Generally, to assert a breach of the covenant of good faith and fair dealing, the complaining party must prove that the manager or member acted with no legitimate purpose with bad motives or intentions; engaged in deceptive; or evasion in the performance of terms and conditions set forth in the operating agreement. Moreover, they must prove that by engaging in such conduct they denied the complaining party of the bargain initially intended by the parties.
Because a Limited Liability Company is essence a contractual entity it has been widely recognized by many courts that the covenant of good faith and fair dealing already applied. Nevertheless, the Revised Uniform Limited Liability Act codifies the case driven application of the law. The codification gives even greater protections for members of an LLC. Of course, because a Limited Liability Company is a contractually based entity, the members may limit the covenant of good faith and fair dealing, so long as the limitation is not “manifestly unreasonable.” As I wrote in a previous blog post, because this law is in its infancy, it is unknown how Courts will define and apply the “manifestly unreasonable” standard. Of course, I will be diligently reading and analyzing those decisions over the course of the next few years.