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Partnership Shares – A Salutary Warning!

The High Court has recently had to determine an appeal from an arbitration by one of the members of an LLP.  The High Court had to consider whether the well-established principle in which a fiduciary (in particular an agent) who acts in breach of his fiduciary duties can lose his right to remuneration also applies to the profit share of a partner in a partnership or member of a limited liability partnership (LLP).  During the course of an arbitration between the members of an LLP, the arbitrator found that one of the partners/members had breached his contractual and fiduciary duties owed to the LLP when he discussed with four of its employees the possibility of starting a new business and produced a business plan setting out his thoughts.  The arbitrator ruled that the defaulting partner should pay compensation to the LLP as a result of the breach of duty and also ordered the return of 50% of his profit share received during the period of the breaches. 

On appeal to the High Court, the defaulting member argued that equitable forfeiture did not apply to shares of profits of a partner or member of an LLP.  Having carried out a review of the forfeiture principle and the case law and authorities, the Judge concluded that the profit share of a partner or LLP member was potentially subject to forfeiture.  The Judge said it was hard to see why the mere fact that someone was a partner or LLP member as well as an agent, should stop the operation of the forfeiture principle which affects agents.  He also disagreed with the submissions of the barrister for the defaulting member and said that he could see no good reason to treat profit shares differently from any other form of remuneration. 

The Judge also said that the fact that the contractual documentation relating to a partnership or LLP contains no provision for forfeiture cannot necessarily mean that there is no scope for it.  He said whilst the principle could be excluded by contract, the principle has been found to apply where there is no reference to it in the relevant contract. 

The Judge found that whilst a profit share usually reflects the interest of the partner or member in the firm, it can also represent compensation for services and where that is so, the profit share can fairly be viewed as remuneration and within the scope of the forfeiture principle.

To request further information please contact James Staton 

 

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James Staton

Partner

James is a Partner and Head of the Dispute Resolution team and primarily handles commercial…

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