Judge Wallace Dismisses Contract Claims but Allows Implied Covenant and Unjust Enrichment Claims to Proceed

January 24, 2018

Publication

In Raytheon Co. v. BAE Systems Technology Solutions & Services Inc., 2017 WL 5075376 (Del. Super. Ct. Oct. 30, 2017), Raytheon Company brought suit against BAE Systems Technology Solutions & Services alleging seven counts: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) contractual indemnification, (4) unjust enrichment, (5) negligent misrepresentation, (6) tortious interference with contractual relations, and (7) a tort related to damaged trade and profession.

The suit arose from the joint effort of BAE and Raytheon to upgrade South Korea’s military aircraft. Under a program known as the Foreign Military Sales Program (“FMS”), South Korea selected BAE and Raytheon to perform the upgrades and sought separate contracts with the United States. The United States, however, urged South Korea to submit a single request, and South Korea agreed. The combined request designated Raytheon as a subcontractor of BAE. As the United States and South Korea went back and forth on price, BAE entered into a subcontractor agreement with Raytheon. Raytheon alleged that the subcontractor agreement went beyond the limited scope of work for the first phase of development agreed to by the United States and South Korea (known as LOA-1). BAE’s position, in contrast, was that the subcontractor agreement with BAE was “undefinitized” and not fully funded. BAE contended that until full funding was established, it was not obligated to reimburse Raytheon for any amount over that which was allotted.

Eventually, the United States government terminated LOA-1. BAE told Raytheon to stop all work, and Raytheon complied. At that time, Raytheon had spent $38.6 million, but, according to Raytheon, BAE had only paid approximately $26 million. After other payments were accounted for, Raytheon would be left with nearly $6 million in unpaid costs. Raytheon originally brought suit in the Court of Chancery, but the action was transferred to the Delaware Superior Court.

In considering BAE’s motion to dismiss, Judge Wallace first assessed the validity of Raytheon’s contract claim. Judge Wallace concluded that the contract was enforceable and unambiguous, the contract did not contain any provision promising full payment, Raytheon spent funds at its own risk, and BAE appropriately terminated the contract.

Next, Judge Wallace considered the implied covenant claim. In allowing this claim to survive, Judge Wallace held that the implied covenant of good faith and fair dealing mandates that no party will undertake an action that would have the effect of injuring the rights of the other party to receive the fruits of the contract. Here, Judge Wallace found that the contract contemplated that BAE would act as the liaison with South Korea, and that Raytheon had stated a claim because BAE inaccurately communicated information to South Korea regarding the status of the project.

With respect to the other claims, Judge Wallace dismissed the indemnification claim because indemnification applied only to third-party claims arising from BAE’s negligence. The unjust enrichment claim survived because the complaint properly alleged that BAE was unjustly enriched by Raytheon’s work. The negligent misrepresentation claim was dismissed because New York law required a “special relationship” as opposed to an ordinary business relationship to withstand a motion to dismiss. The tortious interference claim was dismissed because the purported business relationships were too speculative to warrant protection. Finally, Judge Wallace dismissed the damaged trade and profession claims because they were largely the same as other dismissed claims.

Analysis: This case illustrates the type of complicated transaction commonly involved in CCLD disputes. Despite a complex web of contracts and parties, Judge Wallace construed the contract based on the plain and ordinary meaning in the context of a motion to dismiss. In doing so, Judge Wallace found that Raytheon undertook development efforts at its own risk. Consistent with other Delaware cases, this case illustrates that Delaware courts will not save parties from a bad bargain—plain and unambiguous contractual language will be enforced.