“Package Deal”: The Curious Relationship Between Fiduciary Duties and the Implied Covenant of Good Faith and Fair Dealing in Delaware Limited Liability Companies

Authors

Monica E. White

Document Type

Article

Abstract

Since 1977, the popularity of the limited liability company (“LLC”) has grown tremendously, overtaking the corporation and the partnership as the preferred business structure in many jurisdictions. Amidst this growth in popularity, a legal debate has sparked concerning the existence, nature, and extent of the fiduciary and contractual duties owed in the LLC context.

Drafters of LLC agreements can adjust fiduciary “norms” through limitation or, in certain jurisdictions like Delaware, through complete elimination of fiduciary duties. However, the implied contractual covenant of good faith and fair dealing (the “Implied Covenant” or the “Covenant”) remains and cannot be waived by the parties. This delicate balance between waivable duties and an unwaivable covenant begs two key questions: What, if any, is the relationship between fiduciary duties and the Implied Covenant, and where is the boundary between the two? Further, how is the scope of the Implied Covenant affected when an LLC agreement eliminates fiduciary duties? The answers to these questions are critical in separating permissible acts under an LLC agreement from acts giving rise to causes of action for breach of contract.

The relationship between fiduciary duties and the Implied Covenant is marked by an inherent tension that the Delaware courts have yet to properly resolve. Rather, these courts have structured an extremely narrow view of the Covenant, and have sometimes conflated the Covenant with fiduciary duties, thereby reducing the effectiveness of the Covenant as an independent means of enforcing behavioral norms arising from contractual relationships. Consequently, parties to LLC agreements have been left to question whether the Implied Covenant has any significance independent of fiduciary duties. This Article attempts to shed light on this dilemma, but cautions that, in this unique context, protection under the Covenant appears to be illusory when fiduciary duties are no longer in play.

Recommended Citation

Monica E. White, “Package Deal”: The Curious Relationship Between Fiduciary Duties and the Implied Covenant of Good Faith and Fair Dealing in Delaware Limited Liability Companies, 21 U. MIA Bus. L. Rev. 111 (2013)
Available at: https://repository.law.miami.edu/umblr/vol21/iss1/4