Contractual Good Faith as a Fiduciary Duty Standard

Despite our seeming devotion to logic and reason, we lawyers, in various guises, have made the unknowable—state of mind—the fundamental determinant of many legal rights and obligations. Unless we fabricate a mythical proxy, the "reasonable" person, ascertaining whether an individual acted in "good faith" requires us to peer into the defendant's mind to assess subjective belief. Recently, in Allen v. Encore Energy Partners, 2013 WL 3803977 (Del. Supr. July 22, 2013), the Delaware Supreme Court considered the concept of "good faith," contractually defined as the "belief" that actions taken were in the best interests of a Delaware limited partnership, and the difficulties inherent in determining whether the requisite belief existed.

Background

Under Delaware law, the fiduciary duties owed by a partner in a general partnership are specified, in the Delaware Revised Uniform Partnership Act (DRUPA), to be only a "duty of loyalty" and a "duty of due care."¹ Each of those duties is defined and circumscribed in DRUPA, with the former limited to accounting for partnership property and profits and refraining from self-dealing, conflicted dealings and competing with the partnership,² and the latter being limited "to refraining from engaging in grossly negligent or reckless conduct, or a knowing violation of law."³ Although the general partner of a Delaware limited partnership, under the Delaware Revised Uniform Limited Partnership Act (DRULPA), owes those same fiduciary duties to the limited partnership and all its partners,⁴ DRULPA permits those duties to be expanded, limited or eliminated in a limited partnership agreement, preserving only the implied covenant of good faith and fair dealing from modification.⁵