LLC Fiduciaries: Where Has All the Good Faith Gone?

Since its enactment in 1992, Delaware’s limited liability company (LLC) act has given “maximum effect to the principle of freedom of contract” and allowed for the restriction of fiduciary duties. A full decade later, when dealing with similar language in the limited partnership (LP) act, the Delaware Supreme Court acknowledged the ability of parties to restrict fiduciary duties but refused to go so far as to allow the complete waiver of those duties. The state legislature quickly rebuffed the Delaware Supreme Court with an amendment in 2004 that explicitly provided the right to parties to eliminate fiduciary duties, further codifying the desire by the legislature to move toward a contractbased approach to LLC governance. Delaware’s actions over the past decade are a microcosm of a larger debate. Since the early 1990s, three fundamental issues regarding the role of fiduciary duties in unincorporated entities have occupied considerable mind space: (1) the extent to which such entities allow fiduciary duties to be waived, (2) the default rules that apply in the absence of waiver, and (3) the requirements for effective waiver. The rapid succession of uniform acts for unincorporated entities has perpetuated this discussion, and those uniform acts further serve as a national track record of the trend away from the fiduciary-based