Good Faith and Fair Dealing Developments - Part II

by E. Lee Reichert

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Editor's Note:

Part I of this article addressed Colorado's case law development of "good faith and fair dealing" since 1996.1However, recent interest in this issue has not been limited to the Colorado Supreme Court. In adopting the Colorado Uniform Partnership Act ("CUPA") in its 1997 session, the Colorado legislature statutorily codified a partner's obligation of good faith and fair dealing in CRS § 7-64-404(3).2This Part II provides some guidance to Colorado attorneys facing good faith and fair dealing issues by reviewing the development of § 7-64-404(3) and identifying drafting issues in the context of partnership agreements and other contracts.

As a result of CRS § 7-64-404(3), which became effective January 1, 1998, Colorado courts and transactional attorneys likely will face a number of good faith and fair dealing issues in the context of partnerships and partners governed by CUPA. CUPA applies to all general partnerships and limited liability partnerships ("LLPs") formed under Colorado law after January 1, 1998. Section 7-64-1205(1) of CUPA, however, provides that general partnerships formed under Colorado law and existing prior to January 1, 1998, and limited partnerships to the extent they are governed by general partnership law, will continue to be governed by Colorado's Uniform Partnership Law ("Uniform Law"), unless they affirmatively elect to be governed by CUPA.3

Good Faith and Fair Dealing Under CUPA

Prior to the adoption of CRS § 7-64-404 (3), Colorado statutes governing general and limited partnerships did not contain any good faith and fair dealing provisions. Instead, Colorado, like other jurisdictions, relied on the courts to define a partners' duties as a matter of common law. Justice Cardozo's opinion in Meinhard v. Salmon4 often is cited as the start of partnership duty analysis. Colorado courts, however, have not specifically analyzed whether good faith and/or fair dealing concepts are separate legal duties, components of a partner's duty of loyalty, or a measuring standard of such other legal duties. Nevertheless, the language used in the Colorado cases addressing the duties of partners can be read to suggest that Colorado generally would view the duties owed by a general partner as including some aspect of good faith and fair dealing.5

In addition to the Colorado cases addressing duties of partners, in Friedman v. Colorado National Bank,6 both the Colorado Supreme Court and the Colorado Court of Appeals appeared to suggest that an implied covenant of good faith and fair dealing also applies to a limited partnership agreement. Friedman involved a breach of contract action brought by the general partner against a limited partner in the limited partnership. The likely reason the Freidman court did not discuss "duties" of good faith or fair dealing is because limited partners typically do not owe the same duties as general partners, unless the limited partners in fact exercise control over the management of the limited partnership.

In statutorily codifying an obligation of good faith and fair dealing, CRS § 7-64-404(3) represents a fundamental departure from the Uniform Law and its reliance on duty-based analysis. Section 7-64-404(3), like the rest of CUPA, is based on the Revised Uniform Partnership Act ("Model Act"). In the view of many commentators, the final provisions of CUPA and the Model Act regarding duties and obligations represent a compromise of the "contractarian" and "fiduciarian" viewpoints, leaving both sides dissatisfied.7This compromise is particularly evident in § 7-64-404(3), which does not define the obligation of good faith and fair dealing, unlike the other statutorily defined duties of loyalty and care set forth in the Model Act and CUPA. Instead, the development of the obligation of good faith and fair dealing deliberately is left to the Colorado courts,8 ensuring litigation on the issue.

To date, there are no decisions interpreting § 404(d) of the Model Act on which CRS § 7-64-404(3) is based. Moreover, commentators disagree as to the potential effect of § 404(d) of the Model Act.⁹The Model Act itself and the legislative history of CRS § 7-64-404(3), however, provide some initial indication as to the interpretation of this new statutory obligation.

Legislative History

The drafters of both CUPA and the Model Act intentionally used the term "obligation" as opposed to "duty," based on the recognition that the obligation of good faith and fair dealing is imposed on partners because of a partnership's contractual nature, not the fiduciary duty relationship among the partners themselves.10In doing so, official comment four to § 404 of the Model Act notes that the obligation of good faith and fair dealing is not a separate and independent obligation, but is an ancillary obligation that applies whenever a partner discharges a duty or exercises a right under a partnership agreement or the Model Act.¹¹In other words, the obligation of good faith and fair dealing does not give rise to independent liability for its breach, but is an ancillary obligation (like the covenant of good faith and fair dealing) used to measure compliance with other duties or rights of the partners.

In deliberately viewing good faith and fair dealing as a contractual concept, CRS § 7-64-404(3) and the Model Act represent a fundamental departure from common law, duty-based partnership principles.12As a result, § 7-64-404(3) cannot be read as imposing a fiduciary duty equivalent to the duty of loyalty or the duty of care, both of which are delineated in CUPA and the Model Act.13

Based on the legislative development of the Model Act and CRS § 7-64-404(3), the obligation of good faith and fair dealing will apply to all duties and rights arising under a partnership agreement or CUPA.14The duties and rights set forth in CUPA are extensive and include the following provisions: CRS § 7-64-401, entitled "Rights and Duties," which includes rights to profits and losses, reimbursements, management rights, and use and possession of partnership property; CRS § 7-64-403, which includes the rights and duties with respect to information; CRS § 7-64-403, which includes the duties of loyalty and care; CRS § 7-64-701, which includes a partner's right on dissociation to have his or her interest purchased; CRS § 7-64-801, which includes the right to compel a dissolution; and CRS § 7-64-803, which includes the right to participate in the winding up process of a partnership.

Notably, CRS § 7-64-404(3) further broadens the scope of the obligation of good faith and fair dealing by including duties arising outside of CUPA and the applicable partnership agreement.15 Section 7-64-404(3) accomplishes this by excluding the Model Act's limiting language--"under this Act or in the partnership agreement"--in describing the duties to which the obligation of good faith and fair dealing applies.16

Under the Model Act, the obligation of good faith and fair dealing is not effective while the partnership agreement is being negotiated, because by definition there is no partnership agreement pursuant to which a partner could have duties or rights, and there are no other duties applicable under the Model Act.17This is consistent with both the obligation of good faith in § 4-1-203 of the UCC, as well as the good faith and fair dealing formulation in the Restatement (Second) of Contracts § 205,18 neither of which is effective during the period of contract negotiation.19

There is no indication in the minutes that the drafters of CUPA considered the effect of the broad changes made to CRS §§ 7-64-404(1) and 7-64-404(6) on the ancillary obligation of good faith and fair dealing. The reality of the changes, however, is that the new statutory obligation of good faith and fair dealing may apply to circumstances where the contractual obligation on which § 7-64-404(3) is based never before has applied.20

The official comments to Model Act § 404 (d), the basis for CRS § 7-64-404(3), provide some additional indication as to the scope and application of the new statutory obligation. Official comment four to § 404 of the Model Act notes that the drafters of the Model Act specifically rejected as too narrow the UCC definitions of good faith as "honesty in fact," or in the case of a merchant of "the observance of reasonable commercial standards of fair dealing in the trade." Instead, comment four states that the obligation of good faith and fair dealing is intended, in some circumstances, to include a disclosure concept beyond the disclosure required under Model Act Section 403(c), which addresses partners' duties with respect to information.21Colorado courts interpreting § 7-64-404(3) also should take into consideration the fact that the drafters of the Model Act added the concept of "fair dealing" over the objection of the ABA conferees, which suggests a clear intention to include an objective component beyond the confines of subjective good faith.

Finally, official comment five to § 404 of the Model Act and the language of CRS § 7-64-404(6) emphasize that a partner's conduct does not violate the statutory obligation merely because it serves the partner's own interest. For example, official comment five states that a partner, who with consent owns a shopping center, legitimately may vote against a proposal by the partnership to open a competing shopping center under § 404.22

Applicability of Case Law From Other Contexts

CRS § 7-64-404(3) is based on the contractual concept of an obligation of good faith and fair dealing. As a result, cases arising under the UCC (particularly with regard to sales among merchants)23 or under the Restatement (Second) of Contracts § 205 would seem an appropriate source of guidance for interpreting the new statutory obligation. As noted above, however, the drafters of the Model Act specifically viewed the UCC definitions of good faith and fair dealing as too narrow or not applicable and intended the obligation in CUPA to include a disclosure concept beyond the typical contract context.

The changes made to CUPA from the Model Act further suggest that the drafters of CUPA were not entirely comfortable limiting the scope of the obligation of good faith and fair dealing as it had been applied by courts in contract cases (or alternatively, that the drafters of CUPA simply did not consider the effect of other changes made in CUPA on the ancillary statutory obligation). As such, the obligation of good faith and fair dealing set forth in CUPA must mean something more than the UCC obligation of good faith.

At the same time, the obligation of good faith and fair dealing set forth in CUPA must mean something less than the common law duty of good faith and fair dealing for partners, as a result of its statutory classification under CUPA as an obligation rather than a duty. Thus, the majority of the cases that have arisen in the partnership context under the Uniform Law or in the limited partnership context will be of little use in interpreting CRS § 7- 64-404(3) because: (1) these cases have employed a duty-based analysis; (2) there is no provision similar to § 7-64-404(3) in the Uniform Law or the Colorado Uniform Partnership Act of 1981 ("1981 Act"); and (3) § 7-64-404(3) represents a completely different approach from those taken in Colorado's other partnership acts. In this regard, a better source of guidance in interpreting § 7-64-404(3) may be breach of contract actions arising in the context of partnership agreements that address the covenant of good faith and fair dealing, such as Friedman.24

Similarly, by viewing good faith and fair dealing as a contractual concept, rather than a duty defined by the relationship of the partners, CUPA appears to have foreclosed the argument that the Trimble/Savio line of cases arising in the insurance context should be used to interpret CRS § 7- 64-404(3). The breadth of the tort duty of good faith and fair dealing owed by insurers to insureds is similar to the broad obligation set forth in § 7-64-404(3), and, arguably, there is a special relationship among the partners of a partnership akin to that of the insurer-insured relationship. However, many of the other factors present in the insurance context (for example, unequal bargaining power and sophistication) that give rise to the tort duty are not present such that it makes sense to use the sui generis line of insurance good faith and fair dealings in interpreting the CUPA obligation.

Finally, cases that have or will arise in the limited liability company context are of little use in interpreting CRS § 7-64-404(3) because CUPA represents a different approach from that taken in Colorado's limited liability company act. Section 7-80-406(1) of Colorado's limited liability company act requires that a manager perform his or her "duties" in good faith, creating a duty of care similar to that of a director of a corporation (although there is not an express provision for the business judgment rule for managers of a limited liability company). Interestingly, however, CRS § 7-80-108(2)(c) provides that the members of a limited liability company may determine by agreement "the standards by which the performance of the obligation [to perform duties in good faith] is to be measured, if such standards are not manifestly unreasonable." As such, § 7-80-108(2)(c) in certain respects is somewhat similar to the language and approach set forth in CUPA or in the UCC.

Based on the foregoing, it is clear that in establishing an obligation of good faith and fair dealing in CUPA, Colorado has created an entirely new creature, which in certain important respects differs even from the Model Act. Accordingly, Colorado courts should consider carefully whether it is appropriate to use case law regarding good faith and fair dealing issues from other contexts or jurisdictions in addressing and interpreting CRS § 7-64-404(3).

Partnership Issues for Colorado Attorneys

The potential breadth of the statutory obligations contained in CUPA is particularly significant because of the interplay between: (1) Colorado general partners and LLPs; (2) CUPA and the 1981 Act; and (3) Colorado general partners and Colorado limited liability limited partnerships ("LLLPs"). As a result of the interplay of the various acts, questions concerning the obligation of good faith and fair dealing likely will not be limited to general partnerships formed after January 1, 1998.

Pursuant to § 7-64-1205(1) of CUPA, the statutory obligation of good faith and fair dealing also applies to all general partners of LLPs that are formed after January 1, 1998, and to general partners of LLPs formed before such date that affirmatively elect to be governed by CUPA.25 Similarly, the statutory obligation set forth in § 7-64-604(3) applies to general partners in either a limited partnership or an LLLP that affirmatively elects to be governed by CUPA.

Even if a limited partnership or LLLP does not make such an affirmative election, however, there is a possibility that the new statutory obligation will apply to a general partner in either form of entity. Section 7-62-403(1) of the 1981 Act generally provides that except as set forth in a partnership agreement, a general partner of a limited partnership has the rights and powers and is subject to the restrictions of a partner in a general partnership. In turn, § 7-62-403(1) of the 1981 Act applies to general partners of LLLPs.26The statutory obligation codified in CUPA clearly is a restriction on a partner in a general partnership. As such, the only question of statutory interpretation is whether § 7-62-403(1) refers to restrictions on general partners in general partnerships governed by CUPA and/or the Uniform Law.27

Because CRS § 7-64-404(3) represents a fundamentally different approach for general partners, it will increase the burden on Colorado attorneys faced with good faith and fair dealing issues arising in the partnership context. For example, attorneys will need to keep in mind the obligation of good faith and fair dealing for partners: (1) as an additional factor in advising clients as to choice of entity (for example, as a possible limitation on future action or as to the duties and obligations imposed on certain individuals involved in the management of the entity); (2) as a consideration in advising partnership entities formed prior to January 1, 1998, whether to elect to be governed by CUPA; (3) in advising partners governed by CUPA who are contemplating certain actions (for example, in taking actions that implicate duties or rights, whether such duties or rights are set forth in CUPA, a partnership agreement, or otherwise); and (4) in drafting partnership agreements governed by CUPA (for example, whether to include certain provisions such as those allowing summary expulsion of partners).

In drafting partnership agreements governed by CUPA, attorneys should remember that the statutory obligation of good faith and fair dealing applies to all rights and duties arising under the partnership agreement, which conceivably implicates virtually every single provision of the partnership agreement. As a result, CUPA significantly increases the drafting burden on attorneys. Many of the underlying drafting issues for partnership agreements, however, are similar to those to be considered in drafting any contract governed by Colorado law, as a result of the broad dicta in the Amoco Oil Company v. Ervin28 decision.

Drafting Considerations

The Amoco decision strongly suggests that the use of a standard integration/merger clause will not defeat a claim for breach of the implied covenant of good faith and fair dealing.29 Similarly, parties cannot eliminate completely the obligation of good faith and fair dealing contained in CUPA, the obligation of good faith set forth in the UCC, or the "obligation to perform duties in good faith" under CRS § 7-80-406 of Colorado's limited liability company act.30Through careful consideration of particular provisions at the drafting stage, however, a party can attempt to decrease the possibility of later litigation alleging a breach of the implied covenant of good faith and fair dealing or the relevant statutory obligation, and the corresponding risk of juries' or courts' second-guessing express contractual terms.

Under both the UCC and CUPA, parties are permitted to agree on the measurement standards for the relevant statutory obligation if the standards are not "manifestly unreasonable." Some commentators have suggested that such provisions allow parties to exclude categorically specific transactions from the statutory obligation.31Neither the UCC nor CUPA, however, provides much guidance as to what "prescribed performance standards" are, or when they are "manifestly unreasonable." In fact, the Model Act sets forth only one example, stating that "[t]he partners can negotiate and draft specific contract provisions tailored to their particular needs (for example, five days notice of a partner's meeting is adequate notice)."32

A fair and reasonable reading of the relevant provisions of the UCC and CUPA is that the performance standards governing a contract need not be couched in terms of modifications of the relevant statutory obligation, but instead can arise through modifications of the specific terms of the agreement, provided that the cumulative effect of such modifications is not manifestly unreasonable.³³For example, the parties to an agreement could provide specific time periods for notice, a detailed process regarding expulsion of a partner, definitions of "cause," supermajority voting requirements for certain actions, or limits on the exercise of discretion in certain situations. By doing so, parties should be able to vary the application of the relevant statutory obligation by changing the express terms of their underlying deal.

In drafting agreements (whether governed by the UCC, CUPA, CCIOA, Colorado's limited liability company act, or otherwise) a party should set forth clearly how performance with respect to such contractual obligations will be measured. Such specificity in the express provisions should carry with them any appropriate modifications of the relevant statutory obligation or the implied covenant of good faith and fair dealing. In particular, attorneys should focus on the provisions that are likely to produce good faith and fair dealing challenges (for example, partnership and corporate opportunities, expulsion provisions, buy-out provisions, restrictions on transferability).

Similarly, parties should set forth their specific agreements with regard to the exercise of discretion in all contracts, insofar as such provisions are fertile ground for good faith and fair dealing challenges following Amoco. Of course, the specific provisions will vary from agreement to agreement. The parties may agree that "wherever consent is required in this agreement, such consent shall not be unreasonably withheld, conditioned or delayed." Alternatively, the parties may agree that "except as otherwise provided herein, all determinations which Party A makes pursuant to this article may be made at the sole and absolute discretion of Party A" or that "Party A may terminate this agreement without reason or cause at any time upon five (5) days notice."34

A court is much more likely to enforce a provision allowing a party (including a partner) to act in its sole and absolute discretion if there are other provisions in the agreement providing for different standards of performance (for example, reasonable discretion, prior written notice requirements, specific voting requirements, or supermajority provisions for specified actions).35 As such, parties also should consider modifying the specific terms individually to set forth the relevant limits on the exercise of discretion. By doing so, a party will increase the likelihood that such express provisions will be respected, particularly because the other party will have been put on notice of and will have freely agreed to such provisions.36

In addition to drafting more detailed provisions in the areas where good faith and fair dealing challenges are most likely to arise, Colorado attorneys also should consider including a general provision regarding the obligation of good faith and fair dealing when drafting a partnership agreement for partners who are governed by CUPA. By specifically setting forth the standards by which the statutory obligation is to be measured, the parties can assist courts in interpreting the intent of the parties, and further reduce the likelihood of successful litigation based on good faith and fair dealing challenges.

For example, partners could agree to a general provision regarding the obligation of good faith and fair dealing along the following lines:

The Partners shall discharge their duties to the Partnership and the other Partners under the Act and this Agreement and shall exercise any rights consistently with an obligation of good faith and fair dealing, which shall be strictly limited to mean honesty in fact in the conduct or transaction of the Partnership business. The Partners intend for the standard of good faith and fair dealing to be governed by the law of contracts and the Uniform Commercial Code and not by reference to any law specifically relating to fiduciaries or partnerships. Such obligation of good faith and fair dealing shall not restrict the Partners in the exercise of any right or the performance of any obligation to the extent expressly allowed under this Agreement or at law or from taking action because it would be in their self interest, but shall only affect the manner of performance of such rights and obligations to the extent not specified herein.37

Such a provision is designed to provide courts with guidance in interpretation issues, while still complying with the CUPA provision allowing parties to determine the statutory obligation's measurement standards.

Conclusion

Despite the recent judicial and legislative interest in good faith and fair dealing issues, open questions remain in Colorado, particularly in contract actions. Given these issues, it is probable that plaintiffs will include one or more allegations of a breach of the covenant/duty/obligation of good faith and fair dealing in virtually every commercial litigation action. An attorney can attempt to increase the likelihood of prevailing on such claims through careful consideration of such issues at the drafting stage.

Until Colorado appellate courts provide further guidance, however, parties will continue to bring claims in the hope of having juries or courts second-guess express contractual terms through a free-floating and expansive implied covenant of good faith and fair dealing, rather than through well-established principles of contract interpretation. Similarly, until appellate courts develop a body of case law interpreting the obligation of good faith and fair dealing set forth in CUPA, parties will be likely to challenge acts arising in the partnership context.

NOTES

1. See Reichert, "Good Faith and Fair Dealing Developments--Part I," 27 The Colorado Lawyer 115 (June 1998).

2. CRS § 7-64-404(3) provides "a partner shall discharge the partner's duties to the partnership and the other partners and exercise any rights consistently with the obligation of good faith and fair dealing." The Colorado legislature did not enact another proposed bill in its 1997 legislative session (Senate Bill 97-156), which would have specified that any declaration, bylaws, rules and regulations, or articles of incorporation of a homeowners' association governed by the Colorado Common Interest Ownership Act ("CCIOA") impose a statutory obligation of good faith in its performance or enforcement.

3. See CRS § 7-64-1205(1).

4. 164 N.E. 545, 546 (N.Y. 1928).

5. See, e.g., Hooper v. Yoder, 737 P.2d 852, 859 (Colo. 1987) (partners stand in a relationship of trust and confidence to each other and are bound by standards of "good conduct and square dealing"); Tucker v. Ellbogen, 793 P.2d 592, 596 (Colo.App. 1989) (partners are bound by standards of "good conduct and fair dealing"); Roeschlein v. Watkins, 686 P.2d 1347, 1350 (Colo.App. 1983) (in winding up partnership affairs, a general partner owes his limited partners "a common law fiduciary duty of good faith, sound business judgment, candor, forthrightness, and fairness"). See generally Montgomery, "The Fiduciary Duties of General Partners," 17 The Colorado Lawyer 1959 (Oct. 1988).

6. 825 P.2d 1033, 1042-43 (Colo.App. 1991), aff'd in part, rev'd in part on other grounds, 864 P.2d 159, 172-74 (Colo. 1993).

7. See generally Austin, "An Introduction to the Colorado Uniform Partnership Act (1997)," 27 The Colorado Lawyer 5 (Jan. 1998).

8. See Model Act § 404, cmt. 4 (noting that the obligation of good faith and fair dealing and the other provisions regarding the fiduciary duties of partners contained in CUPA and the Model Act caused more controversy in the drafting process than any other provision).

9. Some commentators suggest that Model Act § 404(d) is motivated primarily by a desire to thwart plaintiffs' recoveries. See Hillman et al., General and Limited Liability Partnerships Under the Revised Uniform Partnership Act (West 1996), Model Act § 404, author's cmt 3(b)(i). Other commentators have cautioned that the statutory obligation of good faith and fair dealing may change current law by requiring partners to be "nice" rather than merely to refrain from twisting the contract in ways the parties never intended. See Ribstein, "The Revised Uniform Partnership Act: Not Ready for Prime Time," 49 Bus. Law. 45, 56 (1993). For a further discussion of the possible meanings of Model Act § 404(d) in the partnership setting, see Callison, "Blind Men and Elephants: Fiduciary Duties Under the Revised Uniform Partnership Act and Beyond," 1 J. of Small & Emerging Bus. L. 109, 141-48 (1997).

10. See Model Act § 404, cmt. 4; see also CBA Committee Minutes, 9th Meeting 9/14/94 ("It was resolved to leave the [obligation of good faith and fair dealing] where it is on the reasoning that the obligation of good faith and fair dealing was intended to play a role similar to the role it plays in the Uniform Commercial Code and the Restatement of Contracts, as an implied term of all contracts. To move it to Section 404(a) as a new part (4) would be to change its status to that of a separate and independent duty of partners and thus lose sight of the more limited role envisioned by the drafters of [the Model Act] for the obligation of good faith and fair dealing.") [Emphasis added.].

11. See Model Act § 404, cmt. 4.

12. See Hillman, supra, note 9, Model Act § 404, author's cmt. 3(b)(i).

13. Some attorneys have suggested that because § 7-64-404(1) of CUPA states that it is not an exclusive statement of fiduciary duties [unlike the comparable Model Act section on which § 7-64-404(1) is based], good faith and fair dealing also could be a fiduciary duty under Colorado law. It is difficult to reconcile such a position with the express use of the contractual "obligation" concept for good faith and fair dealing or the understanding of the obligation reflected in the CUPA committee minutes. See supra, note 10. A more reasonable interpretation of § 7-64-404(1) is that the nonexclusive language contained in such section applies to other concepts not already addressed specifically by CUPA.

14. See Model Act § 404(d); see also CBA Committee Minutes, 9th Meeting 9/14/94.

15. See CBA Committee Minutes, 9th Meeting 9/14/94; 13th Meeting 11/9/94.

16. Model Act § 404(d) provides "a partner shall discharge the partner's duties to the partnership and the other partners under this Act or under the Partnership Agreement and exercise any rights consistently with the obligation of good faith and fair dealing." [Emphasis added.]

17. See Hillman, supra, note 9, Model Act § 404, author's cmt. 4(e)-(f).

18. Restatement (Second) of Contracts § 205 provides that "every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement."

19. See Restatement (Second) of Contracts § 205 cmt. c; see, e.g., Whorley v. First Westside Bank, 485 N.W.2d 578, 583 (Neb. 1992) (no claim based on UCC obligation of good faith where contractual relationship not established).

20. See Austin, supra, note 7 at 9 (stating that "the obligation of good faith and fair dealing pertains during formation and liquidation of a partnership"). As a result of the inclusion of § 7- 64-404(6), for which there is no similar provision in the Model Act, there are likely to be a number of disputes as to whether a partnership was "formed" prior to the execution of a partnership agreement, such that the duties of loyalty and duty of care, along with the ancillary obligation of good faith and fair dealing, would apply.

21. For example, official comment number six to § 404 of the Model Act suggests that the obligation of good faith and fair dealing would require disclosure of a partner's interest in the purchase of partnership property at a tax sale. Model Act § 404, cmt. 6.

22. See Model Act § 404, cmt. 5.

23. While § 4-1-203 of the UCC speaks only of an obligation of "good faith," § 4-2-103 of the UCC provides that in the case of merchants governed by Article 2 (Sales) of the UCC, "good faith" includes the observance of reasonable commercial standards of fair dealing in the trade. Section 38- 33.3-113 in CCIOA initially would appear to be an equally appropriate source of guidance because it is based on § 4-1-203, but there are no Colorado cases interpreting this provision.

24. Limited partnership cases from other jurisdictions addressing implied covenant of good faith and fair dealing issues may provide some guidance by analogy, depending on the similarity of the development of the good faith and fair dealing doctrine in such jurisdictions to that in Colorado. Unfortunately, these cases tend to employ a number of different methods of analysis. Cf. Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199 (Del. 1993); Wilmington Leasing, Inc. v. Parish Leasing Co., L.P., Case No. 15202 (Del.Ch. Sept. 25, 1996); Oregon RSA No. 6 v. Castle Rock Cellular, 840 F.Supp. 770 (D.Or. 1993).

25. See CRS § 7-64-1205(1) (discussing applicability of CUPA); see also CRS §§ 7-64-202 (defining an LLP as a "partnership for all purposes"); 7-64-1002(1); 7-64-1010(2)(b).

26. See CRS § 7-62-101(7) (limited partnership "includes a limited partnership that is a registered limited liability partnership"); see also §§ 7-64-1002(1); 7-64-1010(2)(b).

27. Another open question is the degree to which the statutory obligation of good faith and fair dealing applies to the limited partners in a limited partnership or LLLP that affirmatively elects to be governed by CUPA. As noted above, Friedman suggests that an implied covenant of good faith and fair dealing applies to limited partnership agreements, although as discussed in this article, it is not clear that the statutory obligation of good faith and fair dealing in CUPA is co-extensive with the implied covenant of good faith and fair dealing.

28. 908 P.2d 493, 499 (Colo. 1996).

29. Id. at 500. Logically, however, an integration clause should invalidate an express oral covenant of good faith or fair dealing such as those discussed in Part I of this article, to the extent the integration clause appears in the agreement and the earlier express oral promise is not contained in the agreement. See Reichert, supra, note 1.

30. See Model Act § 103, cmt. 7; CRS § 1-102 (3); CRS § 7-80-108(2)(c).

31. See Hillman, supra, note 9, Model Act § 103, author's cmt. 3(d)(ii).

32. See Model Act § 103, cmt. 7. Official comment seven cites a few UCC cases addressing the manifestly unreasonable standard. See, e.g., PPG Indus., Inc. v. Shell Oil Co., 919 F.2d 17 (5th Cir. 1990); First Sec'y Bank v. Mountain View Equip. Co., 730 P.2d 1078 (Idaho App. 1986); American Bank of Commerce v. Covolo, 540 P.2d 1294 (N.M. 1975).

33. See Hillman, supra, note 9, Model Act § 103, author's cmt. 3(d)(iv).

34. The parties also could attempt to specifically define the conditions where a party is required to grant its consent. For example, the parties could negotiate a provision in a lease as follows: "The phrase 'landlord's consent shall not be unreasonably withheld' shall be deemed to require the landlord to consent when the following conditions are met: (i) the tenant is not in default under the lease; (ii) the proposed assignee has agreed to faithfully perform and to be bound by all of the terms and provisions of the lease; (iii) if the proposed assignee is a corporation (other than a corporation the outstanding voting stock of which is listed on a national securities exchange), the owners of a majority of the issued and outstanding shares of stock in that corporation personally and unconditionally guarantee the performance of all the obligations under the lease; and (iv) the proposed assignee has submitted financial statements to the landlord which establish its financial ability to perform the obligations under the lease."

35. See, e.g., Fox v. I-10, Ltd., 27 Colo.Law. 217 (S.Ct. No. 96SC483, annc'd 3/23/98) (upholding provision in limited partnership agreement that required consent of a majority of the partners to amend certain provisions while specifically noting that another provision in the agreement allowed amendments by the general partner, in its sole discretion, as to certain items); see also Wilmington Leasing, supra, note 24 (suggesting that a provision in a partnership agreement allowing for removal of a partner in a party's sole and absolute discretion would be upheld if parties intended to provide for such discretion).

36. See Cafeteria Operators, L.P. v. AMCAP/ Denver Limited Partnership, 27 Colo.Law. 160 (App.No. 96CA1493, annc'd 3/5/98) (suggesting that a freely negotiated provision in lease giving a landlord an absolute right to withhold consent would be enforceable as written). See generally Nelson v. Elway, 908 P.2d 102, 107 (Colo. 1995) (where "sophisticated parties who are represented by counsel have consummated a complex transaction and embodied the terms of that transaction in a detailed written document, it would be improper for this court to rewrite that transaction by looking to evidence outside the four corners of the contract to determine the intent of the parties").

37. See Krendl, Long Form General Partnership Agreement in 1 Colorado Methods of Practice § 2.117 (1998 Supp.). Similarly, partners likely could agree to a general provision regarding the obligation of good faith and fair dealing based on any of the formulations used by courts in evaluating of good faith and fair dealing issues for partnerships (e.g., "tortious state of mind"; "knowing breach of the partnership agreement"), without violating the manifestly unreasonable standard.

Column Ed.: David P. Steigerwald of Sparks Dix, P.C., in Colorado Springs--(719) 475-0097

This newsletter is prepared by the Business Law Section of the CBA to apprise members of the Bar of current information concerning substantive law. This month's article was written by E. Lee Reichert.

This article originally appeared in the July 1998 edition of The Colorado Lawyer, volume 27, number 27, and is reprinted with permission.