Global Parent, LLC, decided June 24, 2026, the court reviewed a dispute involving a competitor that acquired a stadium operator. The vendor accused the new owner of pressuring landlords to block contract extensions for its services.

When the implied covenant applies

The decision outlines two scenarios where the implied covenant may operate. The first, relevant to this case, involves adding an omitted right or obligation the parties would have included if they had foreseen the circumstances. The second applies when the covenant restricts how a party exercises contractual discretion.

The court established a three-step test to determine whether an implied term should be added to a contract:

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• First, determine if the contract contains a gap—meaning it does not address the issue in question.
• Second, assess whether that gap requires judicial intervention.
• Third, decide what term the parties would have agreed to if they had negotiated the issue initially.

The court only evaluates whether the implied term was violated if all three conditions are satisfied.

Gaps, defaults, and the limits of hindsight

The opinion stresses that the implied covenant cannot override explicit contract language. If an agreement already covers an issue, courts will not add terms. However, when a gap exists, judges must consider whether filling it aligns with what the parties reasonably expected.

Some gaps are so basic that no one would have written them down, while others result from deliberate choices to simplify contracts. The ruling references studies explaining why parties often leave certain situations unaddressed, whether due to cost, complexity, or reliance on default legal rules.

The court also cautioned that excessive reliance on hindsight should be avoided. The fact that a dispute arises does not mean the parties would have agreed to a specific term if they had anticipated it. The analysis must focus on what the parties likely intended, not what would have been most convenient later.

Conscious harm and the scope of implied terms

The vendor in Facilities Holdings did not request a duty to actively assist in securing landlord consent. Instead, it sought only to prevent the operator from deliberately sabotaging the agreement.

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The ruling confirmed that plaintiffs may pursue both breach of contract and breach of the implied covenant at the same time, even early in litigation. This approach allows claims to proceed if either theory presents a plausible case.

While the decision centered on the implied covenant, it also analyzed breach of contract claims and the “prevention doctrine,” which stops a party from benefiting from its own misconduct. That discussion, however, was not part of the court’s main holding.

The ruling’s immediate impact may be limited to cases with similar facts, such as when a competitor acquires a counterparty and then undermines an existing agreement. Its broader significance lies in the guidance it offers for determining when courts should add terms to contracts. For lawyers and contract drafters, the decision highlights that even detailed agreements can leave room for interpretation. The implied covenant remains a useful tool for addressing those gaps, though it is applied narrowly.

Other courts may or may not adopt this reasoning. The Delaware Supreme Court has previously addressed the implied covenant, including in Johnson & Johnson v. Fortis Advisors, LLC (2026), which noted that no contract can cover every possible situation. For now, Facilities Holdings provides the most detailed recent analysis of how Delaware law approaches the first application of the doctrine—implying rights and obligations where none exist in writing.