Delaware Business Litigation Report

Superior Court Permits "New" Defense

Daystar Construction Management, Inc. v. Mitchell, CA No. 04C-05-175-JRS, 2006 WL 2053649 (Del. Super. Ct. July 12, 2006). This decision upholds for the first time the defense to a contract claim that the plaintiff has acted in bad faith in the performance of the contract. It has long been recognized that all contracts include the obligation to act in good faith and to deal fairly. Exactly what that means is more difficult to state. In what it characterized as a case of first impression, this decision holds that the so-called covenant of fair dealing may be raised as a defense in a breach of contract case. Because this is an affirmative defense, the lack of fair dealing must be proved by the defendant. The heart of the obligation to act in good faith is to not deprive the other party of the expected benefits of the contract. For example, a failure to timely give approvals of work so that the other party incurs unnecessary expense is not acting in good faith. The analysis of this issue begins with examining the contract itself to see if the parties have explicitly contracted for the matter at issue and, if they have, then the covenant of good faith has no further place in the inquiry of what is proper. Instead, the contract rules. When, however, the parties have not addressed the matter in the contract, then the court will examine what were their reasonable expectations for the matter at issue. Conduct that materially frustrates those expectations is not in good faith when there is no valid excuse for it. Share