In the current climate of global uncertainty and with many firms facing a dip in revenue and PEP, some are inevitably reviewing their partner ranks. Some partners perceived to be underperforming are facing the prospect of their teams, reporting lines and responsibilities being negatively restructured; others are staring down the barrel of de- equitisation or even involuntary exit. Many are asking whether the unilateral changes they are facing may amount to constructive dismissal and give rise to related protections to support them in their discussions with their firms.
Constructive dismissal can, in the right circumstances, be a powerful weapon for mistreated employees who resign in response to a fundamental breach by their employer, as it releases both parties of their obligations under the employment contract (including restrictive covenants) and can give rise to contractual and statutory rights. But does it apply to partners and LLP members?
In summary, the answer is normally no. The doctrine of repudiation – the equivalent to constructive dismissal, provides an innocent party with the right to terminate the contract which subsequently releases the parties from future obligations where there has been a sufficiently serious breach of the contractual terms by the other party – has been determined not apply to partnerships or LLPs.
It was held in Hurst v Bryk (2002) that the doctrine of repudiation does not apply to general partnerships and, in particular, a fundamental breach of the partnership agreement by one or more of the partners does not discharge the innocent partner from the liabilities of the partnership.
Flanagan v Liontrust (2015) also confirmed, after a long period of uncertainty, that the doctrine of repudiation does not apply to LLPs and the acceptance of a repudiatory breach had no legal effect. In that case, an LLP member sought to accept a purported repudiatory breach by the LLP, which had served on the LLP member an unlawful termination notice without following the correct decision making process or ensuring it was taken by the appropriate decision making body. Mr Flanagan argued, first, that he was released from the LLP agreement, including all its restrictions, and second, that the statutory default rules under the LLP Regulations 2001 replaced the terms of the LLP Agreement, so that he would become entitled, amongst other rights (such as equal right to management participation), to an equal (and very valuable) share of the profits of the LLP, instead of his modest fixed profit share.
His acceptance of the repudiatory breach claim was given short shrift by the High Court, which concluded that it would produce unacceptable and legally incoherent results; including two different constitutions and sets of membership rules within the one LLP, which would lead to legal and managerial chaos, as well as a windfall sum for the LLP member. Therefore, the doctrine of repudiation could not apply to LLPs.
The decisions in both Hurst v Bryk and Flanagan v Liontrust nevertheless left open the potential for the repudiatory breach principle to apply to partnerships and LLP agreements where there are only two partners or LLP members.
What does this mean for partners and LLP members?
This does not however mean that partners and LLP members are left without recourse if they are subject to potentially unlawful treatment. Partners and LLP members are protected under sections 44 and 45 of the Equality Act 2010 against any unlawful discrimination on the grounds of a protected characteristic, such as (without limitation) age, sex, sexual orientation, race or disability. Partners and LLP members are also protected from unlawful whistleblowing detriment and may claim for post termination losses if it can be shown that such losses are caused by/attributable to pre-termination unlawful detriment (Wilson Solicitors LLP v Roberts (2018)). Such discrimination or whistleblowing detriment claims may also be made against relevant individual partners and LLP members.
In the context of a general partnership and in the absence of an agreed resolution, partners can also apply to court for a dissolution of the firm under section 35 of the Partnership Act 1980, for example, where there has been prejudicial conduct or wilful or persistent breaches of the partnership agreement (sections 35(c) and (d)).
For affected LLP members, potential rights and remedies may include:
- they may be able to resign in response to any breaches by providing proper notice under their LLP agreement (if no LLP agreement exists, by providing reasonable notice under section 4(3) of the Limited Liability Partnerships Act 2000) and potentially bringing a breach of contract claim for post-termination losses, if they can show that the dominant or effective cause of those losses was the pre-termination wrongful conduct which led the member to resign (Golstein v Bishop (2013));
- unless it has been excluded in the LLP Agreement, an LLP equity member could apply to court for an unfair prejudice petition under section 994 Companies Act 2006, to seek a buyout of that member’s interest or some other relief (e.g., to prevent the enforcement of an invalid decision against them); or
- if that member is a contributory on a winding up, they could conceivably seek a just and equitable winding up under section 122 of the Insolvency Act 1986 – however, this is a last resort and is unlikely to be available if that member has another remedy or where they unreasonably refuse an offer to buy out their interest.
Finally, as mentioned above, if the firm is a two partner partnership or LLP the doctrine of repudiation might still apply to release the innocent partner from their contractual obligations, and should be carefully explored.
In reality few partners want to litigate or threaten the winding up of their firm and these situations are typically resolved commercially and amicably, but it is important nevertheless that they have a sense of their potential rights and protections in circumstances where they typically will feel very vulnerable and exposed, and where their mental health may also be significantly impacted.
Similarly, firms need to understand clearly the extent and limitations of their legal powers under their constitution, and also the need to adopt clear and consistent processes and policies in their approach to their partners and LLP members, including in a partner restructuring process. Doing so will help firms and senior management to reduce the risk of unwittingly taking action that is outside their contractual powers and may be invalid, and which otherwise creates potential contractual and statutory claims against their firm, and possibly against themselves too.
If you are a law firm, a professional practice partnership or LLP and would like to discuss any issues relating to whether partners and LLP members can claim constructive dismissal or for specific legal advice on particular circumstances, or if you have any other questions arising from this article, please contact Managing Partner Clare Murray or Associate Jennifer Ly, both of whom specialise in partnership and employment issues.
This article was first published in The Global Legal Post.