LLPs are not like other partnerships, says John Machell, especially in respect of good faith


Ask a member of a partnership, particularly a professional, what they regard as the core aspect of the relationship between partners, and the most likely response will be the ethos of good faith.



Partners owe each other an overarching obligation and this obligation is associated with the fact that partnership is a relationship founded on mutual trust and confidence.



The core aspects are the obligations of honesty and openness of a partner in his dealings with his partners, as set out in paragraph 16-01 of Lindley & Banks on Partnership 18th edition and paragraph 11.1 of Blackett-Ord, Partnership Law third edition.



More broadly, when discussing partnerships the concept of good faith is used in two different ways. First, it is used as a collective label for the various fiduciary obligations owed between partners; so, for example, the leading textbooks referred to above discuss the fiduciary obligations owed by partners in their chapters on good faith. Second, good faith is an ingredient within particular fiduciary obligations or disabilities.



So, for example, where a partner wishes to take up an appointment where his interests would conflict with those of his partners, he can only do so with their informed consent, based on the full disclosure required by considerations of good faith.





LLPs - a different beast

Unlike other jurisdictions, UK limited liability partnerships (LLPs) are bodies corporate, not partnerships. Section 1(5) of the Limited Liability Partnership Act 2000 provides that the law relating to partnerships does not apply to LLPs except as provided in the LLP legislation. Although partnership law has not been imported wholesale, the Limited Liability Partnerships Regulations 2001 have applied certain aspects of partnership law: see regulations 7 and 8 (the default rules).



In carrying out its business, a member is an agent of the LLP: see section 6(1) of the act. Although the act does not provide so expressly, the relationship between a member and the LLP will, in the writer's view and unless the contrary is agreed, give rise to a series of fiduciary obligations on the part of the member. These obligations arise out of a member's position as an agent of the LLP, and his consequential power to affect the legal relations of the LLP with third parties. The core obligation of a fiduciary - the member - is that of single-minded loyalty to his principal, namely the LLP. Where a member acts in his capacity as such, the member must: act in good faith in what he believes to be the best interests of the LLP, and not for some ulterior purpose or separate interest (for instance, his own); not misapply money or property of the LLP; not (without fully informed consent) put himself in a position where his duty to the LLP and his own interests are in conflict, or may be in conflict; disclose material information to the LLP; not (without fully informed consent) compete in business with the LLP; not (without fully informed consent) obtain a secret profit for himself out of his position as a member.



Although not all these obligations are reflected in the default rules (see regulations 7(8) to (10)), I think they will be owed by a member to the LLP unless there is an agreement to the contrary, or the circumstances otherwise require.



Given that a member's fiduciary obligations arise from his position as an agent and partnership law generally has not been imported, it is unclear whether the relationship between a member and his LLP will give rise to an overarching obligation of good faith of the kind owed between partners. Where an agent transacts with his principal, he must act with perfect good faith and make full disclosure (paragraph 6-063 of Bowstead and Reynolds on Agency), but there does not appear to be an overarching obligation of the kind found in partnership law. However, the issue may be of little practical importance given that the specific fiduciary duties probably cover most of the same ground as the general obligation of good faith.





Inter-member agreement

Although it is clear that (absent agreement to the contrary) a member owes fiduciary obligations to his LLP, I maintain that inter-member obligations of this kind do not arise unless there is express agreement to that effect (although it should be noted that the statutory disclosure obligation, contained in regulation 7(8), is owed to each member rather than the LLP). Members are agents of the LLP, not of each other.



Should LLP agreements include an express obligation of good faith? Most members will want to include in their written LLP agreement an express obligation of good faith. However, consideration needs to be given to whether the obligation ought to be owed as between the members as well as by each member to the LLP. If the LLP agreement provides for decisions on all aspects of the management and operation of the LLP to be made by majority vote of the members, or to be delegated to a committee, the members may think that the decision whether to enforce an obligation of good faith should lie with the LLP (through its ordinary decision-making process) rather than with the members individually.



John Machell is a barrister at Serle Court chambers in London