No Let Out for Downtrodden Partners

Partnership law expert Andrew Cromby of Weightmans LLP considers whether a partner can ever be treated so badly that he is entitled to turn his back on the partnership and walk away…

They say that familiarity breeds contempt and working with the same partners, year after year, in what is all too often a commercially pressured environment, can (and does) result in personal and professional relationships breaking down. Partnership breakdowns are often likened to bad divorces - and for good reason. Those involved have spent many years getting to know (and sometimes dislike) each other, before they reach the point of no return and simply cannot bear to continue in business together. Often the situation is made more complex by groups of partners ganging up on an individual and treating him badly.

This gives rise to an interesting question – can a partner ever be treated so badly that he or she is entitled simply to walk away from their partners, taking the view that their relationship is at an end as a consequence of the poor treatment that they have experienced?

For many years there was considerable debate on this point. It is well established under English contract law that it is possible for the terms of a contract to be breached so fundamentally that the party offended against is entitled to treat his own continuing obligations under the contract as being at an end – if that “repudiatory” breach is accepted very promptly. But in relation to partnerships, the position is different. That’s because the relationship between partners is considered to go beyond being just a contract; it’s underpinned by trust and the partners owe each other strong fiduciary duties.

In the case of Hurst v Bryk and Others [2000] All ER (D) 432 the court held that partners are not entitled simply to walk away from the obligations and duties that they owe each other – even where they are treated in a way which is inconsistent with the terms agreed within their partnership. Treat a partner badly? That doesn’t mean that he’s entitled to consider himself released from his obligations under the partnership agreement.

What then of the position within Limited Liability Partnerships (LLPs), which are, perhaps curiously, corporate entities? LLPs look and feel like partnerships but have separate legal personality from that of their members - “old fashioned” partnership law simply does not apply to them. Does the doctrine of “repudiatory breach” apply to LLP agreements or would they too survive serious, fundamental, breaches? In the blink of an eye (about 15 years) the court answered that question too – “no”. In line with traditional partnerships, LLP agreements survive breaches by the members. One member, treated inconsistently with the terms of an LLP agreement, cannot claim that the governing constitution of the LLP is destroyed. Of course, the case was decided on its own facts, but that seems to be the accepted interpretation of the court’s judgment in Flanagan v Lionsgate and Others [2015] EWHC 2171 (Ch).

For disgruntled partners the threat of being able to “do away” with the LLP Agreement was potentially a powerful one. Now it seems more likely that a badly treated member of an LLP will need to seek other remedies – damages or possibly even attempting to wind up the LLP on just and equitable grounds, where that is possible.

For new partners and members the point to bear in mind is that partnerships and LLPs are strong entities – in many ways greater than the individuals which comprise them. It is essential to know who you are getting into business with and to keep in sight your exit route, in the event that things go wrong. Otherwise you can find yourself put upon with no immediate escape.