In the recent decision of Edinburgh Holdings, Inc. v. Education Affiliates, Inc., C.A. No. 2017-0500-JRS (Del. Ch. June 6, 2018), the Delaware Court of Chancery considered whether claims for breach of contract, breach of fiduciary duty and the implied covenant of good faith and fair dealing could be brought in relation to the same conduct.
In Edinburgh, the dispute arose from the sale of a proprietary education business. The Asset Purchase Agreement (“APA”) provided for earnout payments to the seller based upon the acquired business achieving certain revenue targets following the closing. The buyer refused to make the final annual payment, which led to the instant litigation.
Defendants moved to dismiss, asserting, among other things, that certain claims brought by plaintiff were duplicative. Namely, defendants argued that the claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and for breach of fiduciary duty, all related to the same conduct and thus subject to dismissal.
Vice Chancellor Slights noted that a breach of contract claim and a breach of fiduciary duty claim cannot both be asserted for the same conduct, unless “there is an independent basis for fiduciary claims arising from the same general events….” In making this determination, the Court “inquires whether the fiduciary duty claims depend on additional facts as well, are broader in scope, and involve different considerations in terms of potential remedy.” See Slip op. at 38. In other words:
Generally, Delaware “[c]ourts will dismiss [a] breach of fiduciary duty claim where [it] overlap[s] completely [with a breach of contract claim] and arise[s] from the same underlying conduct or nucleus of operative facts” as the breach of contract claim.
In addition, the Vice Chancellor discussed whether breach of contract and implied covenant of good faith and fair dealing claims can be asserted at the same time. The Court took note of Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 539 (Del. 2011), which held that “[a] party may maintain a claim for breach of the implied covenant of good faith and fair dealing only if the factual allegations underlying the implied covenant claim differ from those underlying an accompanying breach of contract claim”. Slip op. at 21, n. 84. This is so because “[t]he implied covenant is available only where the terms to be implied are missing from the contract; ‘cannot be invoked to override the express terms of a contract.'” Slip op. at 21 (citations omitted).
Here, the Court granted defendants’ motion to dismiss in part because it found that the above-referenced claims were improperly duplicative. The Court determined that plaintiff’s breach of contract claims encompassed the misconduct alleged in the breach of fiduciary duty claim and the implied covenant claim, and thus dismissed the latter two claims.
Carl D. Neff is a lawyer with the law firm of Fox Rothschild LLP. Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at email@example.com.