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Lord Phillips of Sudbury: My Lords, before saying what I was going to say, I come to the aid of the noble Lord, Lord Renton, because surely Clause 14(c) says that the Government may by regulations apply or incorporate,

Therefore, they could incorporate sections from the Partnership Act if they were so inclined.

Lord McIntosh of Haringey: My Lords, I apologise for intervening. I thought I had looked around but I am sure the House will allow the noble Lord, Lord Phillips, to intervene now. Yes indeed, that is exactly what we have been debating.

Lord Phillips of Sudbury: Mr Lords, perhaps I may come back to the amendment itself. At the previous stage, I said quite frankly that I was confused by the purport of subsection (1) of Clause 5 and, to be frank, although it is an improvement in that I think I understand what it is saying. I have a question for the Minister. If one were to leave out Clause 5 entirely, would it not be harmless as regards the Bill? That is to say, as Clause 5 currently stands with the amendment now proposed in it, is not all of that necessary and is it not essential law that would be implied in the complete absence of Clause 5? If that is not the case, both I and the House would like to know what purpose it serves

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and, in particular, I would like some reassurance that both parts of Clause 5 as now proposed to be amended will not and could not prejudice innocent third parties.

I should like to add one other point. I assume I am right in interpreting the amendment as applying to agreements between all the members from the limited liability company and not some of the members. I should be grateful if the Minister would confirm that as well.

Lord Hope of Craighead: My Lords, before the Minister replies to the noble Lord's question, perhaps I may raise a point which arises out of a matter raised with the Minister by the noble Lord, Lord Renton. It relates to the omission of the words "express or implied" which qualified the word "agreement" in the provision which is being taken out of the Bill. With great respect, it suggests to me that, if the word "agreement" is left unqualified, then it leaves open, by reference to what is commonplace in partnership law at the moment, the argument that an agreement has been created by implication. In the ordinary course of events, that would not give rise to concern but, when one sees the default provision in paragraph (b), one may have cases where, in order to escape from the default provision, a party seeks to rely upon an implied agreement. Experience tells one that, in general, litigation finds it more difficult to cope with cases where implied agreements are sought to be spelled out of the evidence than express agreements. If it is intended to restrict the kind of agreement which is now referred to in the clause, will the Minister think a little more about whether it would be desirable to write into the Bill words to the effect that the agreement should be express or, even better, in writing between, as has been suggested, all the members or between all the members and the LLP? I raise the issue simply because it was a matter of concern to the noble Lord, Lord Renton, and it could have some bearing on the extent to which litigation is either generated or avoided.

Lord McIntosh of Haringey: My Lords, perhaps I may respond first of all to the noble Lord, Lord Phillips. The reason for having Clause 5 in the Bill is in order to make it clear that an agreement between the members or between the limited liability partnership and its members has primacy and that there should be provision in the absence of any agreement. If we did not have that, the status of the regulations to be made under Clause 14(c) would not be clear. The new amendment first of all gives power to apply the default provision which was not explicit before and, secondly, makes it clear that agreement between members is subject to any other enactment. On those grounds, we believe that Clause 5 is necessary.

Secondly, the noble Lord asked whether it applied between the limited liability partnership and all its members, or between all its members or some of its members. Paragraph (a) provides that it is,

    "between the members, or between the limited liability partnership and its members".

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My understanding is that that does not apply to "some" of its members.

The noble and learned Lord, Lord Hope, raised the issue of express or implied agreements. He is right that litigation is easier for express agreements than for applied agreements. It is intended to have--and it is necessary--implied agreements in certain circumstances. For example, it is difficult to set out explicitly in advance an agreement on sharing profits, because that might change from time to time and there might be a formula which would bring about an implied agreement. For that reason one still has to have the possibility of implied agreements, although it is not necessary to refer to it on the face of the Bill. What is being proposed here is no different from the law on partnerships which has worked for 110 years. We do not see any reason to suppose that it will be more difficult.

On Question, amendment agreed to.

Lord Phillips of Sudbury moved Amendment No. 8:

    Page 3, line 25, at end insert--

("(3) Every member of a limited liability partnership shall have a duty of good faith to every other member and also to the limited liability partnership provided that in the event of a conflict between those duties his duty to the limited liability partnership shall prevail.").

The noble Lord said: My Lords, I rise to move the amendment standing in my name and in the names of my colleagues. We believe that the public interest would be served by retaining on the face of the Bill a good faith obligation. We feel that with some strength, notwithstanding the clarity of the Minister's statements today and at previous stages that the Government want this to be clearly a corporate animal and not a partnership one.

Perhaps I may refer to the consultation paper of last month, which covers this point. I wish to congratulate the author on his helpful piece of paper. It must be a new way of dealing with legislation to scotch amendments put forward in this House by saying, "I have now produced a new consultation document so you are in baulk". We cannot buy that, especially since at the previous stage one of my amendments to do with the change of name of LLPs was swept from court on the ground that a prior and existing consultation on company law was going on. If we continue with that thesis and Ministers are quick on their feet in setting up internal consultation groups, there will be very little left for us to talk about. Therefore, I shall not pay any attention to the paper except to say that it is jolly good and I shall refer to some of the points in it.

The author's arguments against including a duty of good faith are, first, that the application of a duty by statute will require a formulation that may well prevent the duty between members developing in the future. The formulation in my amendment would not do that and is precisely intended to hitch the wagon, so to speak, to the common law definition of good faith. Secondly, he says that the express application would be unusual. Well, as the French would say, tant pis. We believe that it is necessary. Thirdly, he says that it is not expressly mentioned in the Partnership Act 1890. That

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is so, but the Partnership Act 1890 was itself only a consolidation of existing common law. Here, given that we are moving completely away from the Partnership Act 1890, there will be no implied duty of good faith unless it is expressly written into the Bill. That is why the amendment is before us. Fourthly, he makes the point, which the noble Lord, Lord McIntosh, himself made several times in previous debates, that it could be confusing. One could have parallel fiduciary duties--partners to each other and partners to the LLP. However, the amendment is perfectly clear that if there is such a conflict, the duty to the LLP prevails.

We then come to considerations with which the noble Lord, Lord McIntosh, dealt in a letter which he kindly wrote to me dealing with this matter and in which he said that he was not convinced that there was the need to encourage greater vigilance in selection and working with other partners in the case of an LLP. He made the point that the reputation of an LLP is very much bound up in the name and that anyone breaking the rules would find himself in extremely difficult circumstances in getting a job if he had had to leave. The world we live in is very different from the world that prevailed even 20 years ago. Reputation within and between partnerships is now a fragile strand. Partnerships are now so large and the rate at which membership of those partnerships changes is growing apace. To rely on the drumbeat of the market place in upholding standards within partnerships is no longer sufficient.

Perhaps I may offer one brief anecdote. Not long ago I met two partners from a large law firm. I knew them both. Then, suddenly, two others materialised from the other direction. I knew one of them. I said, "Of course you know each other". They said, "Well, no". I said, "Let me introduce you. You are members of the same partnership". These partnerships are very large and never the twain shall meet. We feel that it is in the public interest to retain this aspect of partnership.

It was Lord Lindley who, in the case of Blisset v. Daniel in 1853, put it rather well. He said that,

    "if any dispute arise between partners ... he [the partner concerned] will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour".

There are those in the House and outside who are anxious about the impact of the Bill on the highest standards, which we would say do currently prevail within the old partnership structure. The fact that they prevail is intimately bound up with the joint and several liability and the duty of good faith that exists partner to partner and the mutual confidence and trust which that engenders. We very much hope that the Government will not be sidetracked by the old argument about whether we have here a corporate animal or a partnership animal. We accept that a corporation is being created by the Bill. But it is important that that one very particular aspect of partnership law--the duty of good faith between partners--should continue. I beg to move.

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