PARTNERSHIPS: THE DUTY TO ACT IN GOOD FAITH

Under both the common law and statute, partners within a partnership owe each other certain automatic duties in addition to what they have privately agreed within a partnership agreement. One of the most important of these is the fiduciary duty to act ‘in good faith’. A fiduciary duty comes into (1) ….. when a person has possession and control of something, often money or real estate, that another person is entitled to benefit from. It is a combination of elements such as: (i) a duty of honesty; (ii) a duty of care; (iii) a duty of loyalty; (iv) a duty of fairness and (v) a duty to act in good faith.

(A) COMMON LAW DUTY OF GOOD FAITH The leading authority for this duty is the case of Blisset v Daniel (1853), in which the court considered the limits on the power of expulsion from a partnership and the duty of good faith in these circumstances. The facts are that Blisset was a partner in a law firm in which a proposal to employ another partner’s son was (2) ….. to the partnership for discussion. Blisset had (3) ….. objections to this, which resulted in the partners (4) ….. sides. One partner announced that he would leave the practice if Blisset was not removed, an ultimatum which persuaded the partners to expel him. Blisset started proceedings on the grounds that, despite the fact that the partnership agreement allowed for an expulsion to take place on a majority vote, in this case it was not an action taken in good faith because it was improperly motivated and not done for the benefit of the partnership as a whole. The court (5) ….. aside the expulsion as it amounted to a breach of the duty of good faith.

(B) STATUTORY REQUIREMENTS OF GOOD FAITH In addition to a general requirement of good faith that arises from various common law cases, some specific duties are provided for in legislation, most notably in the Partnership Act 1890. This statutory requirement of good faith is unusual because although partners can often override the provisions of the Act by express agreement, they cannot contract out of these statutory duties. Some examples are: • the duty of full disclosure and the requirement to “render true accounts and full information of all things affecting the partnership to any partner or his legal representatives”; • the duty of the partners to account for secret profits, which means that they must pay over to the partnership any benefit deriving from any transaction concerning the partnership; • the duty that exists to prevent a partner from carrying on a business of the same nature which is in competition with the partnership without the consent of the partners.

(C) A PARTNERSHIP DISPUTE CONCERNING GOOD FAITH The case of Don King Productions Inc v Warren and others (1998) concerned a partnership between the companies of two very famous promoters of the popular sport of boxing. The parties were Frank Warren in the UK and Don King in the USA. The partnership was set up with the purpose of promoting boxing in Europe. Under the terms of an agreement dated 16 September 1994, Warren purported to assign to the new partnership with Don King the benefit of a number of promotional and management contracts he had already entered into with various professional boxers, despite the fact that most of these contracts contained express prohibitions against this type of assignment. This problematic contract was replaced with a second agreement dated 25 April 1995, which superseded the first agreement. The second agreement solved the difficulty of the assignment clauses by stating that the partners agreed to “hold all promotional and management agreements relating to the business of the partnership to the benefit of the partnership absolutely”.

Warren subsequently entered into an agreement solely for his own benefit and when Don King discovered this he ended the partnership and commenced legal action. The judge presiding over the case declared that the entire benefit of Mr Warren’s pre-existing agreements and of his new agreement was held by both men and their respective companies on trust for the partnership, and further, it was confirmed that Warren’s actions were in breach of his fiduciary duty to act in good faith. Mr Warren appealed and his business assets were frozen upon the granting of an injunction, but the case was eventually settled when he agreed to make a payment of £7.2 million to Mr King.