Ideoblog

Partnerships and choice of law

We normally think of the "internal affairs doctrine," which applies the formation state's law to a firm's internal governance, as being a special legal rule relating only to corporations. In fact, I have long argued that it is simply a special application of general principles of contractual choice of law. See The Law Market and Corporations and the Market for Law, both with Erin O'Hara. See also Bromberg & Ribstein Section 1.04 for a complete discussion of the cases. A recent Strine opinion, Total Holdings USA, Inc. v. Curran Composites, is a rare explicit recognition of these important principles. Francis Pileggi helpfully discusses this case in the context of motions to stay proceedings pending elsewhere. Here I focus on choice of law.

Curran is a corporate general partner of a partnership whose agreement establishes it "in, and in accordance with the laws of, the State of Delaware." Despite this clause, Curran argues Chancery should dismiss the case because it lacks personal jurisdiction over Curran, or alternatively should stay in favor of its second-filed action in Missouri.

Strine held that the court has jurisdiction under Section 15-114 of the Delaware Revised Uniform Partnership Act ("DRUPA") (analogous to Del. G.C.L. Section 3114), which empowers the Chancery Court to exercise personal jurisdiction in a dispute "involving or relating to the business of the partnership or a violation by the partner ... of a duty to the partnership or any partner of the partnership." The court held that this section

clearly provides a basis for the exercise of personal jurisdiction where: (1) the general partnership agreement clearly chooses Delaware law and provides that the general partnership was established "in, and in accordance with the laws of, the State of Delaware"; (2) the controversy involves a dispute between the partners over the meaning of the partnership agreement; and (3) the non-resident partner remained a partner to the general partnership, the partners executed an amended and restated partnership agreement, and the dispute arose all after the DRUPA and its consent to jurisdiction provision clearly became applicable to the general partnership.

[DRUPA applied here pursuant to the statute's transition provisions although the partnership was formed under the original Uniform Partnership Act. For a general analysis of such transition issues, see my article, Changing Statutory Forms, 1 Journal of Small and Emerging Business Law 11 (1997), reprinted in 39 Corporate Practice Commentator 703 (1998).]

Curran argued that DRUPA did not apply per its choice of law provision (section 15-106) because the parties and transaction lacked a substantial relationship with Delaware and the partnership was not registered in Delaware. In order to understand the issues, we need the language of Delaware Section 106:

(a) Except as otherwise provided in subsection (b), the law of the jurisdiction governing a partnership agreement governs relations among the partners and between the partners and the partnership.

(b) The law of the State of Delaware governs relations among the partners and between the partners and the partnership and the liability of partners for an obligation of a limited liability partnership.

(c) If (i) a partnership agreement provides for the application of the laws of the State of Delaware, and (ii) the partnership files with the Secretary of State a statement of partnership existence or a statement of qualification, then the partnership agreement shall be governed by and construed under the laws of the State of Delaware.

Strine held that

• Subsection (a) applies traditional choice of law considerations, in contrast with RUPA §106, which applies the law of the jurisdiction of the partnership's chief executive office
• Subsection (b) applies only to LLPs [for a general discussion of choice of law and LLPs, see Bromberg & Ribstein on LLPs, Ch. 6]; and
• Subsection (c), while a conclusive basis of applying Delaware law, is not exclusive of other bases, specifically under subsection (a). The Vice Chancellor grounds this reading of subsection (c) in sections 15-113 and 114, which provide for service on unregistered partnerships governed by Delaware law.

With respect to the traditional choice of law analysis under subsection (a), Strine invokes Restatement (Second) of Conflicts, Section 187(2), which applies choice of law clauses even as to issues the parties could not have controlled by contract unless

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

Strine notes not only that the parties clearly contracted for Delaware law, but that

Delaware recognizes and respects the wealth-generating benefits that accrue when parties of diverse geographic origin, such as French-based Total and Missouri-based Curran, can voluntarily form an entity in Delaware (or another domicile of their choice) and have that domicile's law govern their relations [.]29

The footnote cites, among other things, my Delaware, Lawyers, and the Contractual Choice of Law, 19 Del. J. Corp. L. 999, 1012-14 (1994) "[f]or a discussion of why non-resident parties often choose Delaware law in particular to govern the entities they form and their contractual relations."

As for Curran's argument that Delaware lacks a substantial relationship between Delaware and the parties or transaction, Strine responds:

[T]his argument understates Delaware's connection with the transaction and ignores the language of the Restatement calling for respect to be given to a choice of law provision where there is a "reasonable basis" for the parties to choose the law they did. The idea that a state's interests are only implicated by physical contacts is outmoded in all sorts of ways; one just has to think of how many businesses sell services without any physical contact with customers or even any delivery of a physical product. When parties choose to form a Delaware entity and utilize Delaware's system of laws and dispute resolution, they are bargaining for a valuable array of reliable services relating to their entity's internal affairs. That they choose to manufacture all the widgets the entity makes elsewhere and have its accounting done elsewhere does not render less important the legally-designated home of the entity for purposes of (1) its existence as an entity, and, most critically, (2) its relations among itself, its governing fiduciaries, and its investors.

Notably, Strine also discusses Delaware's general contractual choice of law statute (which is the subject of my article cited above) in which, he says, "this public policy finds clear expression in the presumption that choosing Delaware law amounts to a substantial relationship with this State." He continues:

In light of this, Delaware courts will generally honor a contractually-designated choice of law provision so long as the jurisdiction selected is reasonable in light of the parties' contractual objectives. Here, even though the parties do not have operations or sales in Delaware, they had good reason for choosing this State's law to govern the joint venture. Namely, by establishing a legal domicile for the partnership through the choice of law provision and § 1.1 in the Joint Venture Agreement, which indicates that the joint venture is Delaware general partnership, parties from two different nations found common ground-a shared language of commerce-to govern the internal affairs of the general partnership they were creating.

Delaware also has a compelling policy interest in adjudicating this dispute in its court. Delaware's policy interest arises from the fact that this dispute directly involves the meaning of the agreement governing the partnership. In such a situation, the logic of the internal affairs doctrine, developed in regard to corporations, applies with equal force in the context of a partnership. The internal affairs rule requires that the "internal affairs of a corporation ... are governed by the law of the corporation's domicile." The principle behind this long-standing doctrine is that "only one state should have authority to regulate a corporation's internal affairs-matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders." This rule fosters an "efficient and predictable corporate law." The fact that Cook Composites is organized as a general partnership and not as a corporation does not alter this principle: general partnerships continue to serve an important role in the modern economy, FN 37 and this state has an interest, as in the corporate context, in ensuring that the law of partnerships is efficient and predictable. [other footnotes omitted]

FN37. See BROMBERG AND RIBSTEIN ON PARTNERSHIP § 1.01(c) (discussing the ongoing role of partnerships in the U.S. economy).

As stated at the beginning of this post, Strine's opinion reinforces the close relationship corporate and partnership choice of law, as well as the continuity between contractual choice of law generally and within business associations.

Just as importantly, the opinion also invokes the policy role in choice of law of jurisdictional competition. Physical contacts with "selling" jurisdictions like Delaware are no more important in this competition than they are to commerce generally. In Jurisdictional Competition for Limited Liability Companies, Bruce Kobayashi and I provide evidence of a corporate-type competition in the closely related area of LLCs.

So, two takeaway points:

1. Choice of law is increasingly about contracts.
2. A myopic focus on corporations in the study of any business association issue, including choice of law, is misleading.

SOX for the little guy

From the unincorporated business blog comes a report on the Incorporation Transparency and Law Enforcement Assistance Act (S569). The motivation for this piece of legislative detritus seems to be that since a tiny percentage of LLCs are being used for criminal activity let’s wreck LLCs for all firms. Hey, sounds sensible to me.

The bill requires all state-law corporations and LLCs to make disclosures about their beneficial owners, defined as “an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the corporation or limited liability company.”

There is no definition of “control, manage, or direct,” but who cares, given “as a practical matter” and “directly or indirectly”?  Does this mean voting power? Financial leverage? Family ties? There are civil and criminal penalties for false beneficial ownership information. State laws are not preempted if they require additional information or impose additional limits on public access to the provided information. Someday the courts will decide how much of the rest of state business association law is preempted.

Note that the law only applies to corporations and LLCs. No doubt this will lead to a boom in limited partnerships, etc., and end the LLC era. But never fear: the act calls for study of whether we need to be worried about other business entities.

Not to be outdone by Congress, the National Conference of Commissioners on Uniform State Laws has a draft of a "uniform" law (which means it's uniform if all of the states are silly enough to adopt it): The Uniform Law Enforcement Access to Entity Information Act (pronounced “youleeay”). The theory here seems to be that any state law beats any federal law. 

Youleeay fills the gaps left by the federal bill by applying generally to state business entities that require filings. Youleeay requires disclosure of holders of various types of “governance” and “interest” holders, including shareholders, members, limited and general partners, LLCs members, etc. A “material” non-compliance with the statute warrants judicial dissolution in an action brought by the state attorney general as well as administrative dissolution, but no other penalties, including piercing the veil.

If this law is passed in your state, whether you need to worry depends on whether you’re a criminal. If you’re a criminal, no problem: you just form a general partnership or a non-profit entity, which the law effectively doesn’t reach. Of course you can’t earn a profit or get limited liability, but if you’re a criminal using the entity to hide ownership of property, do you care? Also, keep in mind that the penalty for non-compliance is dissolution. So you have to form another of these things. Big deal.

On the other hand, if you’re not a criminal, alas, you’re in trouble if this statute applies in your state. You might find your firm blowing up unexpectedly if, like many (most?) small business owners you make a mistake or fail to update a filing. Then who knows whether the liability shield will apply (the statute protects against veil-piercing, but not necessarily if the business has been dissolved and wound up). Your partner or co-member might welcome dissolution in some situations and so might whisper in the AG’s ear that there’s a problem with the ownership disclosures.

Remember: if business associations are illegal, only criminals will have business associations.

Email comments.

(Minor revisions 7/13/09)

Rise of the Uncorporation: Tomorrow at Searle

Tomorrow I’m going to a Searle Center Research Roundtable on Jon Macey’s book, Corporate Governance: Promises Kept, Promises Broken and my forthcoming Rise of the Uncorporation. I’ve enjoyed past roundtables, but this is my first stint as target. It's a good group and should be interesting.

The book is nearing completion – watch for more on the book in coming weeks. At last, in one place, everything you wanted to know about the uncorporation, big and small, past, present and future.

The reinvention of Wall Street

The WSJ reports that key investment banking "rainmakers" 

are seeking to join boutiques firms, such as Evercore, Greenhill or Centerview Partners * * * . For some, the motivation to leave is the same one that drew them to Wall Street in the first place: money. * * * Bankers there are paid almost entirely by "eating what they kill," while the larger Wall Street firms have historically offered somewhat lower, but more consistent, pay. * * *

Looks like things are moving in the right direction.  As I've said:

Over the last generation, better governance technologies have evolved through private equity, venture capital and hedge funds. This should be the model for the reorganization of Wall Street[.]

Among the advantages of what I've called the "uncorporate" model is higher-powered incentives based on the firm's actual financial success or failure.   

More on the uncorporation and investment banking

James Glassman and William Nolan get on the Michael Lewis bandwagon in today's WSJ by arguing that that the root of Wall Street's excessively risky ways was abandoning the partnership model:

[I]n a $14 trillion economy, you can't hire enough overseers to pore over everyone's books. There is, however, a better solution: expose players in the financial game to greater personal loss if their risk-taking fails. When you worry that a mistake will cause you to lose your second home, your stocks and bonds and your club memberships, then you're less likely to take the kinds of risks that expose the rest of society to your failures. A simple mechanism exists to achieve this purpose: the private partnership. Partners face liability that extends to their personal assets. They aren't protected by the corporate shield that limits losses to what the corporation itself owns (as well as the value of the stocks and bonds the corporation has issued). * * *

[I]nvestors -- and governments -- should recognize the extra safety inherent in doing business with partnerships. In the end, the partnership -- not more regulatory intrusion -- is an efficient, even elegant, answer to the thorny risk-mitigation problem. Partnerships are less likely to make big mistakes, but, even if they do, their smaller size means they pose less of a threat to the financial system as a whole, and to the taxpayers who have to pay for the clean-up.

I have for months been making a similar argument about the role of the corporation's role in Wall Street collapse.  See, e.g., here, here, here, here, and here.  My longer paper, which itself caps years of research and publications and antedates the meltdown, is here. A shorter version will be published soon in the University of Chicago Law Review, and this is part of my longer book-length project on the Rise of the Uncorporation.

My specific remedy is not, however, the same as Glassman, Nolan and Lewis.  I don't think we should necessarily go back to the general partnership, with partner liability. Over the last generation, better governance technologies have evolved through private equity, venture capital and hedge funds.  This should be the model for the reorganization of Wall Street, and much of the rest of what used to be called "corporate" America.

The endgame of TPW, LLP

It looks like the end for Thacher Proffitt & Wood, which had survived 160 years and the destruction of its headquarters on 9/11. Many of its lawyers are moving to Sonnenschein, Nath & Rosenthal. But, per NYT:

Sonnenschein, based in Chicago, is not acquiring Thacher, choosing instead to take on the lawyers who formed the core of its real estate, finance and corporate practices. * * * “We’re still working on what happens to Thacher,” said Robert E. McCarthy, the chairman of Thacher’s planning committee, who is joining Sonnenschein. “Its viability going forward was not likely.” * * *A handful of partners will be left at Thacher after the moves.

Note that the Sonnenschein transaction is taking place after a merger of the firm with King & Spalding reportedly foundered, per AmLaw Daily, when “King & Spalding grew wary of the bank debt and lease exposure that an outright acquisition would entail, and instead proposed a deal in which it would take a group of approximately 75 Thacher lawyers as lateral hires.”

Thacher is an LLP. This means that, like most law firms these days, its partners have limited liability. If Thacher had been an old-style general partnership, its partners would have vicarious liability for the firm’s debts, and those liabilities would follow the individual partners to their new firm or firms.

Even as an LLP, if TPW had merged with SNR or KS, the firm’s liabilities would move to the new firm. But if the partners individually move to SNR or wherever, the liabilities stay behind, unless the partners have obligated themselves individually.

In other words, the LLP structure enables the firm’s main assets (its lawyers) to walk away from creditors. In the old days, the lawyers arguably had more of an incentive to keep the firm together.

I’m not, however, knocking the firms or the lawyers for adopting this structure. And how could I, given that I’ve got a treatise on it (Bromberg & Ribstein on LLPs)? In fact, as detailed in the treatise, the development and spread of law firm LLPs was a predictable reaction to the ratcheting up of potential lawyer liability in the s & l crisis of the early 1990s. And this, of course, is only one example of how limited liability developed in response to the expansion of tort liability. So if you don’t like limited liability, you should know what to blame.

I should add that LLPs are not the last word in this dialectic. I predict there will be a boom in litigation and case law regarding law partnership bankruptcy (just as during the s & l blowup), as well as on the extent of LLP partner liability. Although LLP partners have no vicarious liability, they can be liable for their own misdeeds, including negligent monitoring and supervision (see Bromberg & Ribstein, section 3.04). Expect plaintiffs’ lawyers to push these individual liability exceptions to the limited liability shield. And then expect a structural response to these new liabilities.

Update:  More on Thacher from Bruce MacEwen. 

Dreier: Economic and legal ramifications

The troubles of Marc Dreier raise a lot of interesting questions about partnership law and the structure of law firms.

To begin with, what the heck was Dreier’s firm? The answer: It billed itself as “Dreier LLP” – i.e., a limited liability partnership. But as Marc Dreier wrote last year, this “partnership” had only one equity partner. Dreier himself got all the profits and had exclusive management rights. The other “partners” share in the fees they contribute to generating.

Partnership is generally defined as “an association of two or more persons to carry on as co-owners a business for profit.” See UPA Section 6(1), RUPA Section 101(6) and 202(a). Are non-equity “partners” carrying on the business as co-owners? If not, they’re not actually partners. Then Dreier LLP would not have “two or more” co-owners and would not be a partnership, in which case it couldn’t be an LLP (as to the latter point, see Bromberg & Ribstein on LLPs, Section 2.02).

Although profit sharing and control are very important to the determination of co-ownership it is not absolutely clear they are essential. See generally Bromberg & Ribstein on Partnership Section 2.07. It may be enough that the parties have clearly expressed the intention to be partners.

In Dreier’s case, the parties clearly intended not to have a “conventional” partnership. The website says:

Dreier LLP was founded in 1996 by Marc Dreier to be a more responsive and innovative alternative to conventional "large-firm" lawyering. . . . We are not just an association of attorneys but a collaboration of attorneys, who typically had built successful practices elsewhere but sought in Dreier LLP a more current, more resourceful, more supportive environment to maximize their abilities and results.

So is Dreier a “collaboration” or a “partnership” or both? 

Dreier is a NY-based firm, so NY law probably applies, and NY law is based on the UPA, whose definition of partnership is quoted above.

By comparison, Delaware would "clarify" that “[e]ach person to be admitted as a partner to a partnership formed under either § 15-202(a)(i) or § 15-202(a)(ii) of this title may be admitted as a partner without acquiring an economic interest in the partnership.” The cross-referenced section follows the UPA/RUPA definition of partnership except that it permits not-for-profit partnerships “when the persons intend to form a partnership.” So, basically, Delaware would return to the question discussed above of whether the non-equity partners were admitted as partners.

Note that the Dreier website linked above identifies people in the firm as partners, associates, of counsel, and one managing partner -- Marc Dreier. If Dreier is a partnership, then arguably those identified as “partners” would be vicariously liable unless Dreier was a limited liability partnership, which as discussed above and further below depends on its being a partnership.

Even if not vicariously liable, the members of the firm might be directly liable. As discussed in an AmLaw article today about this mess, relying on David Keyko, Pillsbury partner and former chair of the Association of the Bar of the City of New York's Committee of Professional Responsibility:

An aggressive client could claim, for instance, that a Dreier associate should have done a better job tracking the client's payments* * * If the firm files for bankruptcy, some lawyers may have to give back bonuses and other payments made outside the ordinary course of business -- especially if a court finds that Dreier used fraud to acquire the money to fund those payments * * * In simple terms, the level of the alleged fraud -- combined with the unique structure of Dreier's firm --puts the firm's other partners in wholly uncharted territory.

Yet another ripple (did we need another one?):  Dreier might not be an actual partnership, but it might be a purported or estoppel partnership on the basis that it held itself out as a partnership. Then it would not be clear if the purported partners would be protected by the LLP shield. But the holding out, including via an LLP filing, might be evidence of an intent to be a partnership.  So can an LLP filing bootstrap a non-partnership into a partnership and then into an LLP? Again, See Bromberg & Ribstein on LLPs, Section 2.02(b).

Finally, apart from the partnership issues, Dreier’s article from last year raises some interesting issues about law firm structure. He touted his firm's unconventional structure as a way that the lawyers could serve their own and clients' interests without a law firm getting in the way. His article resonated with rumblings about the current outmoded economic structure of the law business.

There is some perverse logic to his position. If the firm isn’t serving its purpose as a monitor and reputational intermediary, which I’ve argued it can’t effectively do under current ethical constraints, (see Ethical Rules, Agency Costs and Law Firm Structure, 84 Virginia Law Review 1707 (1998)) then maybe this is what it has to come to.

But as I've discussed, e.g, here (with Bruce MacEwen and Mitt Regan), I think there’s a better way.

Anyway, a lot to chew on. See also Gary Rosin.

Michael Lewis on the uncorporation

A couple of months ago I described the current financial crisis as "the wake up call for corporate governance," predicting that "the financial industry will return, in a way, to its partnership roots."  The longer reasoning is in my Uncorporating the Large Firm. 

So I read with interest Michael Lewis' words of wisdom in Portfolio:

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

It's about what happened when Wall Street abandoned the partnership model. Read the whole thing.

Expelling a partner for unpopular views

ATL reports that an Orrick, Herrington & Sutcliffe of counsel emailed the firm complaining that a partner’s contribution to California’s Yes on 8 campaign (opposing same sex marriage)

damages the reputation of Orrick as a progressive law firm supportive of equal rights for gay and lesbian people. This can adversely impact the firm in many ways, including hurting our ability to attract gay and lesbian recruits; turning off clients, existing and potential, that support equal rights for homosexuals; and making our current gay and lesbian work force feel like second class citizens.

The email suggests that "we should try to counteract the damage that has occurred."

Professor B asks about the partners’ power and right to expel the pro-Yes on 8 partner under various assumptions about the applicable law and the partnership agreement.

The simple answer is that this depends on the partnership agreement. The partnership statutes don't provide by default for expulsion by partner vote in this situation. They do provide for expulsion per the partnership agreement and for judicial dissociation (or the close equivalent of dissolution and continuation) for partner misconduct (unpopular views probably wouldn't qualify).

Can the partners take action that has the effect of expulsion without an expulsion provision in the agreement? Cadwalader, Wickersham & Taft, 728 So. 2d 253 (Fla. App. 1998) says no. Dawson v. White & Case, 88 N.Y.2d 666, 672 N.E.2d 589, 649 N.Y.S.2d 364 (1996) seems to allow it, though that opinion didn't resolve the fiduciary duty issue.

If the partners’ action is permitted by the partnership agreement, then it’s probably not a breach of fiduciary duty or bad faith – the courts are pretty generous in enforcing the partners’ right to decide whom they associate with. See my article, Law Partner Expulsion, 55 Business Lawyer 845 (2000), and Bromberg & Ribstein on Partnership, Section 7.02(f).

Any questions?

Seinfeld on good faith in partnerships

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.