What Recent Court Decisions Teach Us About the Duty of Good Faith in Commercial Contracts

U.S. courts continue to enforce the implied covenant of good faith and fair dealing, requiring parties to act honestly and not deprive each other of the benefits of their agreement. While the doctrine doesn’t override clear contract language, recent decisions show that courts will intervene when one party uses contractual power in a way that undermines the bargain.

1. When Contractual “Sole Discretion” Can Still Breach Good Faith

Zest Anchors, LLC v. Biomet 3i, LLC

U.S. District Court for the Southern District of New York (2025)
Official source: Justia — Opinion & Order, No. 1:23-cv-07232
https://law.justia.com/cases/federal/district-courts/new-york/nysdce/1:2023cv07232/604460/72/

This case involved a distribution agreement between Zest Anchors (the franchisor) and Biomet 3i (the distributor). The contract gave Zest “sole discretion” to repurchase Biomet’s inventory and to make various distribution-related decisions.

Biomet argued that Zest used that discretionary authority in a way that was arbitrary and commercially unreasonable, including conduct that effectively blocked Biomet from realizing the benefits of the agreement.

The court held:

  • A party with “sole discretion” must still exercise that discretion in good faith.

  • Discretion cannot be used in a way that is “arbitrary, irrational, or intended to deprive the other party of its expected benefits.”

  • Because the allegations plausibly suggested bad-faith conduct, the court allowed the good-faith claim to move forward.

Why this matters:

Even broad contractual discretion has limits. Businesses should assume that courts may examine how discretion is exercised—especially if a party’s choices appear designed to sabotage the deal.

2. Delaware: Poison Pill Used to Undermine Rights Can Breach Good Faith

Whitestone REIT Operating Partnership, L.P. v. Pillarstone Capital REIT

Delaware Court of Chancery (2024)
Official source: Justia — Memorandum Opinion, C.A. No. 2021-0465-JTL
https://law.justia.com/cases/delaware/court-of-chancery/2024/c-a-no-2021-0465-jtl.html

This case focused on a dispute between a limited partner and a general partner. The general partner adopted a shareholder rights plan, also known as a “poison pill.”

What is a poison pill? (Plain-English Explanation)

A “poison pill” is a defensive strategy commonly used by companies to deter takeovers. When triggered, it can dilute the ownership of a party attempting to acquire more control, making the acquisition economically unattractive.

Here, the general partner adopted a poison pill after the limited partner sought to exercise its contractual redemption rights (i.e., the right to redeem its partnership units).

The Court of Chancery found:

  • The contract did not explicitly prohibit adopting a poison pill.

  • However, the poison pill was adopted specifically to prevent the limited partner from exercising its redemption rights.

  • This frustrated a core benefit of the agreement, constituting a breach of the implied covenant of good faith and fair dealing.

Why this matters:

A party cannot use its contractual authority—even if broadly worded—to intentionally block the other side’s agreed-upon rights. Good faith operates as a backstop against opportunistic behavior.

3. Good Faith Cannot Override Clear Contract Terms

Fidus Mezzanine Capital, L.P. v. Fibers Plus, LLC

U.S. District Court for the Southern District of New York (2015)
Official source: Justia — Opinion and Order, No. 1:14-cv-08534
https://law.justia.com/cases/federal/district-courts/new-york/nysdce/1:14-cv-08534/432862/52/

In this intercreditor-agreement dispute, one lender argued that an additional loan made by another lender violated the implied covenant of good faith.

The court disagreed:

  • The agreement expressly allowed the additional loan.

  • The implied covenant cannot contradict explicit contractual rights.

Why this matters:

If parties negotiate clear terms, courts will not use good faith to “rewrite” the contract or impose new limitations.

4. Delaware Rejects Implied Covenant Claims Where No Contractual “Gap” Exists

Schulz Group GmbH v. Jamestown Premier Property Fund

Delaware Court of Chancery (2025)
Official source: Justia — Memorandum Opinion, C.A. No. 2024-0943-LWW
https://law.justia.com/cases/delaware/court-of-chancery/2025/c-a-no-2024-0943-lww.html

In this partnership dispute, the plaintiff argued that capital calls were made in bad faith during unfavorable market conditions.

The court rejected the claim:

  • The partnership agreement already addressed the general partner’s authority to issue capital calls.

  • Because the conduct was contemplated by the contract, there was no gap for the implied covenant to fill.

  • The implied covenant is “not a free-floating duty” and is “rarely successfully invoked” when the contract covers the disputed issue.

Why this matters:

Detailed, well-drafted agreements reduce the risk that courts will impose implied obligations or limitations.

Practical Lessons for Businesses

Based on these decisions, here are key takeaways for drafting and negotiating commercial contracts:

1. Do not rely on good faith to supply missing terms

If you want to restrict behavior or impose conditions, the contract must state them clearly.

2. Discretion should include standards

If a party has “sole discretion,” consider adding boundaries such as:

  • “commercially reasonable efforts,”

  • “not arbitrary or capricious,”

  • notice requirements,

  • audit rights.

This provides clarity and reduces litigation risk.

3. Consider how one party’s rights may affect the other’s core benefits

Courts will intervene when discretionary authority is exercised to defeat the essence of the contract.

4. Monitor developments in Delaware and New York

These two jurisdictions heavily influence U.S. commercial law, and their cases shape how the implied covenant is applied nationwide.

5. Maintain internal documentation

Since bad-faith claims often hinge on intent and conduct, keep records of business decisions, evaluations, and communications.

The implied covenant of good faith and fair dealing continues to operate as an important safeguard in U.S. commercial law. Courts will not use it to rewrite a contract or impose new duties that the parties never agreed to, but they will intervene when one party uses contractual power in a way that undermines the bargain’s core benefits. For businesses, the message is clear: draft precisely, anticipate how discretion may be used, and ensure your agreements reflect the business realities you expect to manage.

At Borderless Counsel, we help companies negotiate and structure commercial contracts that are both legally sound and practically workable—so your agreements hold up not only on paper, but when courts interpret good-faith obligations in real-world disputes.

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