Also known as: obligationes ex contractu · contractual obligation · obligation arising from contract
Written by attorneys — see sources below.
An enforceable duty created by agreement between parties that requires performance consistent with good faith and fair dealing.
Outback Mining and its two partners signed a partnership agreement that attempted to remove any duty of good faith when one partner sought to sell partnership assets to a competitor. The remaining partners objected and invoked the obligation arising from their original agreement. A court held that the agreement could set measurable standards for performance but could not wholly eliminate the underlying contractual duty.
Osprey Aviation formed a limited partnership with Oakridge Manufacturing as the general partner. The limited partnership agreement set specific benchmarks for disclosure of financial information instead of leaving the duty of good faith undefined. When a limited partner later claimed nondisclosure breached the duty, the court applied the agreement's prescribed standards to decide whether the obligation had been met.
Octavia Okonkwo and Omar Olson formed a general partnership to operate a delivery service. When Olson sought to withdraw capital for a personal venture, Okonkwo demanded that the withdrawal occur only after full disclosure and fair valuation. The partnership agreement and governing statute required Olson to exercise withdrawal rights consistently with the contractual obligation of good faith.
Oasis Resorts admitted Ophelia O'Brien as a limited partner. O'Brien later negotiated a separate supply contract with the partnership and failed to reveal a conflicting interest she held in the supplier. The limited partnership agreement and statute required O'Brien to perform that transaction consistently with the contractual obligation of good faith and fair dealing.
Otto Osman served as general partner of a limited partnership that owned commercial property. When Osman proposed leasing space to a company he partially owned, the other partners demanded full disclosure of terms. The statute required Osman to discharge that leasing decision consistently with the contractual obligation of good faith and fair dealing.
Allied Structural Steel maintained pension obligations to employees under existing contracts. A new state statute attempted to impose additional funding requirements that altered those contractual duties. The company challenged the statute on the ground that it impaired the preexisting contractual obligation without consent of the parties.
Allied Structural Steel Co., an Illinois corporation, maintained a pension plan for its salaried employees that it had adopted in 1963 and qualified under section 401 of the Internal Revenue Code. The plan provided that the company was the sole contributor to the pension trust fund. The company made contributions based on actuarial predictions. It retained the right to amend or terminate the plan at any time and for any reason. In the event of termination, assets were distributed first to retired employees, then to those eligible for retirement, and finally to other covered employees whose rights had not vested, with employees assured payment only to the extent of the assets. The plan expressly stated that no employee had any right to trust assets upon termination of employment except as provided, and that neither the employer nor trustee was liable beyond the assets. On April 9, 1974, Minnesota enacted the Private Pension Benefits Protection Act, which applied to private employers of 100 or more employees with at least one Minnesota resident who provided pension benefits under a qualified plan. The Act imposed a pension funding charge on such an employer if it terminated the plan or closed a Minnesota office. It required the employer to purchase deferred annuities for employees with at least 10 years of service whose nonvested benefits would otherwise be forfeited. Periods of employment prior to the Act's effective date were included in the 10-year criterion. During the summer of 1974, the company began closing its Minnesota office, which had 30 employees, and on July 31 discharged 11 of them. At least nine of the discharged employees had worked for the company for 10 years or more but did not have vested pension rights under the plan. On August 18, the State notified the company that it owed a pension funding charge of approximately $185,000 under the Act. The company brought suit in federal district court seeking injunctive and declaratory relief on the ground that the Act unconstitutionally impaired its contractual obligations. A three-judge district court upheld the constitutional validity of the Act as applied to the company. An appeal was taken to the Supreme Court under 28 U.S.C. § 1253, and the Court noted probable jurisdiction.
View caseA partnership agreement may prescribe reasonable standards for measuring performance of the obligation but may not eliminate the obligation itself. The uniform acts expressly prohibit complete elimination while permitting limited, non-manifestly unreasonable adjustments to the standard.
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Yes. The uniform acts impose the obligation on general partners under the partnership agreement and on limited partners when they exercise rights or discharge duties under the agreement. Both must act consistently with good faith and fair dealing.
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A partner does not automatically violate the contractual obligation of good faith and fair dealing merely by furthering personal interest. The obligation is breached only when the conduct fails to meet the required standard of good faith in discharging duties or exercising rights.
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