Partnership Agreements

On August 22, 2017, the Pennsylvania Supreme Court issued its decision in the case Hanaway v. The Parkesburg Group, LP. There, two limited partners brought suit against a general partner for allegedly freezing out the limited partners through the formation of a separate limited partnership to complete a real estate transaction as part of a broader development project. The limited partners’ claim was rooted in breach of contract, including a claim that the general partner had breached the implied covenant of good faith and fair dealing. At issue on appeal was whether such an implied covenant exists under Pennsylvania law.

Neither the partnership agreement itself or Pennsylvania’s Revised Uniform Limited Partnership Act (“PRULPA”) explicitly included a covenant of good faith and fair dealing at the time the partnership was formed – hence the limited partners’ argument that the covenant was implied. However, during the pendency of the general partner’s appeal before the Supreme Court, the General Assembly revised PRULPA to include the following language:

(d) Good faith and fair dealing – A general partner shall discharge the duties and obligations under this title or under the partnership agreement and exercise any rights consistent with the contractual obligation of good faith and fair dealing.[1]

This amendment became effective on February 21, 2017. However, because the limited partnership at issue in Hanaway was formed prior to February 21, 2017, the amended PRULPA language did not apply.

Instead, the limited partners argued that the implied covenant of good faith and fair dealing applied based on the partnership agreement constituting a form of contract. This was the basis for the Superior Court’s holding in favor of the limited partners, and the Superior Court cited Delaware partnership law in support of the implied covenant. On appeal, the Supreme Court rejected the limited partners’ arguments and overturned the Superior Court’s decision.

Citing the absence of any covenant of good faith and fair dealing language in the earlier version of PRULPA applicable to the limited partnership agreement at issue, the Court refused to read into PRULPA such a duty. The Court distinguished a limited partnership, which is a creature of the specific partnership statute, from contracts, which are governed by the Uniform Commercial Code and a well-developed body of case law. In the absence of the legislature taking action to include such a duty in the statutes governing limited partnerships, the Court was unwilling to find that such an implied duty existed and applied to the limited partnership at issue.

Hanaway is an important case for limited partnerships formed both before and after the amendment to PRULPA. For limited partnerships formed on or after February 21, 2017, Hanaway is a reminder of the new duty of good faith and fair dealing that limited partners and general partners owe to each other and the partnership. For limited partnerships formed before February 21, 2017, Hanaway confirms that no implied duty of good faith and fair dealing exists. Partners that wish to be bound by such a duty should affirmatively amend the partnership agreement to include such a duty; otherwise, a claim based on this theory will not succeed.

[1] Similar language was also added imposing the same duty on limited partners.