New year, good faith: five tips for avoiding a breach of fiduciary duty claim arising in your partnership

It is well established that partners in a partnership owe each other duties of good faith and trust which are known as ‘fiduciary duties’. Partners need to be able to trust each other and act with integrity in order to engage in business to their mutual benefit, meaning that they owe each other duties of trust which are more onerous than duties owed in similar relationships of trust – such as the duties owed between employees and employers.

The nature of fiduciary duties means that the risk of breaching them is often high and the consequences of doing so can be severe, but partnerships can take proactive steps in order to minimise this risk and make provisions for what happens if breaches arise.

1. Ensure that you have a written partnership agreement in place which gives the partners a clear understanding of what is expected of them and how they should conduct themselves in the course of the partnership’s business. Not every breach of a partner’s duty is a breach of fiduciary duty, so try to build provisions into the agreement defining exactly what duties are owed and outline the scope of the partners’ responsibilities to the business and each other. The wording included should be clear and unambiguous, as well as being reasonable and consistent with the general obligations of the partners in the business.

2. It is important to have a general plan in place to tackle what happens should a breach of fiduciary duty occur. Try to pre-empt potential conflicts by outlining the decision-making processes when this happens and any dispute resolution mechanisms. Consider adding express clauses into the agreement which act as a deterrent to breaches and make clear what will happen in the event of a breach of fiduciary duty, for example a right of forfeiture of all or part of a partner’s profit share in the partnership.

3. Encourage a culture of openness and transparency within your partnership. It is important for partners to understand what they can and cannot do and being able to communicate freely with each other will enable the partners to work around any misunderstandings and find common ground. If a partner is going to undertake anything that could be perceived as a breach, that partner should make full disclosure of what they are going to do to all other partners and seek to obtain their consent before proceeding. This is particularly relevant where the course of action considered may ultimately be in the interests of the partnership but could still be perceived as a breach, for example where there is also a benefit to the partner’s own interests.

4. Fiduciary duties bind partners beyond their involvement in running the partnership’s business. They also arise before the partnership is established, for example in negotiations before formation, and after a partner has left the partnership. It is therefore important to maintain communications with any departing partners. This is often where breaches of fiduciary duty occur, such as the setting up of competing businesses or where outgoing partners act for their own benefit. Try to be transparent as this will help to facilitate settlement discussions if needed and aim to treat all outgoing partners equally and consistently.

5. Finally, it would be prudent to conduct regular reviews of the partnership’s records to identify potential breaches of fiduciary duties. Consider carrying out regular audits of the partnerships’ finances, transactions and decision-making processes to ensure that partners are complying fully with their duties of good faith. This will also encourage a culture of accountability within your partnership, minimising the risk of future breaches.

Fiduciary duties exist to ensure that partners act in the best interests of the partnership and perform their roles in a loyal and honest manner. By taking active steps to make your fellow partners aware of the nature and scope of these duties and what to do in the event of a breach, the partnership can turn its focus to running its business effectively knowing that the risks of breaching fiduciary duties have been minimised.