The High Court has confirmed that a partnership profit share can be forfeited for breach of the fiduciary duty owed by a partner to a partnership as agent.
The defendant, a limited liability partnership (Marathon) carried on an investment management business originally set up in 1986 by the claimant, Mr Hosking, and another. Mr Hosking was referred to in the partnership deed as one of the “Founder Members”, and also as one of the “Class A Members”. Class A Members were either “Executive Members” or “Non-Executive Members”. A Non-Executive Member was a Founder Member who no longer worked in the business of Marathon by reason of among other things, “retirement from executive duties”. All other Class A Members were Executive Members and, as such, required to devote all their time to the Marathon business.
Under the deed, Non-Executive Member(s) received 50 per cent of the amount of income profits payable to Executive Members.
Mr Hosking retired in December 2012 and became a Non-Executive Member. In that same month, Marathon began arbitration proceedings against Mr Hosking.
In 2014, an arbitrator held that a partner had breached contractual and fiduciary duties owed to an LLP by discussing with four of its employees the possibility of starting a new business and producing a business plan outlining his thoughts. In addition to other equitable compensation in compensation for the loss suffered by the partnership as a result of the breach of duty, the arbitrator ordered that the partner should return 50% of the profit share that the partner received during the period of the breaches.
On appeal to the High Court under the Arbitration Act 1996, it was argued on behalf of the partner that the equitable forfeiture principle had no application in relation to the share of profits of a partner or member of an LLP. This would be inconsistent with case law and the primarily contractual and statutory basis of partnerships. However, the court held that the mere fact that someone is a partner or LLP member as well as an agent should not preclude the operation of a principle which affects agents more generally. Profit share may usually reflect the interest of the partner or member in the firm, but it can also represent compensation for services. Where that is so, profit share can fairly be viewed as remuneration and within the scope of the forfeiture principle. The judgment includes a useful review of the equitable forfeiture remedy for breach of fiduciary duty by agents and its application to partnership law.
(Hosking v Marathon Asset Management LLP  EWHC 2418 (Ch))