Limited Liability Partnerships and Fiduciary Duties

Author
Date01 September 2017
Pages417-423
Publication Date01 September 2017
DOI10.3366/elr.2017.0438
INTRODUCTION

Previously described as one of the most “elusive concepts”1 in law, recent commentary has shed greater light on fiduciary duties.2 Nevertheless, there has been a conspicuous absence of commentary in relation to their application within the partnership context. This lack of treatment may, it seems, have led to some confusion amongst the judiciary, this point recently being illustrated by comments made by Mr Justice Newey in Hosking v Marathon Asset Management LLP.3 Although the facts of the case are specific to limited liability partnerships (LLP), the decision is cast on a wider basis and is thus also pertinent to traditional partnerships.

THE FACTS

This case concerned an appeal under section 69 of the Arbitration Act 1996 by the claimant, Jeremy Hosking (“Hosking”), against the award of the arbitrator in favour of the defender, Marathon Asset Management LLP (“Marathon”). The focus of the appeal centred on the arbitrator's finding that the claimant had breached both his fiduciary and contractual duties.4 More specifically, it was established that Hosking had discussed plans to form a new business with three other employees, which resulted in Marathon losing a “real or substantial chance”5 of retaining three important clients.6 In his award, the arbitrator found Marathon to be entitled to equitable compensation of £1.38 million in regard to the loss of this corporate opportunity.7 Moreover, Hosking was bound to forfeit £10,389,957.50 (50% of the payments he had received which, in the arbitrator's view, represented Hosking's remuneration for the performance of his executive duties).8

In reaching his conclusion, the arbitrator considered the application of the forfeiture principle both “proportionate and equitable”,9 given the severity of the breach of Hosking's fiduciary duties.10 Indeed, although the sum was large, it was recognised that Hosking would not lose his entitlement to his half of the profits, and thus would recover part of the forfeited sum by way of Marathon's future distribution of profit.11 It would appear that this point carried significant weight in the arbitrator's rebuttal of Hosking's submissions that the forfeiture remedy was inconsistent with the LLP deed.

THE APPEAL Counsels' arguments

Counsel for the claimant focused on the distinction between “profit share” and “remuneration”, arguing that the former did not become the latter simply by virtue of the fact that the partner provides services to the LLP.12 As such, whilst the payment of profits may, in effect, compensate the partner for his services, this was a consequence of his interest in the partnership.13 Accordingly, the principle of forfeiture could not apply to the claimant's share of the profits. It was argued that this was reinforced by the fact that the Partnership Act 1890 (“1890 Act”) makes no reference to the principle of “forfeiture” with regard to remedies for breach of fiduciary duty.14 In terms of the case itself, counsel stressed the importance of section 24 of the 1890 Act, which provides that the partner's rights and duties will be subject to any express or implied agreement between partners.

In response to the claimant's arguments, it was submitted that the 1890 Act could not be considered a complete codification of the law of partnership, and thus the application of the “forfeiture” principle was not excluded by virtue of its omission from the 1890 Act. Moreover, it was immaterial that “remuneration” took the form of a profit share, with the forfeiture principle requiring substance to be emphasised over form.15 In relation to this point, it...

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