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Court leaves open whether two-person LLP agreement can be terminated by a member if there is a serious breach

Members of two-person Limited Liability Partnership should ensure the LLP does not commit a repudiatory breach of the agreement, as this may allow one of them to treat the agreement as terminated, following a recent ruling.

A member of an LLP claimed the LLP had committed repudiatory breaches of the LLP agreement. The agreement provided he was entitled to a fixed profit share of £125,000 per year from the LLP.

The legal test of whether there has been a repudiatory breach is whether, from the perspective of a reasonable person in the position of the innocent party looking at all the circumstances, the contract breaker has shown a clear intention to abandon and altogether refuse to perform, the contract. A repudiatory breach entitles the aggrieved party to treat the contract as terminated.

If an LLP has no specific agreement in place LLP law contains default terms that apply automatically to the members. One of these is that all the members share profits equally.

The member in this case claimed that the repudiatory breach had terminated the LLP agreement in relation to his interest in the LLP. He claimed that he was therefore entitled to an equal share of the profits since the breach (under default provisions that say all partners share the profits equally). Additionally, he claimed he could not be removed as a member by the other members as he could under the agreement. He asked the court to order the other members to buy him out, valuing his own interest in the LLP at £8m.

The court ruled that the doctrine of repudiatory breach does not apply where an LLP has more than two members: if a member is entitled to terminate an LLP agreement in relation to his own interest (so it no longer applies to him), but the other members’ interests continue to be governed by that agreement – this would create a practical nightmare.

The judge said: “It is all but self-evident that the co-existence of two different contractual regimes governing the same LLP is likely to lead to results which are legally incoherent and could only be resolved by further agreement between all the members’. The court therefore ruled that the repudiatory breach did not entitle the member to treat the LLP agreement as terminated.

However, this logic does not apply if the LLP only has two members. It is therefore possible that a member of a two-person LLP can successfully allege repudiatory breach, and treat the default provisions as applying.

Operative date

  • Now

Recommendation

  • Members of two-person LLPs should ensure that their LLP does not commit a repudiatory breach of the agreement and, if it does, take specialist legal advice, as this may allow one of them to treat the agreement as terminated

3 November 2015

Jonathan Waters has over 12 years of experience advising businesses in relation to commercial disputes and how to avoid or resolve them. He has a particular interest in construction law and adjudication, and he is currently studying for an Msc in Construction Law & Dispute Resolution at King’s College. Before starting Helix Law, he was the partner in charge of Commercial Litigation, Employment Law and Property Litigation at Stephen Rimmer LLP. He has a degree in Business Administration and before qualifying as a solicitor he worked in industry and investment banking for over a decade.

This article is written to raise awareness of the issues it discusses and it may not be updated after it is first written, even if the law changes. It is not intended to be legal advice and cannot be relied on as such. Helix Law is not responsible or liable for any action taken or not taken as a result of  this article. If you think the matters set out affect you and you wish to apply them to your particular circumstances then we are happy to give you free initial telephone advice. 

Contact Helix Law on 01273 761 990 or email: [email protected]