October 17, 2016

The High Court has held that a share of profits paid out under a partnership or limited liability partnership deed can be subject to the principle of forfeiture on the basis of the partner’s breach of fiduciary duties.  On appeal from an arbitrator’s award, Mr Justice Newey found that a profit share is not inherently incapable of representing remuneration and being subject to the forfeiture principle.  As such there was no scope to challenge the arbitrator’s decision that the claimant, Jeremy Hosking, should forfeit half of sums paid to him as profit shares during the relevant period on account of breach of contractual and fiduciary duties owed to the defendant, Marathon Asset Management LLP.

The court agreed with the arbitrator that the forfeiture principle could potentially apply to partners.  While the principle had in the past been invoked mainly in relation to agents, the rationale for it – as a “real deterrent to betrayal” – extended more widely to other fiduciaries.

Furthermore, and in any event, a partner or LLP member is an agent.  The judge said it was hard to see why the mere fact that someone is a partner or LLP member as well as an agent should preclude the operation on the principle that affected agents more generally.

The judge acknowledged that it would often by impossible to characterise all or any particular part of the profit share of a partner or LLP member as “remuneration”, but saw no reason why this should always be the case.  As a matter of language, it can sometimes be appropriate to speak of a person being remunerated by way of “profit share”.

Moreover, the judge could see no good reason to treat profit share differently from other forms of remuneration in cases where it could be identified as the reward for undertaking specific duties notwithstanding that such cases were “probably unusual”.  He accepted that profit share might usually reflect the interest of the partner or member in the firm, but considered it possible to envisage cases in which it rather represented compensation for certain services and, where that was so, could fairly be viewed as remuneration within the scope of the forfeiture principle.  The law, he said, should be concerned with substance rather than form.

The judge also noted that partnership legislation does not attempt to provide an exhaustive account of the relevant law.

Finally, the judge observed that the fact that the contractual documentation relating to a partnership or LLP contained no provision for forfeiture could not necessarily mean that there was no scope for it.  While the forfeiture principle could be excluded by contract, it had been taken to apply where there was no reference to it in a relevant contract (Jeremy Hosking v Marathon Asset Management LLP [2016] EWHC 2418 (Ch) (5 October 2016) – to read the full judgment click here).