Delaware Supreme Court Offers Guidance on Good Faith Standards for Limited Partnership

This case summary was prepared by Matthew Arnold.

In Brinckerhoff v. Enbridge Energy Co., Inc., the Supreme Court of Delaware was asked to interpret whether the limited partnership agreement (the “LPA”) of Enbridge Energy Partners, L.P. (the “Partnership”) can be interpreted to permit the Partnership to “breach any of the LPA’s specific requirements if the [Partnership] acted in good faith.”  This litigation stemmed from a previous action involving Brinckerhoff, a unitholder of the Partnership, and the Partnership.  In that prior action, the Supreme Court of Delaware adopted a reasonableness standard that required the unitholder to allege that the Partnership’s actions must be “so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.”

These actions center on a joint venture agreement (“JVA”), between Enbridge, Inc. and the Partnership, to produce a pipeline from Alberta to Wisconsin.  This JVA dealt with intercompany complexities, as Enbridge was the parent company of the Partnership’s general partner.  In the current dispute, Brinckerhoff is disputing the fairness of Enbridge’s sale of its ownership in the pipeline back to the Partnership. 

This dispute revolves around the LPA of the Partnership.  Specifically, it is determining what section of the LPA governs this transaction.  Brinckerhoff alleged that this transaction should be governed by Section 6.6(e) of the LPA which states “[n]either the General Partner nor any of its Affiliates shall sell, transfer or convey any property to, or purchase any property from, the Partnership, directly or indirectly, except pursuant to transactions that are fair and reasonable.”  Therefore, Brinckerhoff believes that the transaction should be held to a fair and reasonable standard.  Contrarily, the Partnership claims that Section 6.10(d) of the LPA governs the transaction, under which the Partnership replaced the default fiduciary duties with a duty to act in a manner “reasonably believed by the General Partner to be in the best interests of the Partnership.”  Therefore, the Partnership believes that as long as it acts in good faith, it does not violate the LPA. The Court of Chancery, siding with the Partnership, dismissed this action stating that Section 6.10 of the LPA governed this transaction.

After giving a summary of the prior litigation of the parties and the LPA, the Supreme Court of Delaware distinguished between Sections 6.6(e) and 6.10(d).  The Court held that Section 6.10(d) is a general standard of care that operates without express standards, while Section 6.6(e) “imposes an affirmative obligation on [the Partnership] when contracting with Affiliates.”  Consistent with generally accepted contractual principles, the specific provision within Section 6.6(e) of the LPA displaces the general provisions of Section 6.10(d).  Therefore, since this was a transaction between the Partnership and an Affiliate, the standard of review is a fair and reasonable standard.  Similarly, the Partnership tried to state that other general standards within the LPA supplanted Section 6.6(e), however, the Court rejected these arguments stating that Section 6.9(a) (bad faith standard) and 6.8(a) (exculpating good faith breaches) did not apply to this transaction.

Under the fair and reasonableness standard in Section 6.6(e), the Court found that Brinckerhoff’s claim was sufficient to allege breach.  Having found that the claim was sufficient, the Court next looked to the LPA’s exculpatory provision, which required bad faith for damages.  Using Norton v. K-Sea Transp. Partners, L.P., 67 A.3d 354 (Del. 2013) as guidance, the Court found that “the use of the qualifier reasonably imposes an objective standard of good faith” and therefore Brinckerhoff does not need to plead to the heightened standard of bad faith.  Through this, the Court reversed its decision in the earlier Brinckerhoff action.  The Court further stated that, notwithstanding the exculpatory provision, the Court of Chancery has the power to provide equitable remedies if the General Partner violated the LPA.  Lastly, the Court rejected the fairness opinion provided by the Partnership, stating that the opinion came in the latter stages of the transaction and after the transaction terms were already agreed upon.

Key Points of Law:

  • “The DRULPA permits the LPA drafter to disclaim fiduciary duties, and replace them with contractual duties.  The drafter cannot, however, disclaim the implied covenant of good faith and fair dealing.”
  • “Although [the General Partner] must act in good faith under the LPA, and is not subject to fiduciary standards of care, it still must comply with the specific requirements of the LPA.”
  • “[The exculpatory provision] does not grant [the General Partner] absolute immunity from suit for any actions taken in good faith.  Instead it only immunizes [the General Partner] and other Indemnitees from monetary damages.  Equitable remedies are still available.”
  • “The LPA eliminated monetary damages if [the General Partner] acted in good faith.  It did not, however, limit equitable remedies.”
  • “The fair and reasonableness standard is something similar, if not equivalent to entire fairness review.”
  • “Thus, we depart from our earlier decision in Brinckerhoff III, and hold that to plead a claim that [the General Partner] did not act in good faith, Brinckerhoff must plead facts supporting an inference that [the General Partner] did not reasonably believe that [the transaction] was in the best interests of the Partnership.”
  • “The use of qualifier reasonably imposes an objective standard of good faith.”