September 19, 2011
Delaware Supreme Court Addresses the Implied Covenant of Good Faith and Fair Dealing
From John Grossbauer of Potter Anderson: The Delaware Supreme Court’s recent Central Mortgage opinion addressed the implied covenant of good faith and fair dealing. Applying New York law, which governed the contract at issue, the Supreme Court clarified that a claim for breach of the implied covenant had to be based on different factual allegations than the contract breach claims, and could not be “duplicative of a breach of contract claim.”
Using this standard, the Court found that Central Mortgage, a mortgage servicer, stated a valid claim for breach of the implied covenant by alleging that actions taken by Morgan Stanley, the seller and wholesaler of the mortgages, deprived it of the benefit of its bargain and “engaged in a ‘bait and switch’ by inducing CMC to buy servicing rights to its detriment.” The Supreme Court also clarified the standard for use by the Court of Chancery in deciding a motion to dismiss, saying that the traditional Delaware “conceivability” standard had not (at least yet) been modified to be consistent with the “plausibility” standard articulated by the US Supreme Court in Ashcroft v. Iqbal. The Supreme Court found that Central Mortgage’s contract breach claims survived under the more lenient Delaware standard.