Fiduciary Duties Waivable by Contract, Precluding Claims
The U.S. Bankruptcy Court in Manhattan recently reminded us why Delaware choice-of-law provisions are so popular in limited partnership and other agreements.
In an adversary proceeding, Judge David S. Jones held that proposed fiduciary claims were futile because of the relevant partnership agreement’s (the “Agreement”) exculpatory clause. The clause provided that, “to the maximum extent permitted by law, each Exculpated Party’s duties to the Partnership, any Partner or any other Person shall be eliminated and replaced with and limited to those set forth in this Agreement.” In re SunEdison, Inc., 16-10992 (DSJ), 2022 WL 1223281, at *7 (Bankr. S.D.N.Y. Apr. 26, 2022). The Agreement contained no duty of loyalty or care, only prohibitions against malfeasance by the general partner and its affiliates.
Delaware’s legislature explicitly permitted waivers of fiduciary obligations—and attendant claims—in its Revised Uniform Limited Partnership Act. 6 Del. C. § 17-002. To be effective, such waivers must be stated “clearly and unambiguously.”
In the case at bar, Judge Jones compared the exculpatory clause in the Agreement to similar clauses deemed effective by Delaware courts. Id. (collecting cases). Judge Jones found that the Agreement “explicitly overrides otherwise-applicable fiduciary duties,” and that the waiver was effective under Delaware law. Accordingly, the proposed fiduciary claims by a limited partner were futile. Id. at 9.
While Judge Jones’s analysis was straightforward given the application of Delaware law, had another choice-of-law (or no choice-of-law) provision been provided, the general partner may have faced fiduciary duty claims. Under California law, for example, general partners’ fiduciary obligations cannot be waived by agreement. See Stull v. Fox, 09-cv-6081, 2010 WL 3895538, at *7 (C.D. Cal. Oct. 4, 2010), aff’d, 487 F. App’x 336 (9th Cir. 2012).
The law for corporate defendants is equally dispersed. As of 2017, only nine states had adopted legislation addressing the waivability of common-law fiduciary duties for corporate entities.
Source: Gabriel Rauterberg & Eric Talley, Contracting Out of the Fiduciary Duty of Loyalty: An Empirical Analysis of Corporate Opportunity Waivers, 117 Colum. L. Rev. 1075, 1102 (2017).
Unsurprisingly, Delaware is among the states that permit corporate parties to waive fiduciary obligations by agreement. This approach is consistent with Delaware’s general practice of giving priority to the intent of the parties to an agreement. It also helps explain why so many contracts are governed by Delaware law.