The doctrine of forfeiture requires a fiduciary in serious breach of his fiduciary obligations to forfeit his right to remuneration received during the period of that breach. A classic example of a fiduciary is an agent, and, pursuant to section 6(1) of the LLP Act 2000, every member of an LLP is an agent of the LLP.
Jeremy Hosking (“JH”) is a high profile fund manager who founded Marathon Asset Management LLP (“Marathon”), of which he was a member. JH resigned from Marathon in late 2012. Marathon subsequently issued arbitration proceedings claiming that JH had breached his contractual and fiduciary obligations while working at Marathon by discussing with certain employees the possibility of starting a new business and drafting a business plan.
The arbitrator held that JH had breached his fiduciary obligations and the forfeiture principle obliged him to repay approximately £10 million of profit share. JH appealed on the basis that the forfeiture principle could not apply to the disputed profit share because it was not remuneration. However, Newey J agreed with the arbitrator that this was a not a valid distinction: the disputed profit share was in reality remuneration attributable to JH’s executive services. Further, the parties could have expressly excluded the forfeiture principle in their LLP agreement but had not done so.
Hosking is a reminder that the law of fiduciary obligations applies to LLP fund structures and that high standards of behaviour are required from fiduciaries. LLP members considering new commercial opportunities risk breaching their fiduciary obligations to the LLP, and, in the event of a dispute, also risk forfeiting past remuneration. However, forfeiture is not the inevitable consequence of such breaches. Some LLP payments will be genuine profit share as opposed to remuneration, and forfeiture is ultimately subject to considerations of whether in the circumstances it is proportionate and equitable. Any doubt as to the doctrine’s potential application and effect can be avoided by dealing expressly with it in the LLP agreement.