LLP Break-Up – Contractual Clarification

Limited Liability Partnerships (LLPs) are a relatively new form of business, having only been introduced following the passing of the Limited Liability Partnerships Act 2000.

An LLP is, as the name implies, a sort of cross between a limited company and a partnership, and the governance of the LLP is decided upon by the LLP agreement, which is a contract between the members.

There are a number of ways in which a contract that has been breached can be terminated in English law and one of these is by ‘repudiation’, which is the legal term for treating a contract as terminated because one or more parties to it have refused to perform their obligations under it.

If a contract between members of an LLP were capable of being repudiated, the LLP would then be governed by the default rules set out in the Act, which include, for example, a provision that profits will be shared equally between the members. As such, a member entitled only to a minority share of profit might gain by seeking to repudiate the LLP agreement.

The question of whether or not an LLP agreement can be ended by repudiation came before the courts for the first time recently when an LLP broke up and a member sought to claim a greater profit share on the ground that the agreement was repudiated and therefore the default rules applied.

The High Court rejected the argument, concluding instead that where there is an LLP agreement in effect, it cannot be brought to an end by repudiation, but only with the consent of the members or by following the procedure laid down in the agreement.

The other contractual remedies for breach of contract (the right of an innocent party to sue for damages to make good a loss, for example) remain with regard to LLP agreements.

If you are in dispute with your business associates or wish to terminate a contractual agreement, contact us for advice.