22 January 2013

Do your partners have to treat you fairly?


So, you're a member of an LLP — do your ‘partners' have to treat you fairly? You might think so but this is not, in fact, always the case.In a traditional (unlimited) partnership, partners owe each other a duty of good faith but, in LLPs, no such duty is implied.  A duty of good faith is sometimes expressly included in the LLP agreement but, if it's not there, the there is no such duty. While members of an LLP can, sometimes, owe a ‘fiduciary' duty of utmost good faith (for example when acting as an agent of the LLP they will owe the LLP itself this duty) they do not owe each other any such duty in their day-to-day dealings. This can make things very difficult for a member of an LLP who thinks he or she has been hard done by.  Whereas employees treated badly can claim constructive dismissal and partners treated badly can assert a breach of the duty of good faith, there may be no such recourse for a member of an LLP. Unless that member can find an express term of his or her contract which has been breached, the recourse to the courts is available only if the poor treatment arises out of unlawful discrimination (on the grounds of sex, pregnancy, marital status, race, disability, sexual orientation, gender reassignment, religion, belief or age). For members who can identify a breach of the LLP agreement, a ‘nuclear option' may be available. If the LLP agreement can be shown to have been ‘repudiated' by the other members, it will fall away and the ‘default agreement' will take its place under which members share profits equally, there are no post-termination restrictions and there is no provision for expulsion. If you are being asked to join an LLP and there is no duty of good faith, you might want to ask why…

Category: Blog