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HCR Law Events

24 January 2024

From partnerships to the Post Office: is there a duty of good faith and is this desirable?

Even before the statutory recognition of the partnership relationship in the Partnerships Act 1890, the duties of the partners at common law was considered by Bacon VC in Helmore v Smith (1886) 35 ChD 436:

“If fiduciary relation means anything I cannot conceive a stronger case of fiduciary relation than that which exists between the partners. Their mutual confidence is the life blood of the concern. It is because they trust one another that they are partners in the first instance; it is because they continue to trust each other that the business goes on.”

Section 5 of the Partnership Act 1890 provides that every partner is an agent of the others in the conduct of the business carried on in common with a view to profit. This creates a fiduciary relationship between partners, being in broad terms:

  • A duty to act honestly toward other partners
  • A duty to act for the benefit of the other partners
  • A duty not to put themselves in a position of conflict of interests
  • An obligation to make full disclosure to the other partners of any information relevant to the partnership business
  • A duty to ensure they are never making an unauthorised profit.

Indeed Russell v Cartwright [2020] EWHC 41 (Ch) provides recent confirmation of the presence of partners’ fiduciary duties between themselves in a partnership; that is, a fiduciary duty arises where someone is entrusted with such a degree of confidence that they must put their own personal interests aside.

The duty of trust and confidence, central to the partnership relationship and arises as a matter of law, is, however, distinct from a duty of good faith, which may exist outside of a fiduciary relationship. For example, under section 6(1) of the Limited Liability Partnerships Act 2000, a member of an LLP is an agent of the LLP, but not an agent of the other members and as such they owe fiduciary duties to the LLP only.

However, it does not necessarily follow that a duty of good faith cannot be implied between the members of the LLP whose mutual rights and obligations, under section 5(1) of the Limited Liability Partnerships Act 2000, are to be governed by an agreement between the members or the default statutory agreement set out in that Act.

An increasing body of caselaw is emerging whereby a duty of good faith may be implied in commercial contracts and can be established through a “relational” agreement. Accordingly, whether there is a duty of good faith as between members of an LLP, will depend upon the terms of the LLP agreement itself.

Turning to the current Post Office controversy, the issue of good faith in relational contracts was considered at some length in the judgement of Mr Justice Fraser in Bates v Post Office (3) [2019] EWHC 606 (QB), who set out the following nine-point non-exhaustive list of tests that are indicative of a relational contract. It is easy to see how these might be applied in the context of an LLP:

“I consider the following characteristics are relevant as to whether a contract is a relational one or not:

  1. There must be no specific express terms in the contract that prevents a duty of good faith being implied into the contract.
  2. The contract will be a long-term one, with the mutual intention of the parties being that there will be a long-term relationship.
  3. The parties must intend that their respective roles be performed with integrity and with fidelity to their bargain.
  4. The parties will be committed to collaborating with one another in the performance of the contract.
  5. The spirits and objectives of their venture may not be capable of being expressed exhaustively in a written contract.
  6. They will each repose trust and confidence in one another, but of a different kind to that involved in fiduciary relationships.
  7. The contract in question will involve a high degree of communication, co-operation and predictable performance based on mutual trust and confidence, and expectations of loyalty.
  8. There may be a degree of significant investment by one party, or both, in the venture. This significant investment may be, in some cases, more accurately described as substantial financial commitment.
  9. Exclusivity of the relationship may also be present.”

What is particularly interesting in the context of an LLP, is that it would appear that the duty of good faith between the members can be excluded within the LLP Agreement, and that will be treated as a definitive position as between the members. It is widespread practice, for instance, to exclude a duty of care in an LLP Agreement, so as to prevent a claim for negligence by the LLP against an individual member. Might the exclusion of a duty of good faith provide further protection of the personal liability enjoyed by an individual member? Or do the members intend for their relationship to be enforceable at a level where good faith is at its very core?

There isn’t an appropriate benchmark here – much will depend upon the nature of the business, size of the LLP, roles of the members and so on. What will be appropriate in a joint venture or investment LLP will be inappropriate for a professional services business; the relationship between equity and fixed share partners will have inequalities which might make a duty of good faith inappropriate; a corporate member may provide an administrative function over an individual function making a duty of good faith inappropriate. The possibilities are multiple.

Given the potential implications of a claim for breach of good faith, and increasing attention that the courts are giving to these claims, this should be an important discussion to have with your partners and LLP members as to whether you intend for your relationship to include a duty of good faith. Certainly when updating your constitutional LLP document, clients are well-advised to address this issue, either by expressly excluding the duty of good faith or, where considered necessary or desirable, including such a duty. What is clear, is that by remaining silent on the issue, the duty of good faith will be a fertile battleground.

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About the Author
Rachel Khiara, Partner

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