Unenforceable Fiduciary Duty Limitations

Statutory Limitations on Partners’ Fiduciary Duties

Introduction

States have adopted, with some modifications, a number of model laws applicable to partnerships. The Uniform Partnership Act of 1914 (UPA) was the first of the uniform laws on partnerships to be promulgated and was adopted by every state except Louisiana. The Revised Uniform Partnership Act (RUPA) was promulgated in 1994 and amended in 1996 and 1997. Over thirty jurisdictions adopted RUPA to some extent. The Uniform Limited Partnership Act (ULPA-2001) was promulgated in 2001 and will likely be adopted by many states that enacted previous versions Delaware, for example, utilizes these model laws in many ways, but Delaware gives great freedom to partners to limit or eliminate entirely the fiduciary duties they owe each other.

Duty to Disclose

UPA

UPA does not allow partners to modify their duty to disclose. UPA section 20 provides that “[p]artners shall render on demand true and full information of all things affecting the partnership to any partner or the legal representative of any deceased partner or partner under legal disability.” UPA does not expressly authorize partners to modify the fiduciary duty created by this section.

RUPA

RUPA allows partners to modify their duty to disclose subject to restrictions. RUPA provides the duty to disclose under section 403(c). Under RUPA, the duty to disclose is not a fiduciary duty. RUPA section 403(c) provides the following:

Each partner and the partnership shall furnish to a partner, and to the legal representative of a deceased partner or partner under legal disability:

(1) without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement or this [Act]; and

(2) on demand, any other information concerning the partnership’s business and affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances.

In its list of nonwaivable provisions, RUPA section 103 does not include the duty to disclose.Thus, RUPA suggests that partners may waive the duty to disclose, with the exception that limitations on “the right of access to books and records” must be reasonable. The definition of reasonable was left for the courts. The waiver of such duties will be interpreted strictly and must not be used to protect wrongdoers from liability. Some courts have implied that the duty to disclose cannot be waived, but the relevancy of these cases to this issue is questionable because of the unusual facts and law involved in the cases.

RULPA

Like RUPA, ULPA-2001 allows partners to modify their duty to disclose subject to restrictions. ULPA-2001 section 407(b) provides the following duty of general partners to disclose:

Each general partner and the limited partnership shall furnish to a general partner:

(1) without demand, any information concerning the limited partnership’s activities and activities reasonably required for the proper exercise of the general partner’s rights and duties under the partnership agreement or this [Act]; and

(2) on demand, any other information concerning the limited partnership’s activities, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances.

Section 304 prescribes the duty of disclosure to limited partners. Waiver of the duty to disclose is restricted in ULPA-2001 section 110(b)(4):

A partnership agreement may not: . . . unreasonably restrict the right to information under Sections 304 or 407, but the partnership agreement may impose reasonable restrictions on the availability and use of information obtained under those sections and may define appropriate remedies, including liquidated damages, for a breach of any reasonable restriction on use.

Thus, partners may waive the duty to disclose in the partnership agreement only if the waiver is reasonable.

Usurpation of a Partnership Opportunity

UPA & RUPA: The Duty Generally

Under UPA and RUPA, the duty to account for a partnership opportunity correlates with two similar duties found in the statutes. First, use of property owned by the partnership is limited to partnership purposes, which excludes personal use by the partners.Second, partners may not be compensated for the partnership’s work unless they agree otherwise. Consistent with these provisions, UPA and RUPA require that partners hold as trustee for the partnership any benefit derived from the partnership property or business. RUPA adds that “[a] partner does not violate a duty or obligation under this [Act] or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest.”

UPA & RUPA: Purpose for the Duty

One purpose for the duty to account for a partnership opportunity is to prevent partners from misusing partnership assets and information for personal gain. A second purpose is to direct partners to use their energies to further the partnership rather than for personal gain.

UPA & RUPA: Limiting the Duty

Under UPA and RUPA, partners may draft their partnership agreement to limit the scope of partnership opportunities. For example, a partnership opportunity can be sharply limited to developing one property, leaving an adjacent property available for a partner to pursue individually. This limitation would be effective because the partnership involved only the first property, and the partners were aware at the outset that each could engage in outside activities.Moreover, partners may consent to specific transactions that would otherwise be deemed “partnership opportunities.”

RUPA section 103(b) provides the limits to modifying the duty of loyalty:

The partnership agreement may not:

eliminate the duty of loyalty under Section 404(b) or 603(b)(3), but: (i) the partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or (ii) all of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty.

Thus, RUPA allows partners to agree that the scope of the partnership excludes specific types of activities, allowing partners to take personal advantage of those opportunities, as long as these agreements are “reasonable.”

ULPA Duty & Waiver

Limited partners have no fiduciary duties to any other partner under ULPA-2001 section 305. General partners have a duty of loyalty under ULPA-2001 section 408(b), which was copied from, and is substantially the same as, RUPA section 404.55 Likewise, ULPA-2001 section 110(b) essentially copies RUPA section 103(b) by prohibiting the elimination of the duty of loyalty but allowing partners to “identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable,” and to establish a procedure for partners to ratify a violation of the duty of loyalty.

Delaware’s Contractarian Freedom

Delaware’s partnership statute is based on RUPA, with one significant exception. The statute provides that fiduciary duty waivers are enforceable: “A partnership agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a partner . . . .” The statute expressly explains that “the policy of this chapter [is] to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.”

Delaware’s limited partnership statute includes a similar provision. As a result, Delaware’s statutes provide the most deference to partners seeking to reduce the fiduciary duties owed between partners.

This post is also part of a series of posts on Unenforceable Fiduciary Duty Limitations.