In Eoghan Flanagan v Liontrust Investment Partners LLP and others  EWHC 2171 (Ch) the English High Court has for the first time held that the doctrine of repudiatory breach does not apply to limited liability partnership (LLP) agreements where there are three or more members in the LLP. Therefore, even if the behaviour of one party is repudiatory in nature, an innocent party cannot accept that behaviour as bringing the LLP agreement to an end.
Limited liability partnerships were created and are governed by a statutory scheme set out in the Limited Liability Partnerships Act 2000 (and regulations made pursuant to that Act). Section 5 of the Act permits an agreement to be entered into between the members (i.e. partners) that can set out the framework of the LLP, e.g. the profit share, provisions for retirement or expulsion of members etc. In the absence of an agreement the statutory scheme provides for certain default rules on issues that are essential for the running of an LLP. One of the default rules is that members of an LLP share equally in the profits. This provision is often amended by an LLP agreement to give the members flexibility to have, for example, different shares in profits.
An LLP agreement is, however, a contract that includes rights and obligations on the parties to the agreement. As a result there can be occasions when the agreement is breached because one party has not complied with their obligations. In these circumstances, it had been suggested in academic text and often asserted, that such conduct could have the effect of repudiating the LLP agreement. This could have severe consequences. This is because if an LLP agreement could be terminated as a result of a repudiatory breach, the default rules under the statutory scheme will apply, including equal sharing of profits. In circumstances where one member only has a smaller share of the LLP’s profits, having the ability to terminate the LLP agreement unilaterally for repudiatory breach could result in that member receiving a windfall. It would also give rise to a complex situation where some (innocent) members are bound by the LLP agreement, whilst others are not.
Non-application of repudiatory breach
In Flanagan, the English High Court has held that once an LLP agreement pursuant to section 5 of the Act has been made it will continue to bind the LLP and the members until either it is terminated by common agreement, or it is varied in accordance with a procedure to which all the relevant parties have previously subscribed. Therefore a breach of an LLP agreement does not entitle the innocent party to accept the breach as repudiating the agreement, however serious that breach may be. The innocent party is nevertheless entitled to claim damages for losses suffered as a result of the breach.
The decision in Flanagan provides important clarification on the interrelation between contract and partnership law. It eliminates a significant risk that was believed by some to exist in the LLP regime. It also removes the incentive for a member whose share of the profits under the LLP agreement is less than 50%, or who otherwise has fewer rights under the LLP agreement than he would have under the default rules, to allege that another member has committed a repudiatory breach of the agreement in the hope that the default rules will then apply instead.
The decision in Flanagan does leave open the question of whether an LLP agreement can be terminated for repudiatory breach where there are only two members in the LLP, although based on the reasoning applied in the case, it appears unlikely that the courts would apply an inconsistent regime to this subset of partnership agreements.