Chancery Allows Claim to Enforce “Agreement to Negotiate in Good Faith”

Great-West Investors LP v. Thomas H. Lee Partners, L.P., C.A. No. 5508-VCN (Del. Ch. Jan. 14, 2011), read opinion here.

Issue Addressed

This 37-page decision from the Delaware Court of Chancery addresses multiple contract interpretation issues between two sophisticated parties. The most memorable issue addressed in the decision – - and one that’s less commonly known among business litigators, is that “an agreement to negotiate in good faith could be an enforceable contract term subject to specific performance.” See page 24 and footnote 61.

Brief Overview

The opinion starts with the first full page explaining an old Chinese folktale that involved a mathematical exercise that explained the hugh numerical sums that were arrived at when a simple amount is doubled and that amount is doubled again and then that amount is doubled yet again in successive instances.

One of the parties to the agreement involved was seeking relief from the onerous contract formula for fees that were paid under the agreement in connection with private equity funds. This opinion addresses the contract theories that one might consider in an effort to obtain judicial assistance in escaping an otherwise unhappy bargain. The bottom line is that the Court emphasized that it will not provide reformation of “bad bargains” especially when the agreement is between sophisticated parties. To some extent the plaintiff realized this when it referenced in passing but did not seriously assert the theory of unconscionability. See footnotes 48 and 49. Because the moving party realized that it could not rely on the theory of unconscionability, claims were made based on more conventional breach of contract theories, as well as an alleged breach of the implied covenant of good faith and fair dealing, and also the alleged breach of fiduciary duty.

Procedural Posture

Ruling on a motion to dismiss, the Court determined that the parties’ obligations and rights were expressly governed by contract and therefore the doctrine of the implied covenant of good faith and fair dealing did not apply. However, the court found that there was a basis to allow the claim for reformation based on fraud to proceed, if only barely.

Procedural Standard on Motion to Dismiss

The Court explained the standard under Rule 12(b)(6) for a motion to dismiss that is used by the Court, as follows: The motion would only be granted if “the plaintiff would be unable to recover under any reasonably conceivable set of circumstances susceptible of proof.” See footnotes 33 and 34 (citing DeSimone v. Barrows, 924 A.2d 908, 928 (Del. Ch. 2007)). 

Compare: recent Chancery opinion citing to U.S. Supreme Court decision in Twombly for a slightly different standard applicable to Rule 12(b)(6) motions, as discussed in post here.

Discussion

The Court explained that “an agreement to negotiate in good faith may be binding under Delaware law,” and specific performance could, in theory, be an appropriate remedy for breach of such a provision. In practice, however, “the problems with ordering parties to negotiate in good faith are significant.” See footnotes 61 and 62. The Court explained that “although it might be difficult to win an order enforcing other aspects of the duty to negotiate in good faith, the Court is not now prepared to state that there are no circumstances under which specific performance would be an appropriate remedy for Great-West if it can prove a breach . . ..”

The Court relied on the recent Delaware Supreme Court decision in Nemec v. Schrader to dismiss an alleged breach of fiduciary duty. Relying on Nemec, the Court explained that “where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim. In that specific context, any fiduciary claims arising out of the same facts that underly the contract obligations would be foreclosed as superfluous.” See footnote 65.

Lastly, before it addressed the claims for reformation based on mistake or fraud, the Court explained that there are three possible justifications for reforming an agreement: mutual mistake, unilateral mistake and fraud. The Court allowed the reformation claims based on all three arguments to proceed.

SUPPLEMENT:  Professor Stephen Bainbridge links to this post on his blog here and provides commentary on this case, with reference to one of the many books on corporate law that he has authored.

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