Andrew Cromby, partner, Bracher Rawlins
LLPs should retain a duty of good faith to partners
12 July 2010
28 January 2014
9 December 2013
28 May 2013
24 March 2014
15 April 2014
It’s difficult not to be sympathetic about the events reportedly taking place at Halliwells. These throw into sharp relief just how strongly an LLP can be tested in difficult financial times.
Turning from Halliwells to the wider legal world, many solicitors have found themselves in hot water recently, although perhaps to a lesser extent; but what is currently commonplace for many firms is the need to restructure internally. Often this means asking partners to leave. How easily can such partner changes be facilitated?
Consider a hypothetical scenario. A solicitor is meeting a number of partners from another firm, an LLP, he is thinking of joining. The solicitor asks about the culture of the firm. The question is almost de rigueur - as is the answer: “We have our differences, but we’re very collegiate.”
Wind the clock forward two years. Things have not worked out for our partner. He’s just been handed a notice requiring him to retire as a partner. He is, in fact, being expelled. He had never been told his position was at risk. He was even performing better than some of the partners who had been with the firm for much longer, but they’re not being given the chop. Everything leading up to his expulsion took place behind closed doors. Suddenly things don’t feel very collegiate.
In fact, our unfortunate partner may have opened the door to treatment of this kind when he signed up to the LLP’s members’ agreement. His partners may be able to argue that, under the members’ agreement, they are acting within their rights.
Everyone is familiar with the fact that LLPs offer the opportunity to limit a partner’s personal liability, but they can also offer the opportunity to exclude, in its entirety, the duty of good faith between the partners. This duty was a feature of traditional partnerships long before the advent of LLPs. It means partners have to make decisions fairly and, to an extent, openly; in many ways it’s a safety mechanism that governs precisely what kind of conduct is permissible between partners.
Of course, if you are the kind of business that prefers to make tough decisions and believes that, when the majority of partners want another partner to go, it needs to happen quickly, you might view the duty of good faith as something of an inconvenience. In those circumstances troublesome considerations such as ensuring you arrive at a decision to expel in accordance with a duty of good faith can merely prevent or impede an early departure.
This is a problem that can be addressed within an LLP. The starting point is that an LLP is subject to a default regime not dissimilar to old-fashioned partnerships. This is set out in part six of the Limited Liability Partnerships Regulations 2001. However, there is little to prevent members stripping out the default provisions and replacing them with provisions that are more to their liking. Increasingly, that is what’s being done.
The result? Where the terms of an LLP’s members’ agreement have been drafted properly, decisions to expel a member or partner may be passed by the necessary mechanism and the scope for the outgoing partner to protest may well be reduced. That’s not to say there won’t still be laws and duties to which the remaining partners may be subject and which may govern what they can or cannot do to their fellows, but excluding the duty of good faith may well be a sign that partners are seeking to loosen the constraints on how they can treat one another.
Solicitors’ practices without internal good faith? This ought to be shocking, but with external investment in firms on the horizon and a constantly developing commercial culture, this trend may well continue. However, as a profession, should we be asking ourselves whether this is a step too far?