Hosking v Marathon Asset Management LLP - a partnership profit share can be forfeited for breach of fiduciary duty The recent decision in Hosking v Marathon Asset Management LLP  EWHC 2418 (Ch) has extended into the partnership law context the well-established principle that an agent can forfeit their right to remuneration by breaching the fiduciary duties they owe to their principal (ie, the forfeiture principle).
In the Hosking case, the court upheld an arbitral award of damages against a partner of an LLP representing both forfeiture of 50% of the partner's profit share (£10.4m) and compensation for loss (£1.5) arising from the partner's breach of fiduciary duties. The breach of fiduciary duty came about when the partner proposed the establishment of a rival business with certain of the LLP's employees, including producing a business plan.
Although the LLP deed, like statue law on partnerships, was silent as to the concept of forfeiting remuneration/profits for breach of duty, the textbooks on equitable principles and the forfeiture line of case law support a general principle of forfeiture, irrespective of the context in which the fiduciary duties arise. Newey J therefore upheld the arbitral application of the general equitable principles and confirmed that forfeiture is a remedy available to an LLP for breach of a partner's or member's fiduciary duties to it.
Since the forfeiture principle attaches to remuneration for services, rather than to profit gained, the court needed to characterise the partner's share in the LLP's profits as remuneration. It did so by reference to the terms of the LLP deed, which specified that "non-executive members" were entitled to 50% of the share that the "executive members" were entitled to. The court concluded that this must mean that 50% of an executive member's profit share is earned as remuneration for the performance of his/her active duties on behalf of the LLP (i.e. duties that the non-executive members do not perform).
This decision means that when drafting LLP deeds (or indeed partnership/limited partnership agreements – to which the principle should also apply) in future, parties will need to think carefully about the consequences of how they characterise partnership profits. The implication is that if the parties want to avoid the possibility of forfeiture, they must clearly state the profit shares do not equate to remuneration. Other parties may wish to do the reverse, or create a specific split (akin to the 50/50 split in the Hosking case, or otherwise).