Cases—Good faith—Does it requires more than honesty?

Does Delaware law impose a duty of “good faith” on contracting parties that requires them to go beyond merely avoiding “fraud, deceit or misrepresentation”?  Although the Delaware Supreme Court has not addressed the issue, the U.S. Court of Appeals for the Tenth Circuit thinks so, refusing to follow lower court rulings to the contrary.  In the case, defendant boat manufacturer bought plaintiffs’ boat building business; part of the compensation was an “earn-out” under which plaintiffs would get more money if the business met certain targets. It did not, and plaintiffs claimed that this was defendants’ fault. The Tenth Circuit decided to rely on Restatement (Second) § 205 rather than lower-court Delaware decisions.

Oddly, Judge Briscoe reasoned that while Delaware courts in employment cases have held that employers owe merely a duty to avoid fraud, deceit, or misrepresentation, commercial parties bargaining at arms’ length owe a greater duty to each other than do employers and employees.

O’Tool v. Genmar Holdings, Inc., 2004 U.S. App. LEXIS 22726 (10th Cir. Nov. 2, 2004).