Implied covenant of good faith and fair dealing
An always-applicable contractual duty that cannot be eliminated by Delaware LLC Operating Agreements.
Definition
The implied covenant of good faith and fair dealing applies to every contract, including LLC Operating Agreements. Under 6 Del. C. § 18-1101(c), members can modify or eliminate explicit fiduciary duties but cannot eliminate the implied covenant.
Context
Bottom-line protection for members even when fiduciary duties are heavily modified.
Example
An Operating Agreement explicitly eliminates duty of loyalty for the controlling member. A minority member challenges a self-dealing transaction; the implied covenant still applies and the transaction may be unwound for bad faith.
Common pitfalls
- Cannot be eliminated by Operating Agreement.
- Bad-faith conduct cannot be contracted around.