Freedom of Contract and Its Limits

Scope of the chapter. The modern LLC statute is principally a statute of default rules, and the operating agreement is the principal source of the members' rights and obligations. This chapter examines that principle and its limits. It explains the policy of freedom of contract as the Delaware act and the Revised Uniform Act state it, identifies the rules that no operating agreement may vary in each, examines the elimination and modification of fiduciary duties and remedies, treats the implied covenant of good faith and fair dealing as the floor below which no agreement may go, considers waivers of statutory rights, addresses the position of third parties who are not bound by the agreement, and identifies the residual limits imposed by public policy and equity. It closes with drafting guidance.

The central question. Every dispute about the meaning or enforceability of an operating agreement raises, at some point, the question whether the statute permits the agreement to say what it says. In Delaware the answer is usually yes, subject to a short list of exceptions. In states that follow the Revised Uniform Act the answer depends on a defined list of non-waivable provisions and on a standard of reasonableness that applies to provisions restricting fiduciary duties. In states with independent statutes the answer may depend on how a court characterizes a provision whose text does not say whether it is mandatory. The chapter supplies a method for each.

Organization. The chapter proceeds in nine parts:

1. the principle of freedom of contract (¶ 310);
2. the mandatory rules of the Delaware act (¶ 320);
3. the non-waivable provisions of the Revised Uniform Act (¶ 330);
4. contractual modification and elimination of fiduciary duties and of liability for their breach (¶ 340);
5. the implied covenant of good faith and fair dealing (¶ 350);
6. waivers of statutory rights, including the rights to seek dissolution and to obtain information (¶ 360);
7. the position of third parties and the limits of contract (¶ 370);
8. limits imposed by public policy and equity (¶ 380); and
9. drafting within the limits (¶ 390).