Employment Knowhow: Partnership disputes

There are a number of different types of partnerships recognised in English law, including Partnerships at will and Partnerships that fall under the Partnership Act 1890, but the most frequently created are Limited Liability Partnerships (“LLPs”).

Usually a partnership will be governed by a Partnership Agreement/Deed which will set out the rights of the Partners (usually called Members). The Deed will govern the key provisions including the allocation of profits and the way in which any entitlement is calculated such as lockstep or performance related payments and the payment in of capital (partnerships are often funded to an extent by the capital payments made by Members).

Partnership law generally requires that Members act under a Code of Conduct that sets a higher standard than the normal employer/employee relationships, similar to the fiduciary duties of Directors. The agreement will also address the rights of Members to call Members meetings, the rights of Members to leave (commonly referred to as retirement) or to be removed (on notice) or be expelled (without notice) and finally restrictive covenants governing Members’ rights to compete after they leave.

As a starting point it is always necessary to consider the governing deed. If the provisions are clear they are seldom able to be challenged, unless they breach common law or statute, for instance by imposing an unreasonable restraint on ex-Members. Members do not have statutory protection against unfair dismissal, which is restricted to employees, but they have many of the protections that cover “workers” and they have full protection under the Equality Act (see Discrimination).

It is enormously important when drawing up or entering into an LLP Agreement that the Members fully understand the effect of the provisions and the limited rights that individual Members may have under that Deed.

Many agreements contain an express obligation of good faith. Some Deeds, however, exclude the express duty of good faith leaving Members with very restricted rights in the event that a group of Members “gang up” on another Member. There is no requirement for Members to act reasonably in the absence of an express good faith clause and especially not where it has been expressly removed. Where good faith must be observed materially higher levels of protection exist against unfair treatment and prohibit conspiracy amongst Members.

Many agreements provide that Good and Bad leavers be treated differently in respect of their rights to accrued profits and the speed at which they are entitled to the return of their capital accounts.

Restrictive covenants for Members are usually drawn more widely both in ambit, and length of restriction and the court is more willing to enforce them (see Restrictive Covenants).

This page was updated on the 1st August 2018.

This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.

All content on this page is correct as of October 24, 2018.