Delaware Business Litigation Report

Implied Covenant of Good Faith Covers Contractual Conditions “Too Obvious” to State Expressly in Indemnification Dispute

Baldwin v. New Wood Resources, LLC, App. No. 303, 2021 (Del. Aug. 16, 2022)
This appeal involved an underlying claim that Baldwin had improperly refused to repay litigation expenses advanced to him under New Wood Resource’s limited liability company agreement. The agreement provided Baldwin with indemnification so long as he acted in good faith, and it also specified a process for determining whether Baldwin had done so. One narrow issue on appeal was whether the implied covenant of good faith and fair dealing required the good faith determination itself to be conducted in good faith. Reversing the Superior Court, an en banc panel of the Supreme Court ruled that the implied covenant did apply. The Court relied upon its earlier decision in Dieckman v. Regency GP LP to restate the principle that one function of the implied covenant is to cover those contractual conditions that are "too obvious" to include expressly. That "too obvious" category included the condition that the good faith determination be made in good faith. Because New World Resources conceded this point at argument and did not make a persuasive alternative argument, the Court remanded the case.

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