From the Uniform Law Commission: In the World of Alternative Entities What Does “Good Faith” Mean?

With this issue, in cooperation with the Uniform Law Conference, we initiate a column on the law of incorporated entities, principally, limited liability companies The column will appear every other month and discuss issues as they develop around the country.
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Over the past several decades, “good faith” has become increasingly important in the law of business organizations. The phrase appears five times in the newest version of the Uniform Limited Liability Company Act (ULLCA (2013)), more than 40 times in the official comments, and has similar importance in the newest versions of the uniform general and limited partnership acts. The phrase also has fundamental importance in the Delaware law of “alternative entities” (discussed below) and was central cases clarifying the reach of liability-limiting charter provisions under Delaware corporate law’s famous section 102(b)(7).
One might think, therefore, that “good faith” can be defined easily or, at least, definitively. But the term is polysemous, a chameleon whose meaning changes dramatically depending on the context. Depending on context and on jurisdiction, the term indicates a test that is either entirely subjective or has both subjective and objective aspects. In one context, the objective standard is a very lax duty of care reclassified as part of the duly of loyalty. In another context, the word “objective” has a meaning radically different from the “reasonableness” concept typically associated with an “objective” test.
This column concerns the law of limited liability companies and partnerships, where the most important context for “good faith” is the implied contractual obligation (or covenant) of good faith and fair dealing. The obligation, which is not a fiduciary duty, originated in the common law of contracts but in recent has years developed its own, special character as applied to operating and partnership agreements.
The goal of this column is to explain how LLC and partnership law understand and apply the implied contractual covenant. We start where the obligation originated, consider briefly the codification provided in the Uniform Commercial Code (UCC), and then address the special character reflected in Delaware law and the newest versions of the uniform LLC and partnership acts.
Under the common law of contracts, the obligation of “good faith and fair dealing” is an implied and inescapable term of every agreement. Per the Restatement (Second) of Contracts, § 201, “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” The official comments suggest that a complete definition is impossible—