Implied Covenant Under Delaware Law

The Non-Waivable Floor: The Implied Covenant When Fiduciary Duties Are Gone

The statute sets the architecture: a member’s or manager’s duties "may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing" 6 Del. C. § 18-1101(c). The Delaware Supreme Court supplies the standard for what remains. The covenant is "inherent in all contracts" and ensures that parties do not "frustrat[e] the fruits of the bargain" by acting "arbitrarily or unreasonably," and it encompasses "the principle of contract construction that ‘if one party is given discretion in determining whether [a] condition in fact has occurred[,] that party must use good faith in making that determination’" Baldwin v. New Wood Resources LLC, 283 A.3d 1099 (Del. 2022). It is a "cautious enterprise," not "an equitable remedy for rebalancing economic interests after events that could have been anticipated, but were not, that later adversely affected one party to a contract" — but it had teeth in Baldwin itself: because the LLC agreement conditioned indemnification on the indemnitee’s own good faith, the determination denying it had to be made in good faith too, for "[i]f indemnification under Section 8.2 of the LLC Agreement could be denied for any reason, even in bad faith, the standard in Section 8.2 — requiring the indemnitee to act in good faith — would be rendered meaningless."

When the waiver is clear and the contract speaks, the covenant will not resurrect what was bargained away. Faiz Khan v. Warburg Pincus, LLC, No. 2024-0523-LWW (Del. Ch. Apr 30, 2025) dismissed minority members’ challenge to a merger that stripped their tag-along rights: the covenant "is a limited and extraordinary legal remedy" that "does not apply when the contract addresses the conduct at issue, but only when the contract is truly silent concerning the matter at hand," and "[t]he implied covenant cannot be used to circumvent the parties’ bargain" when "[e]xisting contract terms control." Because "Delaware law upholds the elimination of fiduciary duties in LLC agreements," courts are "all the more hesitant to resort to the implied covenant" where an alternative entity agreement "eliminates fiduciary duties as part of a detailed contractual governance scheme" — "Respecting the elimination of fiduciary duties requires that courts not bend an alternative and less powerful tool" — the implied covenant — "into a fiduciary substitute." The complaint died on that logic: "Because the limited liability agreement leaves no room for a quasi-fiduciary theory disguised as an implied covenant claim, this case is dismissed."

Discretion is where the covenant still bites. Calumet Capital Partners LLC v. Victory Park Capital Advisors LLC, No. 2025-0036-JTL (Del. Ch. Jan 29, 2026) refused to dismiss claims that an investor ran a predatory campaign to seize a litigation-finance business, holding that "terms that attempt to enhance the breadth of discretion, such as ‘sole discretion,’ do not displace the implied covenant" — when a party holds sole discretion, "[t]hat setting provides more reason for the implied covenant to apply, not less" — and that Delaware Supreme Court decisions indicate "a party violates the implied covenant if it exercises a discretionary contract right for the sole purpose of harming its counterparty." The waiver itself was read narrowly: drafters "must make their intent to eliminate fiduciary duties plain and unambiguous" and "should not be incentivized to obfuscate or surprise investors by ambiguously stripping away the protections investors would ordinarily receive," so an elimination clause paired with an exculpation carve-out was construed to preserve the duties it purported to kill — "[b]y carving out monetary liability for breaches of fiduciary duty, the Exculpation Language recognizes the continuing existence of fiduciary duties."

The map for deal lawyers and litigators is now fairly crisp. A fiduciary-duty waiver holds if it is plain, unambiguous, and internally consistent — a sloppy exculpation carve-out can quietly revive the duties the elimination clause was supposed to end. Once the waiver holds, an implied-covenant claim cannot smuggle fairness review back in; it needs a genuine gap or a discretionary right exercised in bad faith. That makes discretionary levers — sole-discretion pricing, indemnification determinations, capital calls — the live battleground: plaintiffs should plead the specific implied term and the bad intent behind the exercise, and drafters should assume that no modifier, however absolute, contracts around good faith.