Fiduciary Duty, Contract, and Waiver in Partnerships and Limited Liability Companies

Abstract:     
Among the controversies swirling around the promulgations of new uniform statutes governing partnerships and LLCs is the question whether and to what extend fiduciary duties should be made mandatory or waivable. Although courts and commentators have not traditionally focused on the costs of fiduciary duties, the costs are significant in that such duties may preclude agents from engaging in other legitimate ventures. Indeed, fiduciary duty may be used by those to whom it is owed to prevent competition or extort side benefits form participants. Mandatory duties effectively require participants who may identify multiple business opportunities to overinvest their human capital by forcing them to choose one and only one venture in a given market, and thus my preclude economic ventures from being undertaken by precisely those potential participants who have the most to offer. The thesis here is that the approach taken in RUPA and ULLCA, which allows for the broad waiver of fiduciary duties, but only to the extent specific in the partnership agreement or operating agreement, is eminently sound. The approach taken in the new uniform acts encourages disclosure and negotiation by effectively placing the burden on the agent who anticipates engaging in other ventures to negotiate for specific waivers of fiduciary duties. Because the partnership and LLC forms are likely to be used for a wide variety of ventures for which competition may be more or less worrisome, it is vitally important that a flexible approach to fiduciary duty be adopted. The new uniform acts do precisely that without sacrificing the protection of advance disclosure and negotiation to those who may have less bargaining power in connection with the formation of business ventures.

Accepted Paper Series