Johnson & Johnson v. Fortis: Delaware Supreme Court Limits the Implied Covenant in Earnout Disputes
In Johnson & Johnson v. Fortis Advisors LLC (Del. Jan. 12, 2026), the Delaware Supreme Court narrowed the use of the implied covenant of good faith and fair dealing in earnout disputes.
Deal lawyers like clean frameworks where the contract says what happens, the parties follow it, and disputes get resolved by reading the words on the page. The implied covenant of good faith and fair dealing is often invoked as the safety net when reality does something the contract did not explicitly address.
Delaware’s Supreme Court has been clear for years that this safety net is narrow. In Johnson & Johnson v. Fortis Advisors (Jan. 12, 2026), Delaware delivered a sharp reminder that if a risk could have been anticipated, you should assume Delaware will treat silence as a choice, not a gap. Specifically the Supreme Court sided with J&J that the implied covenant is a “narrow gap-filling tool of last resort” that “applies only where there is a true contractual gap about how to handle an unforeseen event.”
What can this teach us about drafting in our next M&A or Financing?
The Principle Delaware Is Reinforcing
If the contract is specific, courts will not “upgrade” it to what one side wishes it said later.
The implied covenant is designed to address truly unanticipated situations where the agreement is silent in a way that defeats the parties’ bargain. It is not a tool to add protections that could have been negotiated and written down. In practical terms, Delaware draws a line between:
a situation the parties genuinely could not have planned for; and
a situation the parties did not plan for, even though it was within the realm of possibility.
Only the first category is where the implied covenant has real room to operate.
The result is blunt: “we did not expect that” is not the same as “we could not have anticipated that.”
Why This Is Bigger Than Earnouts
Earnouts make the issue obvious because they often hinge on a narrow set of milestones, and the incentives to argue about them are extreme. But the same drafting problem shows up across transaction documents wherever performance, pricing, or post-closing rights depend on a specific mechanism that can change.
If you anchor a deal to a named pathway, metric, standard, or approval, you need to decide whether the bargain is tied to the specific thing named, or to the commercial outcome that thing was intended to achieve. If you do not decide, a court will, and it will usually decide based on the literal drafting.
This dynamic shows up in at least six common places.
1) Regulatory Approvals and “Specified Path” Conditions
This is the cleanest analog. If your agreement requires a particular approval, clearance, license, or classification, you should expect Delaware to treat that as an intentional choice unless you build flexibility.
Practical drafting options:
Define the condition as “approval under X or any successor or alternative pathway that achieves substantially the same regulatory outcome.”
Add an adjustment mechanism if the original pathway becomes unavailable or materially more burdensome.
If you want the opposite result, say so: “only X counts, and no alternative pathway shall be required.”
Pick one. Do not leave it to implied covenant arguments later.
2) Financing Conditions and “Market Standard” Concepts
Many deals hinge on future financings, “market” debt terms, customary diligence conditions, or third-party capital availability. Those terms are magnets for post-signing disputes because “market” changes.
Practical drafting options:
Replace “market” with a defined reference set (named lenders, a benchmark index, a specified leverage ratio, a pricing grid).
Add a “hard stop” if financing is unavailable on defined terms, with termination, extension, or reprice mechanics.
If you are relying on efforts to obtain financing, specify what counts as compliant efforts, and what actions are not required (e.g., no recourse debt, no equity backstop, no personal guarantees).
If the contract punts on these issues, courts will not turn general efforts language into bespoke outcomes.
3) Working Capital and Accounting Definitions
Working capital disputes happen because parties assume a shared understanding of how the number will be calculated, then discover post-closing that “consistent with past practice” can mean two different things depending on what is measured and when.
Practical drafting options:
Attach an illustrative example calculation as an exhibit.
Specify the hierarchy: GAAP, applied consistently, consistent with past practice, and exactly what wins if those conflict.
If a known accounting policy may change, address it directly: what happens if GAAP changes, if a regulator issues a new standard, or if an auditor requires reclassification.
Delaware is not going to rescue a party from a definition that is incomplete but could have been negotiated with more specificity.
4) “Efforts” Covenants in Commercial and M&A Agreements
Efforts obligations are the most litigated vague language in deal documents because they often sit next to discretion.
The core drafting risk: you cannot simultaneously give a party broad discretion and then expect a court to treat an efforts clause as requiring a specific strategy unless the document makes that relationship explicit.
Practical drafting options:
If discretion is meant to be subordinate to an efforts baseline, say that the discretionary factors “may be considered only to the extent consistent with” the efforts standard.
If discretion is intended to be independent, say that the party “may make determinations in its sole discretion” and the efforts clause is limited to defined actions.
Provide examples of prohibited conduct only when you actually mean it, because examples often become implied limitations.
Do not rely on “commercially reasonable efforts” as a substitute for negotiating the actual boundary.
5) Material Adverse Effect and Risk Shifting Clauses
MAE clauses are a classic place where parties believe courts will apply “common sense.” Delaware tends to apply what the clause actually says. If you want a pandemic, supply chain, regulatory change, or industry shock to be allocated to one side, you need to address it clearly in the carveouts and disproportionality tests.
Practical drafting options:
Draft the MAE definition like you mean it, not like a recycled form.
If a specific risk is front of mind, address it explicitly rather than assuming it falls into a general bucket.
If you are relying on disproportionality, define the comparison set.
If the risk is foreseeable and economically meaningful, leaving it to inference is an avoidable mistake.
6) Earnouts, Tranches, Milestones, and Any “Pay Later If X Happens” Structure
Earnouts are just one member of a larger family: contingent value rights, milestone-based tranches, holdbacks, price ratchets, royalty step-ups, and performance-based reversions. The common failure mode is the same: the contract ties money to a specific trigger, then reality changes the path to achieving that trigger.
Practical drafting options:
Define the milestone by outcome, not only by method, unless method is the point.
Add what happens if the method becomes unavailable, obsolete, or materially more expensive.
If the parties are allocating the risk of failure to a single path, say that explicitly and move on.
Silence is not neutral, it is usually interpreted as risk allocation.
Drafting Playbook: The “Foreseeability Filter”
A practical way to apply this across agreements is to run a short foreseeability filter during drafting and negotiation:
What are the top three post-signing developments that would break the economics or the timeline?
Are those developments truly unforeseeable, or just unlikely?
For each, do we want:
an alternative path,
an adjustment (time, price, scope), or
a walk-away right?
Then draft exactly that. If you cannot draft it because it is too hard to define, that is a signal that you should not expect a court to do it for you later.
The Real Lesson
Delaware is telling everyone to treat foreseeability as a drafting problem, not a litigation strategy.
If you name a specific pathway, metric, approval, or mechanism, you are likely stuck with it. If you want the contract to track the commercial outcome instead, you need to say so. And if you want flexibility, you need to build it with alternatives, adjustment mechanics, or explicit risk allocation language.
The implied covenant is not an insurance policy for incomplete drafting. It is a narrow doctrine for truly extraordinary gaps. Most deal disputes are not extraordinary. They are predictable.
If you want us to pressure-test your earnout, milestone, MAE, working capital, or efforts language against this Delaware trend, send it over. We will tell you quickly what is missing, what is overbroad, and where you are betting on a court to fix something you could fix at the drafting table.
Sources
J&J v. Fortis (Del. Supr. Jan. 12, 2026)
Nemec v. Shrader (Del. 2010)
Dunlap v. State Farm (Del. 2005)
Chicago Bridge v. Westinghouse (Del. 2017)
Akorn v. Fresenius (Del. Ch. 2018)
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