Breach of Partnership Duties

A partner who breaches his duties to the partnership risks losing some or all of his share of the partnership profits earned in the period during which the breach occurs, according to a corporate lawyer. 

“A partner is an agent of the partnership and owes a so-called fiduciary duty, or duty of good faith, to the other partners” says Philip Round, a partner at George Green LLP.   “It is a well-established principle of law that any agent who breaches his duty of good faith potentially loses his right to remuneration.  A recent case has illustrated the application of this principle to partnerships.”

Mr Round continues, “the High Court case of Hosking -v- Marathon Asset Management LLP concerned a member of an investment management LLP who breached his duties to the LLP by discussing with some of its employers his plans to start a competing business, thereby making it unlikely that they would remain with the LLP.  When the arbitrator ruled that the member should return to the LLP 50% of the payments which he had received as an executive member of the LLP at the time of the breaches, the member appealed to the High Court.”

According to Mr Round, the High Court ruled that whilst a share of partnership profits most commonly reflects the investment of the partner in the firm, following his initial capital contribution, some or all of it can still represent remuneration for services and therefore be subject to the risk of forfeiture. “In this instance the non-executive members received 50% of the profit share to which executive members were entitled. This left it open to the Court to conclude that the additional 50% received by members represented remuneration for their services.”

Mr Round concludes, “whether an element of profits is vulnerable to forfeiture for breach of a partner’s duties will depend on the specific circumstances of the partnership, the nature of any services provided by the partner and the substance of the partnership agreement.  Forfeiture can be expressly excluded by the agreement, and it is therefore crucial to put in place a formal partnership agreement at the outset of a business venture”.