THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

By , February 22, 2017 5:38 pm

The implied contractual covenant of good faith and fair dealing applies powerfully to the interpretation and implementation of the operating agreement of every multi-member LLC.  So LLC lawyers have to have a deep understanding of implied covenant doctrine.  The new article cited below is an excellent introduction to this doctrine under Delaware law, and the doctrine as addressed in the article undoubtedly applies also in most or all other states.

Also set forth below is an abstract of the article.

57 B.C. L. Rev. E-Supplement 212
Boston College Law Review E-Supplement
2016
LEAP OF FAITH: DETERMINING THE STANDARD OF FAITH NEEDED TO VIOLATE THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING FOR DELAWARE LIMITED LIABILITY COMPANIES
Pat Andriola
Copyright © 2016 Pat Andriola. All rights reserved.

Abstract: Delaware courts have long respected the right to contract in Delaware, and possibly no entity is afforded more privileges to set the boundaries of its corporate form than the Delaware Limited Liability Company. Unlike nearly every other state, Delaware permits LLCs to abolish the duties of care and loyalty in their operating agreements, but forbids companies to eliminate liability for “any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.” The problem with the phrase “bad faith violation” is that, when referencing a breach of the implied covenant of good faith and fair dealing, it implies that there exists a non-bad faith violation of the covenant. In determining whether or not “neutral faith” or “non-bad faith” violations of the implied covenant are permissible under Delaware LLC law, this essay argues that Delaware courts should look to the relatively short history of the covenant, the contractarian spirit of Delaware laws and courts, and section 18-1101 of the Delaware Limited Liability Company Act to hold that the implied covenant can only be violated in bad faith.

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