- Research Handbooks in Corporate Law and Governance series
Edited by Robert W. Hillman and Mark J. Loewenstein
Chapter 2: Freedom of contract for alternative entities in Delaware: myth or reality?
The idea that contractual commitments of competent adults are enforceable against those adults is an accepted, indeed revered, concept of American jurisprudence. The concept is sometimes referred to as freedom of contract, a term that enhances its appeal: we are a nation that prizes individual freedoms and the freedom to make enforceable contracts is among those freedoms. As any lawyer knows, and most non-lawyers would intuit, there are limits to the freedom of contract. Courts will not enforce a promise that violates public policy (e.g., a promise to commit a crime) or one that is unconscionable (whatever that means). But what of a contract that does not meet either of those limitations, such as a contract that appears to be terribly unfair to the party against whom enforcement is sought? These are often the “hard cases” that make “bad law,” as courts often find ways to ameliorate or avoid the adverse consequences of enforcement of bad bargains, sometimes stretching the concept of public policy or equitable principles to achieve a “just” result. Delaware, however, purports to eschew such judicial shenanigans, at least for alternative entities. By contrast, neither the Delaware courts nor the Delaware legislature has embraced the notion of contractual freedom for corporations. Corporate officers and directors are bound by a well-developed jurisprudence recognizing a duty of loyalty to the corporation; the ability of corporate fiduciaries to contract around that duty is virtually nonexistent.
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