Richards Layton & Finger
 

Orckit Communications Ltd. v. Networks3 Inc. et al.: Court of Chancery Upholds Provision Providing for Sole Discretion "Not to Be Subject to the Implied Covenant of Good Faith and Fair Dealing"

February 17, 2015

In Orckit Communications Ltd. v. Networks3 Inc. et al., C.A. No. 9658 (Del. Ch. Jan. 28, 2015) (TRANSCRIPT), the Delaware Court of Chancery granted defendant Networks3's motion to dismiss a claim that it had wrongfully terminated an agreement to purchase patents from plaintiff Orckit. The purchase of the patents was contingent upon the issuance of an approval by an Israeli government agency, and the agreement provided that "the terms in the ... Approval shall be satisfactory in the sole discretion (which for purposes of this condition shall not, to the extent permitted by law, be subject to the implied covenant of good faith and fair dealing) of Networks3." The Court held that, under the agreement, whether the terms of the approval were satisfactory to Networks3 was "a decision that is unreviewable in the sense that, if it is timely taken, the defendant could then...terminate."

Plaintiff Orckit had alleged that, under the agreement, Networks3's exercise of its sole discretion was qualified by either (i) a "commercially reasonable efforts" standard appearing elsewhere in the contract, or (ii) a default good faith standard that could not be disclaimed, and that, under either standard, Networks3 had breached the agreement. The Court rejected both arguments. In regard to the first, the Court found it unreasonable to assume that the parties would expressly disclaim the application of the implied covenant of good faith and fair dealing only to impose a higher standard. Further, the Court held that basic "canons of construction" provided that a specific discretionary standard in a particular provision controls over a general one elsewhere in a contract. In regard to the second, the Court, emphasizing that "Delaware is a contractarian state" and that "the language that the parties have agreed to … governs the enforcement of contracts," stated that the provision's "language … could not be any clearer," and that it was, in fact, "as clear as it gets."