The Importance of an Ironclad ‘Prenup’ in a Business Divorce—Recent Trends in Contractual Interpretation

Recent New York decisions demonstrate a judicial trend toward enforcing contractual provisions negotiated between sophisticated parties while maintaining limited exceptions for fraud and fiduciary duty claims.

New York courts routinely enforce negotiated contractual provisions, particularly between sophisticated commercial parties, but recognize narrow exceptions in specific factual situations. Courts also continue to reaffirm that fiduciary duties persist in closely held entities despite contractual attempts to limit them, and in the LLC context, operating agreements are strictly enforced according to their plain language, though LLCs themselves are not bound unless they are signatories.

This overarching theme, judicial deference to freedom of contract, is exemplified in a recent decision in Iberdrola Energy Projects v. Oaktree Capital Management L.P., 231 A.D.3d 33 (1st Dep’t 2024), where the First Department emphasized that

Freedom of contract, particularly between sophisticated commercial actors, dealing at arm’s length, is an important right… and, [a]bsent some violation of law or transgression of a strong public policy, the parties to a [commercial] contract are basically free to make whatever agreement they wish, no matter how unwise it might appear to a third party.

In Iberdrola, the First Department upheld a broad non-recourse provision that barred the plaintiff’s claims for tortious interference, unjust enrichment, and statutory violations, finding that the claims were related to the contract and foreclosed by its unambiguous terms. The court further noted that the plaintiff, as a sophisticated party, could have negotiated for a narrower provision but chose not to do so, reinforcing the principle that courts will not rewrite agreements negotiated at arm’s length.

Merger Clauses

Merger clauses and no-reliance provisions play a critical role in commercial transactions by clearly defining the scope of parties’ obligations and protecting against claims based on alleged understandings outside the four corners of the underlying agreement.

New York courts have consistently enforced merger clauses, particularly in disputes between sophisticated commercial parties. As explained in AT&T Corp. v. Atos IT Sols. & Servs., Inc., 714 F. Supp. 3d 310, 332 (S.D.N.Y. 2024), if “a merger clause and its surrounding contract were the product of arm’s-length negotiations between sophisticated parties, the specificity requirement may be relaxed (or even altogether disregarded).” (quotations and citations omitted) (applying New York law).

In Behler v. Tao, 43 N.Y.3d 343 (2025), the Court of Appeals affirmed that under Delaware law, the amended LLC agreement’s merger clause superseded any prior oral agreements between the parties, emphasizing the principle of freedom of contract by allowing the LLC’s operating agreement to govern the terms of membership and investment without regard to unsigned agreements. Delaware law, as applied in this case, supports the enforceability of LLC agreements and their amendments, reflecting a strong commitment to the principle of freedom of contract, which is similarly upheld in New York.

Likewise, in IBT Media Inc. v. Pragad, 220 A.D.3d 530 (1st Dep’t 2023), the First Department found that an oral agreement to purchase membership interests “could not have survived” the later execution of a written purchase agreement containing a merger clause because such clause “forecloses the introduction of parol evidence to vary or contradict the terms of the writing.”

However, New York courts recognize that merger clauses do not automatically preclude all claims. In Gedula 26, LLC v. Lightstone Acquisitions III LLC, 213 A.D.3d 409 (1st Dep’t 2023), the First Department clarified that while merger clauses may extinguish prior agreements, they do not preclude breach of contract claims arising from subsequent additional agreements.

No-Reliance and Disclaimer Provisions

New York courts generally enforce no-reliance and disclaimer provisions but have carved out exceptions where such provisions lack specificity or where one party possesses superior knowledge of the facts at issue. The enforceability of these provisions turns largely on how precisely they are drafted and the underlying circumstances surrounding any alleged misrepresentation.

In CANBE Properties, LLC v. Curatola, 227 A.D.3d 654, 657 (2d Dep’t 2024), the Second Department found that a general disclaimer did not defeat justifiable reliance where the seller failed to specifically disclaim the very representation alleged to be false – that all creditors “shall be current at the time of closing”. The court noted that the seller “had peculiar knowledge of the underlying fraud,” which further supported the buyer’s reliance on the misrepresentation. Id.

Similarly, in Ria R Squared, Inc. v. DW Partners, LP, 230 A.D.3d 983 (1st Dep’t 2024), the First Department found that no-reliance language in the parties’ agreements did not bar fraud claims because the alleged misrepresentations were incorporated by reference into the written agreements themselves, making the disclaimers ineffective.

LLC Operating Agreements: Interpretation and Enforcement

New York courts continue to strictly enforce LLC operating agreements according to their unambiguous terms, reflecting strong deference to freedom of contract in the LLC context. Additionally, courts reaffirm that operating agreements afford substantial contractual flexibility, particularly for sophisticated parties seeking to customize governance structures and limit traditional fiduciary duties.

For example, in 333 Johnson LLC v. Maple 333 Johnson Member, LLC, 237 A.D.3d 456 (1st Dep’t 2025), the First Department held that “the language of the agreement coupled with the irreconcilability of fiduciary duty principles with the operation of the agreement manifest the clear intention of the parties to preempt fiduciary principles.” The court emphasized that sophisticated commercial parties seeking broader disclosure obligations “could have included them in the agreement,” demonstrating judicial deference to contractual terms.

Nevertheless, New York Courts draw a firm line at core fiduciary obligations, particularly those owed to minority members where an actual fiduciary relationship exists. In Chan v. Havemeyer Holdings LLC, 223 A.D.3d 403 (1st Dep’t 2024), the First Department distinguished between outside investors and minority members, holding that while a manager did not owe fiduciary duties to the outside investor, it could not rely on contractual disclaimer provisions to avoid fiduciary duties owed to minority members where the manager made conflicting representations to them. The court concluded that, because the manager owed fiduciary duties to the minority members, broad disclaimer language in the subscription agreements did not bar fiduciary duty claims.

Recent litigation has focused on whether LLCs themselves are bound by their operating agreements. In Gurney-Goldman v. Sol Goldman Investments LLC, 235 A.D.3d 428 (1st Dep’t 2025), the First Department held that a defendant LLC was not bound by its operating agreement and thus was not liable for breach of contract with plaintiff where it was a manager-managed LLC and was not a signatory to the agreement.

The court rejected arguments that the LLC’s operational compliance with the agreement created binding obligations, noting that “the fact that defendant LLC was managed, opened bank accounts, or otherwise was operated in accordance with the operating agreement does not stop it from claiming that it is not bound by that agreement.” This development has significant implications for liability allocation and dispute resolution in multi-entity structures.

Finally, courts strictly enforce governance provisions covering member authority and removal. In Lengyel–Fushimi v. Bellis, 242 A.D.3d 727 (2d Dep’t 2025), the plaintiff, a Class A member of an LLC, sought a preliminary injunction to prevent his removal as a manager by other Class A members, arguing that the operating agreement did not authorize such removal by majority vote. The Second Department found that the operating agreement required any amendment, such as the removal of a manager, to be executed by all members, which had not occurred, thus entitling the plaintiff to the injunction. The decision reinforces that operating agreements control governance outcomes.

Takeaway

In conclusion, the clearer and more comprehensive the contract is, the more likely courts are to enforce it as written. This trend highlights the need for carefully drafted “business pre-nups” to mitigate risk in the event of a business divorce.

Practical Implications

• Drafting merger clauses and no-reliance provisions requires precision and specificity. Courts are more inclined to enforce provisions that expressly address the representations and reliance being disclaimed, rather than broad, generalized language.
• Sophisticated-party status creates heightened expectations for due diligence and contractual compliance but does not eliminate all fraud protections. Parties can strengthen their position by ensuring that merger clauses and disclaimers specifically address the categories of information and representations most likely to be disputed, while conducting thorough due diligence to avoid claims of superior knowledge or concealment.
• Operating agreements provide flexibility but cannot entirely eliminate fiduciary duties owed by managers and controlling members. Effective agreements should clearly allocate authority, define permissible conduct, and be reviewed and updated proactively.
• Retain experienced commercial counsel when involved in any business transaction or related dispute.

Reprinted with permission from the New York Law Journal^©, ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.