Partnership Law for Employment Lawyers. Clare Murray CM Murray LLP. Partnership Spoilers. General Partnerships and LLPs covered by separate bodies of law In the absence of a partnership or LLP agreement certain default rules regulate individuals’ rights & duties
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CM Murray LLP
General Partnerships are regulated by:
“Partnership is the relation which subsists between persons carrying on a business in common with a view of profit” s1(1) PA
But an exiting partner remains responsible:
Duty of Good Faith is owed by each partner to the others in all partnership dealings and transactions
Core fiduciary obligations of a partner are
loyalty (fidelity) and good faith, incorporating:
“If fiduciary relation means anything I cannot conceive a stronger case of fiduciary relation that that which exists between partners.” V-C Bacon, Helmore v Smith (1887)
Common Law duty of Good faith is reinforced by PA 1890:
Default rules which apply, in absence of agreement otherwise:
Right to dissolve a partnership at will by giving notice of dissolution to the other partners; no advance notice required.
Partnership at will arises:
In practice they tend to occur where:
Dissolution can trigger winding up of the business
Right to petition Court for dissolution of Partnership under s35:
An LLP is a corporate entity with its own separate legal existence
Flexible internal ownership and governance structure
LLP usually carries the duties and liabilities, contracts with third parties and usually owns the assets of the business
LLPs are regulated, not by general partnership law (except in limited circumstances), but by:
Responsibilities set out in CA and IA
Ensure LLP disclosure/compliance obligations are fulfilled e.g.
If in default Designated Members may be found guilty of
an offence and liable to a fine.
Default rules which apply in the absence of agreement otherwise, include
Key Default Rules (cont’d)
Expulsion, Resignation and Dissolution:
No majority of Members can expel any Member unless power to do so has been conferred by express agreement (Reg 8)
(NB. Legislation is silent on financial consequences of exit)
Right to petition the Court to exercise its power to order winding up:
Are fiduciary duties owed between Members, to the LLP and by Senior Management to the LLP?
Every Member is the agent of the LLP (s6(1) LLPA)
His acts are attributed to and bind the LLP (except in certain circumstances or as otherwise agreed)
When does he owe fiduciary duties to the LLP (beyond those set out in the Regulations - not compete without consent and not make secret profit)?
Contractual duty of utmost good faith – analogous to but not same as fiduciary duties.
Extent of contractual duty of good faith depends on factual and contractual context
Must have regard to legitimate interests of the LLP, but not obliged to act in interests of the LLP or subordinate/defer own legitimate interests to them
Contractual duty of good faith embraces:
“Dividing line” regarding duty to disclose in contractual duty of good faith
No automatic fiduciary duties owed between LLP Members
“Fiduciary duties arise from particular circumstances, where a person assumes responsibility for the management of another’s property or affairs”
Therefore where one has assumed to act in relation to the property or affairs of another, he comes under fiduciary duties to that other person
The extent of the duties will depend on the particular case.
No general fiduciary duties automatically owed by Members to LLP beyond statutory duties of no competition without consent & no secret profit
s.6 LLPA does not mean that members owe fiduciary duties to the LLP in everything they do.
Look at “the specific roles and responsibilities arising in the particular context in question in order to assess whether and what fiduciary obligations may arise”
None of the Members (in that capacity), had direct control over the affairs and property of the LLP or of each other in a manner which could to give rise to fiduciary duties
Fiduciary obligations of LLP Board Members/ Management etc to LLP?
“ask what obligations of a fiduciary character may reasonably be expected to apply in the particular context, where the contract between the parties wil usually provide the major part of the contextual framework in which that questions arises”
Consider the precise nature of the relation in question to determine the type of fiduciary oblations which apply.
Contractual context may mean the parties could not reasonably expect fiduciary obligations should apply.
When assessing Board member decisions, the Court will have regard to what Board Members genuinely thought to be in the best interests of the LLP
Measure the entire business relationship against s.1 PA 1890:
“Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”
s.1(3) PA 1890:
“The receipt...of a share of the profits of the business is prima facie evidence that he is a partner in the business but ..does not of itself make him a partner in the business..”
“..impossible to say …. a salaried partner is or is not necessarily a partner in the true sense. He may or may not be a partner depending on the facts….”
“What must be done is to look at the substance of the relationship between the parties … and not..any mere label attached to that relationship.”
“One must in every case look at the terms of the relationship to ascertain whether or not it creates a true partnership”
Stekel v Ellice  Megarry J
Sharing in profits and losses v. Guaranteed pay
Sharing in liabilities v. Indemnity against liabilities from Partners
Capital Investment v. No capital requirement
Participation in management v. Subject to control
Ability to hire, fire & sign cheques v. No such rights
Participation in assets on winding up of the Firm v. No participation
Held out as a partner, inc name on firm notepaper v. Not held out as Partner
“A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership”
Was served notice by the partnership
Claim to ET for unfair dismissal, breach of contract and
redundancy rejected – he was a partner, not employee
Appealed to EAT on basis he believed he was in reality an employee as:
There is no certain minimum number or types of rights to vote or to participate in management decisions to qualify as a partner
“..in many large professional partnership, all but a few of the partners have any right to participate in the overwhelming range of decisions made by the firm and yet they are clearly partners”
Court of Appeal: He was a Partner, not an employee
Whistle blowing protections (Court of Appeal - Clyde & Co & Morris v Bates Van Winkelhof )
ET: Claimant not a worker & could not pursue whistle blowing claim
S230 (3) ERA: Worker means an individual who entered into or works/worked under :
“a) a contract of employment, or
b) any other contract, whether express of implied and (if it is express) whether oral or in writing, whereby the individual undertakes to do or perform personally any work or services for another party to the contract whose status is not by virtue of the contract that of a client or customer of any profession or business undertaking carried on by the individual”
ET: Claimant was in business in her own right, receiving a share of profit for work carried out and did not satisfy limb b) of definition
The LLP as other party to contract, was a client or customer of the business/profession carried on by her
EAT: ET decision overturned - Claimant was a worker & could pursue whistle blowing claim
Claimant was in a subordinate position within the Firm
It was impossible to describe the LLP as her client or customer
She therefore fell within limb b) definition of worker
Court of Appeal: Claimant not a worker & could not pursue whistle blowing claim
A member of a limited liability partnership shall not be regarded for any purpose as employed by the limited liability partnership unless, if he and the other members were partners in a partnership, he would be regarded for that purpose as employed by the partnership”. S4(4) LLPA 2000:
CoA: Claimant would have been a partner if this had been a partnership
Court preferred wider view that “employed by the limited liability partnership” meant both employees and limb b) workers
Central question then - whether gen. partnership partners could be limb b) workers
Clear authority that such a partner could not be a worker:
As with employees, partner restrictive covenants are void unless they are:
But separate body of law has developed regarding partnership restrictive covenants
Bridge v Deacons  Judicial Committee of Privy Council