Wednesday, August 24, 2011

Fiduciary Duties and the Nature of an LLP


While the position of law in relation to the inter-se relationship between partners of a firm is fairly well-settled, there is no great clarity on similar issues arising in the context of LLPs. It is clear that the “double agency” rule of partnerships does not apply to LLPs: but, if LLPs are seen as a hybrid form of a partnership and a company, does the law impose any fiduciary duties on members of an LLP? To what extent can features of partnership law be applied to LLP as being based on general principles? This question arose before the England & Wales High Court in Barthelemy v. F&C Investments [2011] EWHC 1731 (Ch).
 
The Court held that a member of an LLP does not as such owe fiduciary duties to other members. The Court held that the LLP Act established a wholly new form of entity, which “may be expected to have its own corporate governance structures”. Referring specifically to Section 1(5) of the LLP Act 2000, the Court held that the general law of partnerships does not apply to LLPs at all, unless specifically stated to apply. Insofar as the question of fiduciary duties was concerned, the Court relied on the classic paragraph in White v Jones [1995] 2 AC 207 where Lord Browne-Wilkinson explains how fiduciary duties arise:

The paradigm of the circumstances in which equity will find a fiduciary relationship is where one party, A, has assumed to act in relation to the property or affairs of another, B. A, having assumed responsibility, pro tanto, for B's affairs, is taken to have assumed certain duties in relation to the conduct of those affairs, including normally a duty of care. Thus, a trustee assumes responsibility for the management of the property of the beneficiary, a company director for the affairs of the company and an agent for those of his principal. By so assuming to act in B's affairs, A comes under fiduciary duties to B. Although the extent of those fiduciary duties (including duties of care) will vary from case to case some duties (including a duty of care) arise in each case. The importance of these considerations for present purposes is that the special relationship (i.e. a fiduciary relationship) giving rise to the assumption of responsibility held to exist in Nocton's case [Nocton v Lord Ashburton [1914] AC 932] does not depend on any mutual dealing between A and B, let alone on any relationship akin to contract. Although such factors may be present, equity imposes the obligation because A has assumed to act in B's affairs. Thus, a trustee is under a duty of care to his beneficiary whether or not he has had any dealing with him: indeed he may be as yet unborn or unascertained and therefore any direct dealing would be impossible…

Noting the principle laid down in this paragraph, the Court in Barthelemy nonetheless held that in the context of LLPs, no such general assumption of responsibility could arise. It was also held, following the typical reluctance of the common law to impose good faith obligations, that there was no duty of good faith owed by the members of an LLP to one another. 

The Court noted the view in Palmer on LLPs that there was a general fiduciary obligation; noting (with some understatement) that “the discussion in Palmer proceeds a little too quickly here”. It was held that the view that ‘as a general rule, members of an LLP owe fiduciary duties to one another’ may not be appropriate. This is because under s 1(5) of the English LLP Act, the general principles of partnership law cannot be read in to the law governing LLPs. Further, an LLP has a separate corporate personality unlike a typical partnership, and the Act leaves open a large window of flexibility for structuring relationships through the LLP form. In such a scenario, the Court held that a general rule would not be appropriate. Thus, the Court seems to leave open the issue that there may be cases where the Agreement between the members is such that an “assumption of responsibility” situation arises: in such cases, based on White v. Jones, fiduciary duties may well arise. The Court held, refusing to lay down a rule of general application, “it is necessary to look at the specific roles and responsibilities [of the member] arising in the particular context in question in order to assess whether and what fiduciary obligations might arise…”

The decision of the English Court also contains a discussion of the general content of fiduciary obligations in the common law. Another excellent discussion of fiduciary duties is available in J. Edelman, “When Do Fiduciary Duties Arise?” (2010) 126 LQR 302.

1 comment:

Renganath said...

I haven't read the judgement, but it appears from your post that there has not been a juxtaposition of fid. duties of members of an LLP with the fiduciary duties owed by directors - considering esp. that LLPs are seen as a cross between pships and cos. Of course, here again there is the issue that fid. duties of dirs. are owed to the co. rather than to the sh. holders (except probably in the case of fresh issue)