Delaware Supreme Court Says Contract Terms Trump Implied Covenant of Good Faith

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By Susan Bokermann

March 19 — The Delaware Supreme Court March 18 reversed a superior court decision, holding that a seller did not breach the implied covenant of good faith and fair dealing when the contract addressed the conduct at issue.

The supreme court wrote that “the implied covenant ‘cannot properly be applied to give the plaintiffs contractual protections that they failed to secure for themselves.’”

The court remanded for the superior court to determine whether the plaintiff is entitled to fees under the agreement at issue.

The Agreement

Nationwide Emerging Managers LLC owned 65 percent of NorthPointe Capital LLC in 2006, when Nationwide decided to sell its interest back to NorthPointe. The two companies negotiated the terms of the sale for a year and in 2007 agreed on a sale price of $25 million, plus additional compensation owed under an earn-out provision.

The parties signed an agreement allowing for NorthPoint to continue its sub-advisory services for seven specific funds listed in the agreement for three years. The agreement also contained a “Termination Provision” in which Nationwide agreed to pay a “Termination Fee,” capped at $3.5 million, if Nationwide terminated NorthPointe as a sub-advisor for any of the seven funds during that three-year period.

However, Nationwide did not have to pay the “Termination Fee” if one of two conditions were met: (1) if Nationwide determined in good faith that termination was necessary to satisfy its fiduciary obligations to the shareholders of the fund, or (2) if NorthPointe failed to meet certain performance standards for the funds.

The Disagreement

Nationwide subsequently opened a new fund in competition with one of NorthPointe’s sub-advised funds and later merged the NorthPointe fund into the Nationwide fund. Nationwide then terminated NorthPointe’s sub-advisory contracts for five of the other funds and left NorthPointe’s sub-advisory role in place for the last fund, stating that it met the agreement’s performance standards.

Nationwide argued that the terminations were valid under the agreement because the funds had failed to meet performance standards. Nationwide also argued that the merger of the NorthPointe fund into the Nationwide fund was necessary due to “poor performance,” and was not disallowed by the agreement.

NorthPointe argued that they had met the performance standards and that the requisite amount of time outlined in the agreement had not passed, meaning that Nationwide could not yet assess the fund performance.

The Outcome

NorthPointe filed its complaint against Nationwide in November 2009 and, after a series of motions, claimed “fraud, breach of the express terms of the Purchase Agreement, and breach of the implied covenant of good faith and fair dealing.”

The superior court found that Nationwide was liable for breach of the express terms of the purchase agreement and for breach of the implied covenant of faith and fair dealing. The superior court awarded NorthPointe $15.1 million in damages.

In reversing, the Delaware Supreme Court found that the superior court “spontaneously reformed the contract.” It also held that the superior court “erred by finding that Nationwide’s refusal to pay Termination Fees breached both the Termination Provision and an implied covenant.”

The supreme court wrote that the “express terms of the contract governed, and Nationwide’s refusal to pay was either a breach of the Termination Provision or not a breach at all if one of the exceptions applied.”

The supreme court remanded the case with the instructions that “the parties are bound by the plain terms of the Agreement: Nationwide could not terminate NorthPointe as sub-advisor of any of the seven funds … without paying a Termination Fee, or showing that the termination fell under [one of the cause exceptions].”

To contact the reporter on this story: Susan Bokermann in Washington at

To contact the editor responsible for this story: Ryan Tuck at

The opinion is available at


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