By: Whitney Snyder
Pennsylvania courts, consistent with the Restatement (Second) of Contracts, imply a duty of good faith and fair dealing to the terms of all contracts. See, e.g., Baker v. Lafayette College, 504 A.2d 247, 255 (Pa. Super. 1986), aff’d, 532 A.2d 399 (Pa. 1987).
However, in Hanaway v. The Parksburg Group, LP, 55 MAP 2016 (Pa. Aug. 22, 2017)(Majority)(Dissent), the Supreme Court (reversing the Superior Court and adopting the reasoning of the dissent that then Judge now Justice Donohue authored) ruled that an implied duty of good faith and fair dealing does not arise under a limited partnership agreement that provided its general partner with “full, exclusive and complete discretion in the management and control of the business of the Partnership.”
The Supreme Court reasoned that since limited partnerships are governed by a specific statute (PRULPA – Pennsylvania’s Revised Uniform Limited Partnership Act), the Restatement’s implied duty of good faith and fair dealing does not apply. Instead, only the express terms of PRULPA and the partnership agreement itself govern the relationship between the parties. Relying on (1) PRULPA’s previous provision of contractual freedom, and (2) the General Assembly’s passage of Act 170 of 2016, which revised PRULPA to expressly state all partners in a limited partnership have a duty of good faith and fair dealing to their partners and that this duty cannot be abrogated in a partnership agreement, the Court reasoned that the partnership agreement here did not have such an implied covenant because of timing – the partnership agreement was formed and allegedly breached before Act 170 was effective.
The Court’s discussion of timing is particularly interesting. Justice Wecht writing for the majority, in which Chief Justice Saylor and Justices Todd, and Dougherty joined, stated:
Prior to Act 170, there was no duty of good faith applicable to limited partnership agreements formed pursuant to PRULPA. Because the duty of good faith and fair dealing did not exist at the time that the parties entered into the Parkesburg limited partnership agreement, and because it did not exist at the time that an alleged breach occurred, it is unnecessary to address T.R. White’s second inquiry—whether the implied duty of good faith and fair dealing can override the parties’ express contract terms.
This reasoning raises the question of whether a partnership agreement entered into prior to Act 170, but breached after Act 170 has an implied duty of good faith and fair dealing. That question applies not just to limited partnership agreements, but also to general partnership agreements and limited liability company operating agreements, because Act 170 amended the governing statutes for each of these entities in the same way with respect to the duty of good faith and fair dealing.
Although some observers have expressed the view that the decision has a far reaching impact on other partnership agreements, Zach Needles, Justices: No Good-Faith Duty in Pre-Act 170 Limited Partnership Agreements, The Legal Intelligencer, Aug. 25, 2017, a closer look shows that this ruling should only affect a small portion of these types of agreements – those that, like the agreement in this case, were both entered into and breached prior to Act 170.
(b) Initial application.–Before April 1, 2017, this chapter governs only:
(1) a limited partnership formed on or after February 21, 2017; and
(2) except as provided under subsections (c) and (d), a limited partnership formed before February 21, 2017, which elects, in the manner provided in its partnership agreement or by law for amending the partnership agreement, to be subject to this chapter.
(c) Full effective date.–Except as provided in subsections (d) and (e), on and after April 1, 2017, this chapter governs all limited partnerships.
15 Pa. C.S. § 8611(b)-(c) (emphasis added).
Thus, going forward, all limited partnerships, general partnerships, and limited liability companies have a duty of good faith and fair dealing implied in all of their terms that cannot be contractually abrogated, regardless of when the agreement was executed.
The dissent believes that these agreements have had this implied duty all along. Justice Mundy, whom Justice Baer joined, stated that neither a partnership agreement nor PRULPA as it existed prior to Act 170 could through mere inference “eliminate the default contract principle that every contract imposes a duty of good faith and fair dealing on the parties.” They reasoned that common law implies this duty and that only express and specific provisions of a statute or the parties’ agreement can abridge it. They also found the implications of the majority’s ruling unsound:
It is illogical to conclude that, had the limited partners considered this issue at the time of forming the limited partnership, the limited partners would have authorized . . the general partner to exercise its discretion in bad faith to the detriment of either the Partnership or the limited partners.
About the Author:
Whitney Snyder, attorney at Hawke, McKeon & Sniscak, LLP, represents clients in wide-ranging appellate matters in state and federal court. Her practice focuses primarily on administrative agency appeals and litigation. Prior to joining the firm Whitney interned at the Pennsylvania Supreme Court and Pennsylvania Public Utility Commission.