Guest article from John Machell QC of Serle Court, leading Counsel in Flanagan v Liontrust on LLP Agreements and the question of repudiation

Life does not get much more exciting for partnership/LLP lawyers! We now have the thing we have been waiting years for: a decision on the applicability to LLP agreements of the doctrine of discharge by acceptance of repudiatory breach.   To the uninitiated, it may appear a dry and dusty topic, but those involved in LLP disputes will know that it has been one of the favourite weapons of disgruntled LLP members ever since the LLP Act 15 years ago.

The repudiation argument was usually deployed in one of two ways.  First, as a way of providing a disgruntled member with an exit from the LLP without having to serve out notice and free of restrictive covenants (the constructive dismissal-type argument).  Secondly, as a way of a disgruntled member with a low profit share and/or no share in the equity being able to assert that, having accepted the repudiatory breach and the LLP agreement having been terminated (at least so far as the disgruntled member and the LLP were concerned), he or she remained a member of the LLP subject to the default rules and, consequently, is entitled to an equal share in income and capital profits.

Perhaps to the surprise of many, Henderson J has held in Flanagan v Liontrust Investment Partners LLP and Others [2015] EWHC 2171 (Ch) that the doctrine does not apply to LLP agreements (save, perhaps, in relation to two member LLPs, in respect of which he reserved the position).  The full judgment can be viewed here.

Henderson J’s decision contradicts the prevailing view in the textbooks (including the textbook of which I am joint author …), but it is, with respect, right.  LLP agreements are not like employment or other bi-lateral agreements.  An LLP member does not have a relationship simply with the LLP: he or she is a party to a multi-party agreement with the LLP and each of its members which contains multi-lateral and interdependent rights and obligations.  That matters; and the mistake in the prevailing view (mine included) was a failure properly to appreciate the significance of the multi-party angle.   In particular, there was a failure to recognise that, if (say) a disgruntled member accepted a repudiatory breach committed only by the LLP, he or she will still have been bound by the LLP agreement in relation to each of the other (innocent) members. Moreover, even if it can be established that the LLP and all of the other members had committed repudiatory breaches, the LLP agreement would not (even if the doctrine applies) have been discharged completely: the LLP agreement would have continued to govern the relationship between all the parties in breach of contract.  An LLP agreement is like the rules of a club: the rules govern all the members and a club cannot function with two inconsistent sets of rights and obligations.

Whatever view one takes about the issue, it is difficult to argue with Henderson J’s statement that it would be: “offensive to common sense, and contrary to the reasonable commercial expectations of the parties, if the effect of the doctrine were to permit Mr Flanagan to share in the profits of the LLP on a basis of notional equality with the other members, when the LLP Agreement itself gave him only a fixed allocation of income profits and no entitlement to any capital profits“.

Whether Henderson J’s decision is the last word on the subject remains to be seen.  Let’s hope we don’t have to wait another 15 years for another view.