Partnership Law & Misleading Statements – Court Enforced Duties of Good Faith

A common principle in English law is that of good faith, by which a duty of complete openness and fair-dealing is assumed to be owed by one person to another and which is considered should apply in a variety of situations. Recently, the court was asked to consider whether the duty of good faith, which is assumed to exist among partners in a partnership, would also apply to an incoming partner who was not yet in partnership.

Verbal Assurances

The situation was that a solicitors’ firm was negotiating with a solicitor who was intending to join the partnership. The senior partner of the firm was under investigation for dishonesty, but assured the prospective partner that he was innocent and would be found to be so. The prospective partner accepted his assurances and joined the partnership. In the event, the senior partner was found guilty and was struck off the Solicitors’ Roll.

The Dispute

The new partner sued the former senior partner, arguing that he had been induced to join the partnership on false pretences and that had he known about the dishonesty he would not have joined. He argued that the senior partner owed him a duty of good faith which he had breached by misrepresenting the position. The counter-argument was that the existence of the investigation had been revealed and this was sufficient, there being neither a duty of good faith in these circumstances nor any further duty of disclosure prior to his joining the partnership.

The High Court considered that the prospective partner was owed a duty of utmost good faith. Whilst in the normal law of contract the ‘buyer beware’ (caveat emptor) principle applies, in contracts involving a special fiduciary relationship (such as insurance contracts and partnerships), the duty is one of utmost good faith and all material facts must be disclosed.

Results of the Litigation

Where material facts are not disclosed, the contract may be void. Where the failure to disclose is deliberate and dishonest, damages may be sought.

This ruling has important implications for any person contemplating forming or joining a partnership, or anyone offering a partnership to another to join a business. Before joining a partnership based business or offer partnership to another person ensure that there is no room for ambiguity in the interpretation of statements and make full disclosures to avoid allegations of false pretences, fraudulent and negligent misrepresentation.