We don’t usually think of Jerry Seinfeld as an authority on partnership law, but a very recent Maryland case reveals this other side. (See also Unincorporated Business blog, and the WSJ Law Blog.)
In Clancy v. King, famous writer Tom Clancy and his ex-wife were partners in a limited partnership that was to engage in activities relating to the writing and sale of books. The agreement provided for good faith and fiduciary duties, but broadly allowed Clancy to compete with the partnership:
Neither the Partnership nor any Partner shall have any rights or obligations, by virtue of this Agreement, in or to any independent ventures of any nature or description, or the income or profits derived therefrom, in which a Partner may engage, including, without limitation, the ownership, operation, management, syndication and development of other businesses, even if in competition with the Partnership's trade or business.
The majority held that this clause permitted Clancy to modify one of the partnership’s ventures so that that venture could no longer use Clancy’s name. The court relied on the broad power of freedom of contract, particularly in limited partnerships, citing yours truly several times on that issue in notes 13 and 14.
Interestingly, the court held that the agreement was enforceable even under Maryland’s RUPA-based fiduciary opt-out provision that requires such provisions to “identify specific types or categories of activities that do not violate the duty of loyalty.”(emphasis added).
However, the court held that bad faith could be shown by evidence that Clancy’s act was intended to punish his ex-wife.
The court’s authority for this interpretation was, amazingly, Jerry Seinfeld, in his Wig Master episode from 1996. Seinfeld buys a jacket from a store that promises to let him return it for a refund. He tried to return it after he got into a fight with the salesman, saying he was returning it because “I don’t care for the salesman that sold it to me.”:
Clerk: Well, if there was some problem with the garment. If it were unsatisfactory in some way, then we could do it for you, but I’m afraid spite doesn’t fit into any of our conditions for a refund.
Jerry: That's ridiculous, I want to return it. What's the difference what the reason is?
The manager then says he can’t return it purely for spite.
Jerry: Well, so fine then ... then I don't want it and then that's why I'm returning it.
Bob: Well you already said spite so....
Jerry: But I changed my mind.
Bob: No, you said spite. Too late.
So Jerry could return the jacket for any reason, including that he didn’t want it, but not for spite. But the contract said any reason, period. It’s not clear how spite is not within this contract because this kind of contract and transaction essentially leaves the question of whether the jacket is suitable (so to speak) up to the buyer.
In general, the implied covenant of good faith (as distinguished from the corporate duty of good faith) rests on the parties' expectations, as I've explained often, most recently here. Now, perhaps one could argue that the contract in Clancy is different from the one in Seinfeld – it’s one to make a joint profit. The parties therefore expect that they will act in a profit-maximizing way. Acting out of spite to reduce the revenues of the partnership is contrary to this expectation. As the court said, quoting another case:
under the covenant of good faith and fair dealing, a party impliedly promises to refrain from doing anything that will have the effect of injuring or frustrating the right of the other party to receive the fruits of the contract between them.
On the other hand, the parties did bargain that Clancy could deny “the fruits of the contract” by competing. If, as the court held, he can appropriate the “fruits” this way, why can't he appropriate them out of spite?
The reason is that the parties did agree to good faith and fiduciary duties, as noted above. They also denied a party the power to act in contravention of the agreement. So it's necessary to reconcile these obligations with the competition opt-out. The dissent, in fact, reasoned that the general fiduciary duty should trump the opt out. So as sympathetic as I am with the majority, I might have been more persuaded by the dissent if it had relied on the language of the agreement. However,the case may end up coming out the same way under either rule.
A legal lesson here is that the sea of broad freedom of contract looks like it's starting to wash over the contract-limiting language in RUPA, subject to the same sort of qualifications we see of the broader language in the Delaware opt-out provision.
Two drafting and planning lessons here:
1. Don't have clauses in the agreement that pull in two different directions -- here, broad opt out covered by explicit good faith and fiduciary duties.
2. Be careful before you do partnerships with your spouse.
Seinfeld, RUPA. At least Seinfeld makes sense.
Posted by: Fat Man | August 27, 2008 at 01:53 PM