Fiduciary Duty Contracts inUnincorporated Firms

The 1994 revision of the venerable Uniform Partnership Act (UPA) and the development and rapid spread of new unincorporated business forms, including the limited liability company (LLC) and the limited liability partnership (LLP) have not only raised many new issues, but have also breathed new life into old ones. One of the most important of the latter is the extent to which fiduciary duties may be waived or modified by contract. Both the Revised Uniform Partnership Act (RUPA)1 and the Uniform Limited Liability Company Act (ULLCA)2 make unenforceable some contractual waivers of fiduciary duties. Although there has been some criticism of such restrictions on waivers,3 most commentators have defended restrictions on fiduciary waivers in partnerships and LLCs that are at least as extensive as those in the uniform laws.4 This commentary carries forward the long-standing debate between those who have argued that fiduciary duties are and should be essentially contractual in nature5 and those who argue for some restrictions on waiving these duties.6 This issue is worth revisiting despite the substantial amount of ink that has been spilled over it. First, the debate so far has focused on publicly held corporations, where the commentators were able to make the argument, albeit a questionable one,7 that the duties did not really arise out of contract at all. In a closely held firm, which is very much like any longterm contract, that argument is untenable. Second, the debate has focused on corporations. Partnerships and other unincorporated firms differ from corporations in several ways that are relevant in the present context, including the absence of rhetoric implying that the firm is a "creature" of state law, a general assumption that the parties' contract controls all important elements of the relationship among the members, and idiosyncratic and highly customizable terms that make mandatory duties particularly costly in this context. Third, the anticontractarians have made assertions about the present state of the positive law that no one so far has seriously refuted. This Article's basic premise is the one forcefully stated by Easterbrook and Fischel, who assert that fiduciary duties are simply a species of contract, "not a distinctive topic in law or economics. "8 They show how a transaction cost economics approach, which views fiduciary duties as presumptive contract rules, better explains the positive law of fiduciary duties, particularly including the variation across different relationships, than do noncontractarian approaches that attempt to identify fiduciary duties as a distinctive set of absolute duties. The present Article shows how this analysis applies to fiduciary duty waivers in unincorporated firms. This Article then moves beyond the Easterbrook-Fischel analysis in two respects. First, it refutes specific arguments against enforcement of fiduciary duty waivers whether or not these waivers are characterized as contracts. Although my prior analysis of fiduciary duties in public corporations relies primarily on theories and evidence of public securities market discipline of corporate contracts,9 the present Article shows that arguments for protecting individuals from potentially bad bargains in the context of one-on-one bargaining in closely held firms are unfounded. Second, this Article extensively analyzes cases relating to partnership fiduciary duties. It shows that anticontractarians have misconstrued the positive law of partnership and that restrictions in RUPA and the ULLCA would reverse long-standing case law favoring the enforcement of contracts. The Article proceeds as follows. Part I states the affirmative case for enforcing contracts in unincorporated firms that is based primarily on the inability of mandatory rules to cope with the significant variability of contracts in this context. Part II then unpacks and refutes the arguments of the anticontractarians against contract enforcement. …