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Lord Renton: My Lords, this is an interesting but slightly puzzling amendment. Although the

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partnership is to be incorporated, its decisions will, the provision states,

    "in the event of a conflict",

of the kind mentioned, depend on a majority of the partners. It seems to me that that will arise rather frequently. After all, in any partnership there will, before decisions are reached, be a good deal of discussion and perhaps not complete agreement between the partners. We should legislate on the assumption that that is what will normally happen. When it does happen, the view of the majority should prevail. That is another, and perhaps better, way to express it.

Perhaps I may have the attention of the noble Lord who moved the amendment. I should like to draw attention to two drafting points which are so minor that I hardly dare to mention them. First, in common English the expression "every other member" means "every alternative member". That cannot be what the noble Lord means. If the amendment said "each other member", the noble Lord would have it right. Secondly, I was brought up to avoid ever using the expression "and also" because that is merely repetition. Therefore, the word "also" could be omitted.

Baroness Buscombe: My Lords, I rise to speak in support of the amendment, although in light of the observations of my noble friend Lord Renton perhaps I should add "in principle". In so doing, I thank the noble Lord, Lord Phillips of Sudbury, for his correspondence on the point. I have reread the reference to a duty of good faith between members in the Minister's letter to me dated 10th January 2000. In that letter he states that the difficulty lies in how to define it since there is no express duty set out in the Partnership Act 1890 and, instead, it has been developed under general law.

Given that partnership law is to apply only to LLPs in a very limited way--namely, for the purposes of taxation--it cannot matter that it is not expressly referred to in the Partnership Act. I believe that the expression and status of a duty of good faith as between members themselves and members and the LLP will assist in protecting the interests of third parties. I also agree with the observations of the noble Lord, Lord Phillips of Sudbury, about standards in that regard.

The amendment complements the remainder of Clause 5 and is of assistance when considering the apportionment of liability, to which I referred at the beginning of the debate. If a partnership wants to convert to an LLP and, in so doing, retain the partnership ethos--something which has not so far been expressed this afternoon--surely a duty of good faith, although not expressed in partnership law, is central to maintaining that ethos.

Lord McIntosh of Haringey: My Lords, the amendment would apply a duty of good faith between members in addition to an existing duty between the

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members and the limited liability partnership. I recognise that the amendment has been drafted so as to provide that the duty which exists between the members and the LLP prevails if there is any conflict. That was one problem which arose in Committee which we do not face now. However, I am still not convinced of the necessity or desirability of imposing such a duty between members.

The consultation paper published by the Government on 16th February, which set out draft regulatory default provisions governing the relationship between members, raised the issue of a duty of good faith. If I am accused of consulting, I plead guilty. If the noble Lord suggests that I used the argument about consultation to stop him tabling and speaking to amendments, or even voting on them, I plead not guilty. I recognise that he is fully entitled to put his point of view regardless of the consultation document. I admit that, in response to the noble Lord, Lord Goodhart, I said that Amendment No. 1 would scupper the consultation process. However, the noble Lord is not obliged to pay attention to anything that I say; he can proceed as he wishes.

This is a matter which affects not only Members of your Lordships' House, learned in the law and in accountancy as they are, but the outside world. Therefore, it is proper to seek outside views on issues which are raised in this House. I should have thought that noble Lords would be pleased by that rather than the reverse. We explained in the paper that, even though it was not expressly set out in legislation, we believed that it was reasonable to expect that a member would owe a fiduciary duty to the LLP because he would be the firm's agent. The paper went on to say that it was doubtful that any similar duty would be owed between the members, but that there were a number of dangers in imposing a duty. The most important of these is that at present there is no statutory definition of "good faith".

It is generally recognised that a duty of good faith includes the following factors (which are a summary of paragraph 20 of the consultation document): first, a duty of honesty and good faith owed to each fellow member. I am not sure that that deals with the question whether it should be "each" or "every". Good faith also includes: a requirement for openness; a duty to act in favour of the firm; fair treatment of a minority within the firm; and a duty not to compete with the firm. Those are generally accepted factors in the context of partnerships, although they do not feature in the Partnership Act 1890. Why should we assume that reference to a duty of good faith with regard to limited liability partnerships will result in the same conclusions as exist for partnerships? Moreover, why should we assume that in future what is applicable to partnerships should now be applicable to LLPs? In any case, there will be nothing to prevent members agreeing between themselves in their agreement that they owe particular duties to each other.

We are doubtful about the desirability and necessity of imposing a duty of good faith. However, this is an issue on which we have gone out to consultation and it may be that we shall be persuaded otherwise by the

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results. It is open to the noble Lord, Lord Phillips, to press his amendment if he wants to do so, but we may still be persuaded when the results of the consultation are known. At the moment, however, we are not inclined to pre-empt the results of the consultation and to agree to the amendment.

The noble Lord, Lord Phillips, referred to partnerships where there were hundreds of members who did not know one another. I do not believe that that affects the duty of good faith between members. I do not see how the duty of good faith, which from the factors that I have cited appears to be intensely personal, will apply any more or less according to whether the partners know each other. Surely the important fact is that in large partnerships the members owe a duty to the firm, which is much more effective.

The noble Lord, Lord Renton, referred to majority decisions. We have provided for such decisions by agreement in the default provisions which will be part of regulations. I hope that that answers the noble Lord's point.

I understand the concern of noble Lords, but it arises from a desire to bring into legislation partnership principles which should apply only to taxation and, as far as possible, to little else. That is the principle on which we have drafted the legislation. We cannot believe that it will be helped by introducing the principle of good faith as is proposed in the amendment.

Lord Renton: My Lords, with the leave of the House, can the noble Lord point to where majority decisions are expressly mentioned?

Lord Macintosh of Haringey: My Lords, they are to be provided for in regulations under Clause 14(c).

Lord Phillips of Sudbury: My Lords, I am grateful for the Minister's response. The definition of "good faith" is classic common law. The common law has done the job of defining that expression in relation to partnerships, and could do it eminently well in regard to companies. That would be a much better way to proceed than is trying to define it and set it in concrete.

The noble Lord referred to partners being able voluntarily to write into their partnership agreements good faith obligations. Our whole approach is based on the public interest in not leaving yet further matters to the partners of very privileged animals: LLPs. I very much hope that the Government will reconsider the arguments expressed this afternoon. I do not believe that the public interest will be served other than by allowing the good faith obligation to prevail in limited liability partnerships. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

7 p.m.

Clause 6 [Members as agents]:

Lord McIntosh of Haringey moved Amendment No. 9:

    Page 3, line 32, leave out ("or believes").

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The noble Lord said: My Lords, the issue of the word "or believes" arose in Committee. By removing the words "or believes" from Clause 6(2)(b), the amendment narrows the test of authority in Clause 6(2)(b) so that an LLP is bound by the actions of its member except where the person dealing with that member knew that he had no authority. The amended wording follows the precedent of Section 5 of the Partnership Act 1890.

The effect is to strengthen the position of persons dealing with an LLP, so that the LLP will be bound by a member's actions unless the member had no authority to act, and the person dealing with that member knew that he had no authority or did not know or believe him to be a member of the LLP.

We have concluded that this strikes a better balance between the interests of the third party and those of the member in the light of discussion on this point in Committee, and particularly the comments from my noble friend Lord Goldsmith, to whom I wrote about this and another issue which arose in the debate on Clause 6. I should like, if I may, to touch upon that other issue. It was whether the common law could be relied upon in all cases to achieve the liability of a member for his own negligence; and whether the Explanatory Notes to the Bill accurately reflected the position. I do not think it appropriate or necessary to return here to anything that was said in Committee, which drew out cogently the potential for uncertainty, other than to point out that it would be outside the scope of the Bill to amend the general law on the duty of care, and that any other attempt to create greater legislative certainty would seem likely to cause as many problems as it would solve.

However, I should like to note that we shall be revising the Explanatory Notes on this point before they go with the Bill to another place. We shall draw on the detail which was contained in the correspondence that I have had with my noble friend Lord Goldsmith, which has been copied to other Members who have taken part in these proceedings. I beg to move.

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