In all partnerships, whether it is expressed in the deed or not, the partners are bound to be true and faithful to each other.
This means that a partner must act in the interests of the partnership and not for himself. He must act honestly and treat his fellow partners with the utmost fairness and good faith.
This duty should be made clear to all potential partners, and set out in the partnership agreement. The details of the duty may, however, be modified in
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that agreement or by the practice of the parties.3In Tann v Herrington4 (see also below), the court held that the duty was not breached by the defendant partner’s failure to disclose to the claimant partner the correspondence preceding a client’s letter of claim, because the obligation to keep a co-partner informed was tempered by the practice of the parties, which was for the defendant to deal with administrative matters, and by the partnership agreement which only imposed a duty on a partner to provide information to another partner on request.
The relationship between partners is a fiduciary relationship5and therefore they owe each other fiduciary duties, in other words to behave as if they were trustees, and the other partners beneficiaries.
A limited duty arises even before the partnership is formed. In Simms v Conlon and another,6the court held that the principle of caveat emptor (i.e. let the buyer beware) did not apply to the making of a partnership agreement. Each party owed a duty to the other negotiating parties to disclose all material facts of which he had knowledge and of which the other negotiating parties might not be aware. Breach of this duty would merely give rise to a right of rescission unless the breach was fraudulent, in which case the party to whom the duty was owed could instead recover damages for the tort of deceit.
The duty of good faith continues until the partnership is fully wound up.
Duty of care
This flows from the relationship of agency between the partners (see 7.1.1). However, the standard is unclear. In Winsor v Schroeder,7a partner rejected, without consulting the other partner, an offer of £36,000 for partnership property marketed at £50,000 but valued by the agent at £39,000. A property slump occurred and the property was eventually sold for £30,000. The court held that although a partner was not liable for innocent mistakes made in good faith, this was more than an error of judgment and fell below the standards expected, which were ‘the standards of a reasonable businessman in the
3Tann v Herrington [2009] EWHC 445 (Ch), [2009] PNLR 22.
4Tann v Herrington [2009] EWHC 445 (Ch), [2009] PNLR 22.
5Thompson’s Trustee v Heaton [1974] 1 WLR 605.
6Simms v Conlon and another [2006] EWCA Civ 1749, [2008] 1 WLR 484.
7Winsor v Schroeder (1979) 129 NLJ 1266.
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In the Scottish case of Ross Harper & Murphy and others v Banks,9the court held that the standard of care required:
the exercise of reasonable care in all the relevant circumstances … [including] recognition that the relationship is one of partnership (which may import some tolerance of error), the nature of the particular business conducted by that partnership (including any risks or hazards attendant on it) and any practices adopted by that partnership in the conduct of that business.
In Broadhurst v Broadhurst10(see also 5.1.2), the parties agreed that the claimant would purchase vehicles overseas and pay the transportation costs, and the defendant would take all steps necessary to ensure that the vehicles were imported into the United Kingdom, registered and sold. The court held that there were many factors militating against easy sale of the cars, and although it might have been difficult for potential purchasers to contact the defendant, it was his secondary business and the claimant could not have expected him to make it his primary business, and in any event it had not been established that such difficulties caused any cars not to be sold. These problems were inherent in the venture and the defendant was not thereby in breach of his obligations. In Tann v Herrington11(see also above), the court held that the partner administering the firm’s insurance must do so with reasonable skill and care. Since the defendant partner knew that failing to notify the firm’s insurers of the client’s letter of claim in a timely manner could enable them to avoid indemnifying the firm, this was a breach of the objective standard of skill and care. Indeed, it was a breach of the lower standard which he would apply to his own affairs, and constituted culpable or gross negligence.
In Campbell v Campbell12(see also 2.1.1, 5.1.2 and 11.1.8), the court held that the defendant, who carried on business with his brother partly in London through a partnership and partly through overseas companies, had breached his duty of care to protect the business and its assets for the benefit of the
8Winsor v Schroeder (1979) 129 NLJ 1266 at 1266 per Woolf J.
9Ross Harper & Murphy and others v Banks [2000] PNLR 631 at [36] per Lord Hamilton.
10Broadhurst v Broadhurst [2006] EWHC 2727 (Ch), [2006] All ER (D) 143 (Oct).
11Tann v Herrington [2009] EWHC 445 (Ch), [2009] PNLR 22.
12Campbell v Campbell [2017] EWHC 182 (Ch).
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partners collectively because he had operated the overseas companies for his own personal benefit.
5.1.2 Statutory duties
Although the Partnership Act does not expressly set out the duty of good faith, it does set out at ss 28–30 three examples of the duty which apply in default of contrary agreement.13
Duty to disclose information
A partner must fully disclose to the other partners ‘true accounts and full information of all things affecting the partnership’ (s 28 of the Partnership Act). This is a positive duty to disclose information, rather than simply a negative duty not to conceal it. In Law v Law,14one partner agreed to buy out the other partner’s share in two instalments. After payment of the first instalment, the partner whose share had been purchased discovered that certain assets had not been disclosed. However, he accepted payment of the remaining instalment before commencing proceedings. The court held that although partners were under a duty to disclose information, the partner who had been bought out was not entitled to compensation for the difference in the value of his share of the partnership, because he had validly elected to reach a settlement without full disclosure.
In this connection, it should be noted that the partnership books must be kept at the principal place of business and every partner has the right to inspect them, including the right to use an agent to do so (s 24(9) of the Partnership Act; see also 8.1.1 and 10.1.2).
The content of the duty was discussed at length in Inversiones Frieira SL and another v Colyzeo Investors II LLP and another15(see also 5.2, 6.2.1 and
13As expressly stated in ss 29–30; in relation to s 28, see Moser v Cotton (1990) The Times,
29 August, and Lindley & Banks on Partnership (Sweet & Maxwell, 20th edn, 2017) at para 16-15.
14Law v Law [1905] 1 Ch 140.
15Inversiones Frieira SL and another v Colyzeo Investors II LLP and another [2011] EWHC 1762
(Ch); [2012] EWHC 1450 (Ch), [2012] Bus LR 1136.
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8.1.1), in which the court held that the test was ‘a functional one’.16The general obligation was to keep and make available information sufficient to enable a partner to examine into the state and...
