New Jersey Revised Uniform Limited Liabilty Act Addresses Manifestly Unreasonable Operating Agreements

Generally, an “Operating Agreement” is an agreement amongst the members of a limited liability company (“LLC”).  It sets forth the Member’s rights and duties.  New Jersey’s Revised Uniform Limited Liability Act recognizes the members’ rights to freely contract amongst themselves with one exception: the operating agreement cannot contain terms and conditions that are “manifestly unreasonable.”   In other words, if the operating agreement is not “manifestly unreasonable,” the members may agree to restrict or limit fiduciary duties or set forth measures of performance of the contractual obligation of “good faith and fair dealing.”   The “manifestly unreasonable” standard allows Courts to intervene if they believe a term is so unfair to the members that the application of what is contained in the operating agreement is “manifestly unreasonable.”  Unfortunately, the drafters of the Act did not specifically define what “manifestly unreasonable” means.  In the next few years, I expect the Courts to provide more depth of what does and does not constitute terms that are “manifestly unreasonable.”