The Delaware Supreme Court recently analyzed the extent to which contractual definitions in a partnership agreement of the duty of "good faith" can supplant the implied covenant of good faith. Under the Delaware Revised Uniform Limited Partnership Act, parties may contractually set the terms of their relationship, including eliminating fiduciary duties (the Delaware Limited Liability Company act operates similarly). However, one exception is that partners cannot eliminate the implied contractual covenant of good faith and fair dealing. Many partnerships have in the past defined good faith and fair dealing in the partnership agreement so as to make the terms meaningless. Such was the case in the partnership agreement of EPE LP. The agreement provided that the general partners must act in good faith, which was defined as a "belie[f] that the determination or other action is in the best interests of the Partnership." The agreement also created a presumption of good faith if the general partner took an action in reliance upon expert advice, and created a safe harbor for engaging in conflict of interest transactions if certain conditions were satisfied.
The Delaware Supreme Court held that these provisions did not eliminate the common law implied duty of good faith. The Court reiterated the concept of good faith set forth in ASB Allegiance Real Estate Fund v. Scio Breckenridge Managing Member, LLC: as seeking to enforce the parties' contractual bargain and to ensure that the parties are not deprived of their reasonable expectations by conduct that they would not have agreed to, had the issue been considered, in their original bargaining positions at the time of contracting. The Court found that because the partnership agreement provisions would operate to insulate bad behavior to an extent that partners would not have agreed to upfront (e.g., shielding general partners from liability when they rely on an expert opinion that is plainly erroneous or where the bankers were misled), the implied covenant of good faith still applies. However, the Court did acknowledge that well drafted contractual provisions will supersede the implied covenant, as opposed to overly broad provisions that are easily subject to abuse and are not effective.
Gerber v. Enterprise Products Holdings, LLC., C.A. No. 5989 (Del. June 10, 2013)