Duty of Good Faith

You may be aware that directors and principals in a corporation or partnership owe each other and the organization fiduciary duties of care and loyalty, which means that they must act in the best interests of the company and not in their own self-interest. Under Illinois law and that of most other states, they also owe the fiduciary duty of good faith. But whether that is a separate, standalone duty or one that is subsumed under the duty of loyalty is a matter of debate in the legal and academic communities and an issue of interest to our Chicago business lawsuit lawyers.

Under Section 404(d) of the Illinois Uniform Partnership Act of 1997, a partnership agreement may not waive the duty of good faith: “A partner shall discharge his or her duties to the partnership and the other partners under this Act or under the partnership agreement and exercise any rights consistent with the obligation of good faith and fair dealing.”

The Illinois Supreme Court, in Couri v. Couri (95 Ill.2d 91 (1983), stated: “[A] fiduciary relationship exists between partners, and [] each partner is bound to exercise the utmost good faith and honesty in all dealings and transactions relating to the partnership.” The business lawsuit attorneys at our Chicago firm recognize that this case sets an important precedent for claims based on this duty.

Other jurisdictions have also recognized that partners must exercise good faith in their dealings with other partners, and that they not derive any personal benefit from the partnership arrangement without the full knowledge of the other partners.

What “good faith” actually means and how it is defined is usually left to courts, but it has been described as something above and beyond care and loyalty to the company; not just looking out for the organization but having subjectively honest and honorable intentions in all professional actions. For example, one could act with loyalty to one’s company but still not act with sincerity or good intentions toward other parties, or even lawfully. Our business lawsuit lawyers can advise Chicago clients on whether the duty may have been violated.

Some legal experts believe that the duty to act in good faith is a fundamental part of the duty of loyalty: “[T]he duty of loyalty has traditionally been conceived of as being much broader than the duty to avoid acting for personal financial advantage. The duty of loyalty also precludes acting for unlawful purposes and affirmatively requires directors to make a good faith effort to monitor the corporation’s affairs and compliance with law.” (Strine, Hamermesh, et al., “Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law,” Georgetown Law Journal, Vol. 98:629).

On the other hand, some such as University of California, Berkeley, law professor Melvin Eisenberg propose that the duties of care and loyalty are not sufficient to cover good faith, therefore it is an independent duty: “The duties of care and loyalty do not cover all types of improper conduct by managers, because certain kinds of managerial misconduct fall outside the spheres of those duties. Various rules limit a manager’s accountability under the duties of care and loyalty, and these limiting rules are inapplicable to conduct that violates the duty of good faith.”

Although there is no private shareholder right of action for a violation of the duty of good faith, its violation may raise a claim under the duty of loyalty. The language of the Illinois partnership act would seem to indicate that the “obligation of good faith and fair dealing” is required as part of the discharge of the partner’s other duties. At the same time, the state supreme court interprets the good faith duty as required in “all dealings and transactions” concerning the partnership, which could conceivably encompass actions that fall outside the fiduciary duties of care and loyalty. Our Chicago business lawsuit attorneys believe that it clearly behooves partners and corporate officers to adopt the broadest possible definition of the term in all their activities.

Sources:

http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1736&context=facpubs
http://www.law.uchicago.edu/files/file/strine_duty_of_good_faith.pdf
Winston & Strawn v. Nosal, 279 Ill. App. 3d 231 (1996)