The Delaware Limited Liability Company Act’s policy is to give the maximum effect to the principle of freedom of contract in LLC operating agreements. The act permits parties to eliminate common-law fiduciary duties, and replace them with contractual duties that are often more limited in scope than default common-law fiduciary duties. While parties may not eliminate the implied covenant of good faith and fair dealing in an operating agreement, the implied covenant only operates to imply terms essential to fill gaps necessary to meet the reasonable expectations of the parties as reflected in the express terms of the operating agreement.

The Delaware Court of Chancery has cautioned that when an operating agreement eliminates, or replaces common-law fiduciary duties as part of a contractual corporate governance scheme, “Delaware courts should be all the more hesitant to resort to the implied covenant.” The reason lies in the act’s policy of freedom of contract: the elimination or replacement of default common-law fiduciary duties in an operating agreement “implies an agreement that losses should remain where they fall” in the agreement, rather than being shifted after the fact through fiduciary-duty review under the guise of the implied covenant. Moreover, because of the primacy of contract over fiduciary law in Delaware, fiduciary-duty claims arising from the same facts that underlie contractual duties are superfluous, and thus, foreclosed. In sum, when a dispute arises over the conduct of a manager or LLC’s board, the Court of Chancery is often left to interpret only the express terms of the operating agreement to determine whether the contractual duties imposed cover or prohibit the conduct challenged in the dispute.