Fiduciary duties in partnerships and LLPs

27th July 2022

A ‘partnership’ is not an entity, but instead is a relationship – a state of being – that exists where two or more people are running a business with a view to profit. In other words, the partnership does not exist independently of its partners. Due to this, the partners are agents of each other, and owe fiduciary (that is, being in a position of trust) duties, including to act with the utmost good faith.

Whilst there is not a legal definition of the duty of utmost good faith in a partnership, it is generally accepted that the fiduciary obligations imposed would include those matters applicable to directors of a company, that is that all partners have a duty to:

  • Act honestly toward other partners;
  • Act for the benefit of the other partners
  • Not to put themselves in a position of conflict of interests
  • Make full disclosure to the other partners of any information relevant to them
  • Ensure they are never making an unauthorised profit

Overall, a duty of good faith puts an obligation on all partners to ensure they always make a conscious effort to think about their actions and any consequences. Those who are thinking about entering a partnership should also be aware that the duty of good faith does not only apply once you have signed a contract, but also extends to negotiations leading up to the establishment of a partnership. Therefore, those who are negotiating a partnership should also keep in mind the obligations that are placed on them under a duty of good faith.

Unlike a partnership, a limited liability partnership (LLP) has a separate legal personality from its participants. Members of an LLP aren’t responsible to each other as they are in a partnership. The duty of good faith stems from the agency relationship between each member and the LLP, and it is well established that there are no general statutory fiduciary duties between members.

It is, of course, possible to create such duties between the members in writing in an LLP deed, but question whether it is desirable to do so. By extending fiduciary duties between members, you are creating obligations between each member, weakening the concept of limited liability of an individual member.

The interests of the business are suitably protected through the rights of the LLP and duties owed to it. Notwithstanding this, many LLP members do choose to extend the duty of good faith between them in their LLP deed, to demonstrate the importance a trusted relationship.

In addition to the existence of fiduciary duties of partners and members, there are a plethora of statutory duties (including the Partnership Act 1890, the LLP Act 2000, and LLP Regulation 2001, the Insolvency Act 1986 and the Companies Act 2006), contractual duties, such as confidentiality and restrictive covenants, and common law duties of care in tort. A well-drafted partnership or LLP deed will set out the rights and responsibilities of partners and members clearly and comprehensively.

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