NJ-RULLCA is based on the Revised Uniform Limited Liability Company Act which was enacted in 2006 by the National Conference of Commissioners on Uniform State Laws, (NCCUSL) with the latest published version dated July 20, 2011. NCCUSL has amended RULLCA (now designated as ULLCA), published January 14, 2013. The comments to both RULLCA and ULLCA are recommended to be used by practitioners and the courts to understand NJ-RULLCA including the language about prescribing standards to measure performance under the contractual obligation of good faith and fair dealing.

NJ-RULLCA includes a contractual obligation of good faith and fair dealing: “A member shall discharge the duties under this act or under the operating agreement and exercise any rights consistently with the contractual obligation of good faith and fair dealing. N.J.S.A. 42:2C-39(i)(2).

The word “contractual” is used to emphasize that the obligation is not an invitation to re-write agreements among the members. As noted in the statute, the contractual obligation of good faith and fair dealing applies to rights and duties under an operating agreement as well as under the statute. It applies to rights and duties under the statute because the statute serves as a default contract in the absence of an operating agreement.

The contractual obligation of good faith and fair dealing is the same as the implied covenant of good faith and fair dealing existing in every contract in New Jersey. Brunswick Hills Racquet Club v. Route 18 Shopping Center Assocs. 182 N.J. 210, 225 (2005). The Appellate Division has summarized the application of the implied covenant as follows:

First, the covenant permits the inclusion of terms and conditions which have not been expressly set forth in the written contract. The covenant acts in such instances to include terms “the parties must have intended… because they are necessary to give business efficacy” to the contract. Second, the covenant has been utilized to allow redress for the bad faith performance of an agreement even when the defendant has not breached any express term,….and Third, the covenant has been held…to permit inquiry into a party’s exercise of discretion expressly granted by a contract’s term. Seidenberg v. Summit Bank, 348 N.J. Super. 243, 257 (App. Div. 2002).

An LLC operating agreement may not eliminate the contractual obligation of good faith and fair dealing. N.J.S.A. 42:2C-11(c)(5). However, if not unreasonable, the operating agreement may prescribed the standards by which to measure the performance of the contractual obligation of good faith and fair dealing….N.J.S.A. 42:2C11(d)(5).

In view of the above it would be prudent to include language in the LLC operating agreement to contain a standard to measure performance under the contractual obligation of good faith and fair dealing. 

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