Delaware Supreme Court Returns to Contractual Good Faith Standard

Allen v. Encore Energy Partners, L.P., Del. Supr., No. 534, 2012  (July 22, 2013).

Issue addressed: This Delaware Supreme Court opinion addresses a contractually defined good faith standard in a limited partnership agreement that replaces the common law fiduciary duties that might otherwise apply. This 35-page decision is the latest in a number of recent high court decisions addressing similarly defined replacements for common law fiduciary duties. See, e.g., cases highlighted on these pages, such as Gerber v. Enterprise Products, at this link.

The contractual duty of good faith in this case was satisfied under the terms of the agreement if the independent directors acted in “subjective good faith”. This opinion provides “must reading” for anyone interested in this cutting edge topic of how Delaware both recognizes and enforces “customized” standards of conduct, and in particular why Delaware’s high court reasoned that the contractual standard was satisfied based on the facts of this case, and why neither corporate law concepts nor tort law concepts would be imposed on the contractual standard adopted by the parties.

The Court of Chancery’s opinion was affirmed. That trial court opinion, which provides more background on the case, was highlighted on these pages here.