- Delaware Court of Chancery in Winshall v. Viacom:
The implied covenant of good faith and fair dealing is inherent to every contract. It “requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain.” Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 442 (Del. 2005). A party is liable for breaching the covenant when its conduct “frustrates the overarching purpose of the contract by taking advantage of [its] position to control implementation of the agreement’s terms.” Id. While it may be unclear as to when courts should implement implied covenant analysis, a recent Delaware decision, Winshall v. Viacom Int’l Inc., No. 6074-CS (November 10, 2011), sheds some light on the issue.
In Winshall, defendant Viacom had acquired defendant Harmonix Music Systems, Inc., creator of the music-oriented video games Rock Band and Guitar Hero, in a 2006 merger. Under the merger agreement, Viacom promised the Selling Stockholders an up-front payment of $175 million for their shares, as well as the contingent right to receive uncapped earn-out payments based on Harmonix’s financial performance in the two years following the Merger, 2007 and 2008.