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Does a repudiatory breach discharge an LLP Member’s Agreement?

Flanagan v Liontrust Investment Partners LLP and others

David Reade QC
The recent Judgment of Mr. Justice Henderson in Flanagan v Liontrust Investment Partners LLP and others [2015] EWHC 2171, 24th July 2015, has addressed the vexed question of whether the Common Law doctrine of repudiatory breach applies to LLP members’ agreements. It has long been settled law that the doctrine did not apply to traditional partnerships, Hurst v Bryk [2002] 1 AC 185 (HL), but the position under LLP agreements has been the subject of continuing debate. In particular it has been argued, by the author amongst others, that the doctrine applied and that the effect of a repudiatory breach was to enable a member to accept the breach and assert that the default provisions under the Limited Liabilities Partnership Act 2000 applied. In Liontrust Mr. Justice Henderson rejects that argument, save possibly in the case of a two member LLP.

The Facts

Mr. Flanagan was  a member of the Liontrust Investment Partners LLP. Liontrust was engaged in the business of fund management. Mr. Flanagan had joined the LLP in October 2011, following the acquisition of a business which included a fund that Mr. Flanagan managed. At the time he joined the LLP a side letter provided that Mr. Flanagan was entitled to remain a member of the LLP for a period of two years from the date that he joined the LLP, placing a limitation on the giving of compulsory notice to retire under the LLP Agreement. 
In August 2012 Liontrust decided that it would close the fund that Mr. Flanagan managed. As a consequence the LLP purported to give Mr. Flanagan notice of compulsory retirement under the LLP Agreement  and to place him on “garden leave” early than the expiry of  the two year period.
Mr. Flanagan sought to argue that the conduct of the LLP and Liontrust Investment Services Ltd, one of the members of the LLP,  was in repudiatory breach of the LLP Agreement and the side letter. Mr. Flanagan asserted that he was entitled to accept the repudiatory breach with the consequence that the terms of the Agreement ceased apply and that the default provisions under Reg 7 of the Limited Liability Partnership Regulations 2001 would apply instead. In practical terms this would have the very significant consequence that Mr. Flanagan would be entitled to an equal share in the capital of the LLP whereas under the Agreement he had no equity interest of a capital nature other than for the return of his original contribution.
Mr. Justice Henderson found that the original termination letter was invalid, the LLP  had subsequently served further termination letters without prejudice to the effect of the first but the LLP had acted towards Mr. Flanagan on the basis that the first notice was valid. As  a consequence of the finding that the original letter was invalid Mr. Justice Henderson found that there was a breach of the LLP Agreement in that it ceased paying Mr. Flanagan’s fixed allocation of profits from 4 October 2013, it purported to place him on garden leave and it had treated him as if automatically retired from the Management Committee of the LLP.
There had been no meeting of the Management Committee for the necessary resolution to place Mr. Flanagan on garden leave, the Judge found that Liontrust had fabricated minutes of a non-existent meeting to correct this failure. 
The Judge found that this was a repudiatory breach of contract on the part of the LLP and that it was not acting in good faith when it placed Mr. Flanagan on garden leave, this he found to be a renunciation of Mr. Flanagan’s contractual rights under the LLP Agreement. Mr. Justice Henderson additionally considered that had the renunciation of Mr. Flanagan’s contractual rights had not been a repudiatory breach he would have found that his exclusion, in breach of contract, from involvement in the affairs of the LLP would have amounted to a repudiatory breach of contract itself.
Mr. Justice Henderson then turned to consider whether the effect of the repudiatory breach was to enable Mr. Flanagan to accept the breach, so as to treat himself as being discharged from the LLP Agreement, an thus rely on the default provisions. He analysed  the reasoning of Lord Millet in Hurst v Bryk and the problem of the application of the doctrine of frustration to multi party agreements. Lord Millet, in  a passage that was strictly obiter, identified the problem occasioned if  the repudiatory breach meant that the partnership agreement was non binding with some partners, the “guilty” partners, but was binding with other partners, the “innocent” partners.  Mr. Justice Henderson found that  the same problem would be occasioned with a multi party LLP Agreement if not all the parties were in breach. 
Section 5 of the of Act deals with the position of  an LLP Agreement which seeks to define the relationship between the members other than in accordance with the default provisions, S.5 provides that:
5.Relationship of members etc
(1)Except as far as otherwise provided by this Act or any other enactment, the mutual rights and duties of the members of a limited liability partnership, and the mutual rights and duties of a limited liability partnership and its members, shall be governed –
(a) by agreement between the members, or between the limited liability partnership and its members, or
(b) in the absence of agreement as to any matter, by any provision made in relation to that matter by regulations under section 15(c).
(2)… ”
Mr. Justice Henderson found that S.5 required all the parties to be bound by the agreement and in the multi party situation, where not all the members  were in breach, some would be bound by the agreement and others not. 
 “I accept that there is some force in at least the former of these arguments [the arguments of Mr. Flanagan], but in my view neither of them answers the basic question whether Parliament could reasonably have intended to create a statutory framework for LLPs under which the same subject-matter might foreseeably be governed by inconsistent provisions (under a section 5 agreement and the default rules respectively) following acceptance of a repudiatory breach of a section 5 agreement. In my judgment, the statutory scheme should if reasonably possible be construed in a way that avoids this possibility.”
To address this issue Mr. Justice Henderson adopted a construction of S.5 in the following manner:
“I would accept Liontrust’s submission that it is implicit in the statutory regime for the internal governance of LLPs that, in relation to any particular matter, an LLP and all of its members for the time being must be subject to the same set of rules, whether those rules are contained in an exhaustive section 5 agreement, or (in the absence of any section 5 agreement) in the default rules alone, or in a combination of a section 5 agreement and the default rules.  This does not mean, of course, that the rules have to treat all the members alike, or that the rules may not themselves be subject to amendment or modification in accordance with procedures to which all have previously agreed. But it does mean, in my judgment, that there is no place for operation of the doctrine in relation to section 5 agreements, save perhaps where the LLP has only two members. 
Another way of expressing the same principle is to say that, once a section 5 agreement 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. It is only in such circumstances, in my judgment, that there could be “the absence of agreement as to any matter”, within the meaning of section 5(1)(b) of LLPA 2000, in relation to a matter which was previously covered by the section 5 agreement, so as to allow the matter to be governed for the future by the default rules. 
It should be noted that the same problems may not arise in two member LLPs or arguably if all of the Members are party to the conduct giving rise to the repudiatory breach. This also leaves the interesting question of  whether in some cases the powers of an LLP may be exercised on behalf of all of the members of the LLP so that even those who did not expressly sanction the conduct are still “guilty”.
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