Traditional partnerships versus LLPs: do partners have the same rights?
While there are benefits to the LLP model, Daniel Sutherland warns those considering making the switch from a traditional partnership to draft their member agreement with care
In recent years, many law firms have made the decision to convert from a traditional partnership to an LLP.
Solicitors in a traditional partnership can expect their fellow partners to act in good faith towards one another and, if they do not, can seek redress, through the courts if necessary.
What many partners do not realise is that the same assumptions cannot be made if their firm makes the transition to an LLP.
Conversion to LLP has many merits and is a sensible choice for most. It dramatically lowers personal financial risk for partners.
But the shared terminology of partnership, ease of conversion and ability to mirror past custom and practice hides some of the fundamental differences between the two vehicles.
Those fundamental differences can come into sharp focus when an LLP member feels he or she has been wronged by the LLP, as it often quickly becomes apparent that a member is unable to hold the LLP to account in the same way that they might have held their partners to account in a traditional partnership.
One reason for this is that, in a traditional partnership, each partner owes to each of the other partners a duty of honesty and good faith.
This duty arises because the partners in a traditional partnership have all voluntarily constituted one another their agents in relation to the partnership’s affairs.
That relationship of mutual agency means each partner can bind each of the others to an unlimited extent in the ordinary course of the partnership’s business. With that power comes the responsibility to act in good faith in relation to the partnership.
In an LLP, the situation is quite different. An LLP at no time acts on behalf of its members (in the same way that a company does not act for its shareholders) and so the LLP is not bound by the obligation of mutual trust that exists between partners in a traditional partnership.
Similarly, individual LLP members do not act on behalf of one another and therefore that an obligation of mutual trust between members does not arise.
In contrast, the individual LLP members do act for and on behalf of the LLP and in doing so will owe the LLP a duty of good faith.
The relationship between LLP and member is therefore asymmetrical, with the LLP owing its members few, if any, legal obligations and members owing the LLP obligations to the high standard they might once have owed one another in a partnership.
This may seem like an esoteric difference, but the loss of this duty removes a powerful weapon in the arsenal of a wronged partner.
Examples of decisions which might leave a partner seeking redress include decisions as fundamental as profit-sharing, promotions and expulsion.
These types of decisions, in the traditional partnership context, would need to be made in good faith.
In the LLP context, an aggrieved member will find that an absence of good faith offers, of itself, very little assistance.
Instead the individual will need to find a contractual provision of the members’ agreement that protects him or her, or some other grounds for complaint, such as discrimination (one of the few employment rights extended to partners).
In many situations the unhappy member will find that neither the members’ agreement nor discrimination legislation will assist.
This can be particularly painful when it is clear the same set of facts in a partnership context would amount to a breach of the duty of good faith.
Likewise, in an employment context would amount to unfair or constructive dismissal, or in the company context would amount to unfairly prejudicial conduct (a protection that is in theory available to LLP members, but which is routinely disapplied in the members’ agreement).
LLP members can find themselves uniquely lacking in legal rights.
But all is not lost for an unhappy member, as the law has been developing, albeit slowly, to redress the balance of power and give more rights to the individual to challenge decisions.
LLP members are now classed as ‘workers’, giving certain additional rights that may be helpful, such as a right to paid holiday. Further rights may come to apply to LLP members in due course.
More powerfully, LLP members are increasingly challenging the decision-making of those entrusted with LLP management.
Where a decision has been reached on the basis of irrelevant factors or is so unreasonable that no reasonable decision maker could have reached that decision, there is the prospect for a partner to successfully challenge a decision, even if it has been taken in compliance with the members’ agreement.
These are far from complete replacements to the duty of good faith, but it remains a developing area of law.
As things stand, the best way for members to have confidence that they will have the appropriate rights when they have been wronged is to make it as clear as possible in the members’ agreement what those rights are and how they can be enforced.
Simply copying an old partnership agreement may not be enough.
Daniel Sutherland is a partner at Fox Williams LLP foxwilliams.com