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The Implied Covenant of Good Faith and Fair Dealing: Does it Protect Members of Delaware LLCs?

Co-authored by Jason Jowers

The Delaware Supreme Court’s three to two decision in Nemec v. Shrader, 991 A.2d 1120 (Del. 2010), raises two issues regarding Delaware’s application of the implied covenant. First, while the traditional test of when to apply the covenant, in part, asked whether the parties at the time of formation would have proscribed the conduct had they thought to negotiate about that conduct, the Nemec majority limits the application of the implied covenant to situations where the parties could not have anticipated, rather than simply failed to consider, the conduct later sought to be proscribed. Second, although Nemec did not involve an LLC dispute, the majority’s opinion illustrates limitations on the ability of members of LLCs to use the implied contractual covenant to police the exercise of an LLC manager or managing member’s discretion. Mr. Jowers and Mr. Lazarus begin by explaining the pre-Nemec standard, then examine the Nemec decision, and conclude by discussing Nemec’s implications for practitioners advising members and managers of Delaware LLC’s.

First published in Business Law Today, November 2011. Link to article.
Reprinted with permission.

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