In an opinion handed down on August 22nd of this year, the Pennsylvania Supreme Court held that, unlike other contracts formed under Pennsylvania law, limited partnership agreements formed under the pre-Act 170 version of the Pennsylvania Revised Uniform Limited Partnership Act, do not contain the implied covenant of good faith and fair dealing.
The Pennsylvania legislature amended the state’s Revised Uniform Limited Partnership Act in late 2016 as a provision of Act 170, which altered the formation and operation of corporations, limited liability companies, limited partnerships, and other business forms. As part of its revisions to the PRULPA, Act 170 provided that a limited partnership agreement could not change or do away with the contractual obligation of both limited and general partners to discharge their duties under the agreement in accordance with the contractual obligation of good faith and fair dealing.
The case, Hanaway v. The Parkesburg Group, LP, involved a dispute among members of a limited partnership (Parkesburg) that had been formed to invest in and develop several parcels of real estate. The plaintiffs, who were among Parkesburg’s limited partners, sued the corporation’s general partner, alleging that he sold Parkesburg’s assets to a new partnership he had formed, so that the new partnership could develop the real estate in question without the plaintiffs.
The trial court granted summary judgment in favor of the general partner, dismissing the Hanaways’ claims for conversion and breach of fiduciary duty, and also dismissed their breach of contract claim, which was based on an alleged breach of the general partner’s duty of good faith and fair dealing under the partnership agreement.
The Superior Court reversed on the breach of contract claim. Looking to Delaware’s limited partnership law for guidance, the Superior Court found that the PRULPA, as it then existed, prohibited parties entering a partnership agreement from waiving the covenant of good faith and fair dealing.
But the Supreme Court disagreed, holding that, unlike typical contracts governed by common law, limited partnership agreements are creatures of statute, and the old PRULPA’s emphasis on freedom of contract among partners distinguished it from Delaware’s statutory scheme: “PRULPA’s silence with respect to the duty of good faith and fair dealing, the fact that PRULPA expressly provided parties with contractual freedom, and the clear terms of the Parkesburg limited partnership agreement reveal to us that the implied covenant of good faith and fair dealing did not apply as a matter of law.”
The Hanaway decision has important ramifications for limited partnerships formed before Act 170, which became fully effective as of April 1, 2017. Partners who entered into limited partnership agreements prior to Act 170 may well have expected, based on general contract principles of contract law, that they would be protected by the implied covenant of good faith and fair dealing.
More broadly, Hanaway could have effects beyond its applicability to limited partnerships. The pre-Act 170 statutory provisions related to limited liability companies, for instance, were also silent as to the contractual duty of good faith and fair dealing, whereas the current law forbids an LLC operating agreement from varying the duty. Practitioners should monitor developments in this area in the coming months, as the lower courts are presented with opportunities to weigh in on the implications of Hanaway.