Law of Partnership Fiduciary Duty Analysis

Law of Partnership Fiduciary business AnalysisAnalyse at heart the Law of Partnership Fiduciary DutyDefinitionPartnership is a longstanding legal concept which has become regulated by statute. Recently, the instauration of Limited Liability Partnerships has added a rising species of league to the legal lexicon and posits a dramatic reworking of the way in which alliances atomic human action 18 viewed.The classic definition of partnership is provided by s.1 of the Partnership constitute 1890Partnership is the relation which subsists between persons carrying on a business in common with a view to profit.The relationship between partners must be contrasted with the relationship between employer and employee. The latter may also be said to be carrying on a business etc. exactly matchless is subordinate to the authority of the some other. Partners possess a account of co- lastent rightsTo be involved in decisions affecting the businessTo sh be in the wage and lossesTo ex amine the accountsTo be entitled to the good faith of the other partner(s)To veto the introduction of a new partner.Traditionally, a definition of partnership would involve a contrast with a comp any(prenominal)(prenominal) drawing the distinction that, distant a company, a partnership could non benefit from the protection of limited liability. However, as go out be seen below, such a distinction is no eternal universally valid following the Limited Liability Partnerships Act 2000.Fiduciary DutyPartnership is a particular type of contract (albeit governed by the partnership legislation). There is therefore considerable involvement of the common law and equitable principles. The major consequence of entering into a partnership is that the partners owe a fiducial duty to one another. Since the law of fiduciaries and constructive trusts is a creature of equity and the categories of equity ar never closed it is impossible to provide a all-encompassing and definitive list of such duties but a number of clear principles have emerged. The partners owe one another a duty of good faith. For example, in Floydd v Cheney1, an architect engaged an assistant with a view to partnership. The assistant removed certain documents and photographed others in the absence of the architect who then sued for the return of the documents and negatives and sought-after(a) an injunction restraining the use of confidential information. There was a dispute as to whether this was a partnership or a master/servant relationship. However, Megarry J held that horizontal if this was a partnership, there existed a duty of good faith which prevented the assistant from acting as he did.A partnership relationship is one of finish trust (uberrimae fidei). Therefore each partner must deal honestly and openly with his fellows and confess all relevant information to them. A failure to disclose is a breach of this duty there is no need to establish fraud. This is also partly somatic in statute. Section 28 of the Partnership Act 1980 providesPartners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives.A regent must not profit from his trust and this applies to partners as fiduciaries. This a partner must not make unauthorised personal profit. This principle is also embodied in s.29 of the Act which requires a partner to account to the debauched for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership or involving the use of partnership holding. Thus the rule in Keech v Sandford2 (which provided that where a trustee of a trust which holds a permit obtained a renewal of the lease for his own benefit, he held the lease as a constructive trustee for the beneficiaries) applies to partners where they obtain such a benefit as a result of their perplex as a partner. A partner must not put himself in a position of conflict of int erest and duty toward his partners. This is codified by s.30 of the Act which provides that where a partner has carried on a business of the same nature and in competition with the partnership, he must account to the other partners for the profits of that business. Because, as has been seen, partnership is a species of contract, the indite foothold of the partnership deed (if any) and indeed those imposed by the Act can be varied by express or implied agreement.Limited Liability PartnershipsFor many years pressure had been growing in the commercial world and particularly among those providing professional services for the introduction of a form of partnership that would provide a limitation of liability akin to that enjoyed by directors of a limited company. This was driven in particular by an increase in litigation and the consequent threat to firms and therefore to their partners personally. This led to the passage of the Limited Liability Partnerships Act 2000 and the creation of Limited Liability Partnerships. LLPs are therefore entirely a creature of statute and a new form of legal entity. They continue to enjoy the organisational flexibility of partnerships. In matters relating to taxation (partners are Schedule D as before) they are similar to traditional partnerships but in many other respects it is appropriate to think of them in terms of the company model. Indeed the only way in which an LLP can be created is by reachting an incorporation document to Companies House. While there is no need to submit a partnership deed (contrast the filing of Articles of Association in respect of companies), partners in LLPs are well advised to subscribe to a deed which will regulate the operation of the partnership and protect their interests in the event of a dispute. An LLP is therefore a corporate body with a separate identity from the partners. In general, partners in an LLP will have full entitlement to limited liability. (There is an exception in circumstanc es in which an LLP continues to trade after being reduced to only one designated member such that, after a prescribed interval, the remaining partner will become jointly and severally liable with the LLP.) Similarly, in the event of insolvency, partners are not in most circumstances personally liable to any extent over and above the aggregate of their capital share in the LLP and any contribution they have agreed to make. An LLP is analogous to a limited company in that it has no existence until the formalities of incorporation are complete. However, many of the restrictions upon the freedom of action of company directors particularly interaction with the corporate body do not apply. Nonetheless, unlike partnerships, Companies House imposes a number of formal requirements such as the filing of an annual return and audited accounts. Both partnerships and LLPs involve a venture for profit. There is no restriction upon the type of venture to be undertaken (although LLPs are not suit able for use by charities). In a traditional partnership, the central feature is the relationship between the members whereas with an LLP it is the act of association that creates the entity. This can be seen from the position that in a partnership every member is an agent of the partnership and an agent of the other partners whereas in an LLP every partner is an agent of the LLP itself but not of the other partners. This has led commentators3 to concludeOverall, LLPs are a curious mix of the law of partnership and the law of companies.Those authors (at p.165) speculate as to the operation of duties within the new form of partnershipPartners will owe a duty to the LLP as a body corporate in common law but it seems undecipherable whether they owe a duty of good faith to each other.LLPs and Fiduciary DutyThe fiduciary duties of a partner to an LLP are helpfully explored by Whittaker and Machell4. They get hold that the core obligation of a fiduciary is that of single-minded loyalty to his principal. This core obligation is represented by several separate duties or restrictions including but not limited to the followingTo act at all times in good faithNot to misapply the money or property of the LLPNot to put himself in a position of conflict of interest with the LLPTo disclose all relevant information (including any material breach by him of his fiduciary duties to the LLPNot to compete with the LLPNot to misuse his position in the LLP for his own advantage.The authors suggest (at p.137)that the fiduciary obligations set out above will exist unless they are expressly (and properly) excluded by the LLP agreement or it is clear from a consideration of all the circumstances that particular duties are inapplicable.The Act contains a number of default rules which specify such duties and, regulate, for example, the circumstances in which a member may be expelled from an LLP but it should be noted that these rules are not a comprehensive statement of a members fiduc iary duties which will continue in their totality to be regulated by equitable principles where any partnership deed does not make express provision.Partnerships in Other JurisdictionsPartnership is recognised as a legal relationship throughout atomic number 63 and, provided that it has been create in accordance with the laws of a member state and has its registered office (in the case of LLPs) or principal place of business (in respect of traditional partnerships) within the EC, a partnership will be treated for the purposes of European law in the same way as a natural person who is a national of a member state. In most European jurisdictions there are three basic types of commercial partnership the undisclosed or enigmatical partnership the general partnership and the limited partnership. In France, partners in a secret partnership can authorise each other to disclose their partnership relationship to third parties thus rendering it a socit en participation ostensible with the r esult that they become jointly and severally liable for the firms obligations. By contrast, in Austria, where the partnership will consist of a principal and a single dormant partner, the latter will not be liable even if he manages the business. The formalities for creation of general partnerships vary according to jurisdiction. In countries such as Belgium, Bulgaria and Greece, it is necessary to have a indite agreement for registration purposes whereas in other countries an oral agreement will suffice. In France and Belgium, there are two types of limited partnership (socit en commandite simple and socit en commandite par actions). The latter is more analogous to a limited company. In the former, the limited partners may not participate in the management of the partnership on pain of losing their limited status. This contrasts sharply with the operation of English LLPs discussed above which is more akin to that in Austria which allows limited partners to participate in internal management.Proposals for ReformFinally, it should be noted that the Limited Liability Partnerships Act 2000 created an additional category of partnership rather than reforming the existing rules. In the Preface to the archetypal Edition of Partnership Law, Geoffrey Morse observedIt is to the everlasting credit of the Victorian judges that they created a business form which has proved to be both beardown(prenominal) and flexible enough to adapt itself to EEC-wide firms of accountants when it was designed for small parochial businesses in Victorian England.Nonetheless, as has been seen by the need to develop LLPs, modern circumstances demand continual evolution. In November 2003, the Law Commission and the Scottish Law Commission published a report on such reform accompanied by a detailed draft Partnership Bill. Central to their proposals is a redefinition of partnership which moves away from the relationship between persons carrying on business together to an association formed whe n two or more persons start to carry on business together under a partnership agreement emphasis supplied. This gives primacy to the existence of an agreement. A written agreement has never been an essential prerequisite of a partnership (even under the 2000 Act) and the Commissions shied away from imposing a statutory model agreement but it is even proposed to abolish partnerships at will providing that there should at the very least be express agreement.BibliographyAdams, T. et al, crinkle Law and Practice 2004-2005Banks, R., Lindley Banks on Partnership, (18th Ed., 2002)Morse G. et al, Palmers Limited Liability Partnership Law (2002)Morse, G., Partnership Law, (5th Ed., 2001)Whittaker, J. Machell, J., The Law of Limited Liability Partnerships, (2nd Ed., 2004)Encyclopaedia of Forms Precedents, Partnership, Volume 30(1)1Footnotes1 1970 Ch 6022 (1726) Sel Cas t King 613 For example, Adams, T. et al, Business Law and Practice 2004-2005, p. 1664 The Law of Limited Liability Partne rships, (2nd Ed., 2004) p.134 et seq