Texas Partnership Rule Changes Warrant Close Attention to Detail

Texas reinforced its vision for flexibility for limited liability companies last May with new rules allowing waivers of duties, but this move lacks an important backstop for companies doing business in Texas.

Both Texas and Delaware have long championed LLCs, which were designed to offer companies options by providing limited liability without the formalities of corporate law.

Texas passed Senate Bill 29 amending Texas Business Organizations Code to allow LLC and limited partnership agreements to “expand, restrict, or eliminate any duties, including fiduciary duties,” owed by managers, members, officers, and partners.

But Texas’ new statutory language itself isn’t where the differences lie. Instead, they’re found in Texas’ long-standing refusal to imply contractual duties of good faith and fair dealing—a feature that significantly magnifies the practical consequences of a duties waiver.

For advisers, the lesson is clear and demanding. Texas LLC and partnership agreements can no longer rely on background legal norms to police discretion or fill gaps. A Delaware-style form agreement imported into a Texas deal may not function as expected.

Delaware waives duties through a different legal architecture. Like Texas, Delaware permits LLC and limited partnership agreements to waive or eliminate fiduciary duties, including duties of loyalty and care.

But Delaware preserves a narrow contractual constraint that can’t be waived: the implied covenant of good faith and fair dealing. The covenant isn’t a fiduciary duty and doesn’t authorize courts to impose open-ended notions of fairness.

It’s a contract-law doctrine designed to prevent one party from exploiting gaps in an agreement in ways that defeat the parties’ reasonable expectations at the time of contracting. The implied covenant remains embedded in the contract itself even where fiduciary duties are eliminated. Texas law supplies no comparable default backstop.

That absence reflects long-standing Texas Supreme Court doctrine. In English v. Fischer, decided in 1983, the court rejected the existence of a general implied duty of good faith and fair dealing in a commercial dispute between business parties, emphasizing that Texas law enforces contracts as written rather than judicially imposing standards of fairness.

The court has reiterated that position consistently. In City of Midland v. O’Bryant, a case about whether an employer owes a duty of good faith and fair dealing to its employees, the court reaffirmed that implied duties of good faith arise only in narrow “special relationships” and held that employer/employee isn’t one of those relationships.

To date, Texas courts haven’t held that the relationship between LLC managers and members, or between general partners and limited partners, constitutes the kind of special relationship of trust that generates an implied duty of good faith and fair dealing. That doctrinal reality frames the question Texas businesses now face: not whether fiduciary duties can be waived, but what governance assumptions, if any, remain once they are.

This matters because LLCs and partnerships aren’t niche entities. They are the dominant business forms for non-public companies. According to the Texas Secretary of State, the state now has nearly three million active registered business entities, with in-state LLCs comprising the largest share—roughly two million. These aren’t Fortune 500 firms or S&P 500 companies; they’re the backbone of the Texas economy.

For these businesses, governance often rests as much on trust and shared expectations as on formal drafting. Family members may assume loyalty even if the operating agreement is sparse. Longtime partners may expect discretion to be exercised with restraint.

Under Texas’ current regime, those expectations may have no legal footing unless they are expressly written into the agreement. Texas treats as optional what Delaware law treats as a narrow contractual backstop.

In Texas, LLCs and limited partnerships are the workhorse entities for some of the state’s largest and most capital-intensive industries. Energy infrastructure is a prime example; most major pipelines are operated through limited partnerships, a structure long favored for tax efficiency, asset segregation, and centralized control.

Oil and gas exploration, real estate development, private equity–backed operating companies, and venture-backed technology firms routinely rely on LLCs and LPs to house operating assets and joint ventures. These are sophisticated enterprises that often involve multiple layers of investors, sponsors, and managers, where control and information are unevenly distributed. In those settings, the legal assumptions that govern how discretion may be exercised and whether it’s constrained at all have meaningful consequences for risk allocation and dispute resolution.

At a high level, Texas and Delaware share a core principle of LLC and partnership law: Parties get what they contract for. Courts in both jurisdictions treat these entities as creatures of contract and are reluctant to rescue parties from bad bargains or poor drafting. What contract is presumed to include, not whether contract governs, is the difference.

Delaware assumes that parties contract against a backdrop of good faith, preserving the implied covenant as a narrow but mandatory constraint even when fiduciary duties are eliminated. Texas doesn’t. Under Texas law, courts don’t presume that parties contract in good faith unless the agreement expressly says so or the relationship falls within a recognized category of special trust.

As a result, a Texas LLC or partnership agreement that waives fiduciary duties and is silent on good faith may leave managers with broader discretion and investors with fewer legal remedies than a functionally identical agreement governed by Delaware law.

The consequences are practical and unevenly distributed. Sophisticated parties—private equity sponsors, dominant investors, or controlling owners—are more likely to understand the implications of fiduciary waivers and insist on them.

Less sophisticated members may not. In closely held entities, where exit is costly or impossible, the absence of legal guardrails can turn routine governance decisions into existential disputes. Conduct that is technically authorized by contract may nonetheless destroy the enterprise.

If parties want loyalty, restraint, or good-faith decision-making, they must negotiate and draft for it explicitly. If they don’t, the law is unlikely to supply it later. Until that balance is clarified, investors, founders, and families doing business in Texas should read the fine print not just twice, but line by line.

Columnist Carliss Chatman is a professor at SMU Dedman School of Law. She writes on corporate governance, contract law, race, and economic justice for Bloomberg Law’s Good Counsel column.

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