Partnership and LLP Disputes: High Court of England and Wales Decides that the Doctrine of Repudiatory Breach Does Not Apply to Multi-party LLP Agreements

This post comes to us from Ffion Flockhart, Charlie Weston-Simons, and Steven Hadwin of Norton Rose Fulbright.

In recent times, an important focus of the cases concerning Limited Liability Partnerships (LLPs) has been the status of LLP members and, specifically, whether an individual can have the dual status of member and employee (or worker) under certain circumstances. Many of these cases have also involved the more commonplace LLP agreement construction and breach of contract issues to which the expulsion of a member can give rise.

In Flanagan v Liontrust Investment Partners LLP & Ors [2015] EWHC 2171 (Ch), however, the High Court of England and Wales was required to consider an altogether different question: whether the common law doctrine of repudiatory breach can apply to multi-party LLP agreements implemented under section 5 of the Limited Liability Partnership Act 2000. Framed in such terms, this might appear to be a rather esoteric point. However, the implications of the Court’s decision for LLPs were (and are) significant.

In the Flanagan case, the claimant’s argument was that the service of an invalid retirement notice, determined without following the proper procedure, was a repudiatory breach of contract which terminated the LLP agreement. As a consequence, it was said that the default provisions of the Limited Liability Partnership Regulations 2001 applied, entitling the claimant to a pro rata share in the LLP’s capital and profits. As the claimant had only been entitled to a fixed income allocation and a performance-linked allocation under the LLP agreement, the practical result of a finding that the default provisions applied would, in all probability, have been a windfall for the claimant in the order of many millions of pounds.

Ultimately, the Court decided against the claimant on this issue in finding that the doctrine of repudiatory breach does not apply to multi-party LLP agreements. The Court found that applying the doctrine to LLP agreements would lead to legally incoherent results, would run contrary to commercial common sense, and would contradict the express exclusion of the default rules under the LLP agreement. This decision was reached in the absence of any preceding authority on the operation of the doctrine in relation to multi-party LLP agreements.

The judgment creates new law and runs contrary to the views expressed previously by most commentators in this area, and therefore warrants close attention.

Please click here for our full briefing on the case and its implications.