While Covenant Claim May Not Be Duplicative of Contract Claim, Damages For Breach of Covenant May Not Be "Intrinsically Tied" to Contract

Posted: April 3, 2026 / Written by: Jeffrey M. Eilender, Thomas A. Kissane, Samuel L. Butt, Joshua Wurtzel, Channing J. Turner / Category Breach of Implied Covenant of Good Faith

While Covenant Claim May Not Be Duplicative of Contract Claim, Damages For Breach of Covenant May Not Be "Intrinsically Tied" to Contract

On March 6, 2026, Justice Melissa A. Crane of the New York County Commercial Division issued a decision in Warlock Partners, LLC v. The Arena Group Holdings, Inc., et al., Index No. 6553222/2023, denying defendant issuer's motion for summary judgment to dismiss plaintiff stockholder's claim for breach of the covenant of good faith and fair dealing based on defendant's failure to cooperate in plaintiff's efforts to remove the restricted legend from its common shares, but rejecting plaintiff's argument that it could obtain contractual damages on its covenant claim, explaining:

Arena argues that the implied covenant of good faith and fair dealing claims fail because Warlock cannot prove damages. Warlock claims that the record provides support for "at least three categories of compensable harm: (1) lost opportunity to sell or access liquidity during a critical pricing window; (2) entitlement to liquidated damages under SPA § 4.2(b ) ... ; and (3) reputational and economic harm stemming from Arena's obstruction" (NYSCEF Doc. No. 333).

First, the Court addresses categories 1 and 3. Damages are a core requirement of a claim for breach of the covenant of good faith and fair dealing (AMF Trust Ventures LLC v 180 Group LLC, _AD3d_, 2026 NY Slip Op 00073, *1 [2026]). In this case, if Warlock is successful on its claims, it will have suffered some damages. The parties agree that Warlock transferred its holdings of Arena's common stock to its broker, T.R. Winston & Company ("T.R. Winston") (NYSCEF Doc. No. 335). The parties also agree that subsequently, Warlock sold their shares through open-market transactions (id.). Therefore, if there is evidence that Arena breached the implied covenant and caused Warlock to lose an opportunity to sell or access liquidity during a critical pricing window or suffer reputational and economic harm, Warlock would be entitled to damages (AMF Trust Ventures LLC, _AD3d_ at_ , NY Slip Op at * 1 ).

Second, with respect to category 2, a claim for breach of covenant of good faith and fair dealing cannot stand "where the alleged breach is 'intrinsically tied to the damages allegedly resulting from a breach of the contract"' (Hawthorne Group, LLC v RRE Ventures, 7 AD3d 320, 323 [1st Dept 2004]). The Court rejects Warlock's argument that it is entitled to liquidated damages under the SPA because these allegations turn on Arena having a public information failure in violation of §4 .2(b) of the SP A. A claim for a breach of the implied covenant cannot be maintained in connection to these damages because the damages are "intrinsically tied" to a breach of contract claim.

While the court here declined to dismiss the covenant claim as duplicative of a previously dismissed contract claim, the court also held that plaintiff's measure of damages under its covenant claim could rely on the contract. Contact the Commercial Division Blog Committee at commercialdivisionblog@schlamstone.com if you or a client have questions concerning a claim for breach of the covenant of good faith and fair dealing.