LLPs and Partners: Enforcing Strict Legal Rights
A partner harshly treated by reason of a business choosing to stand on its strict legal rights ought to think twice before resorting to the court. Other than sympathy, they may not get very far - as a recent ruling illustrates.
Limited liability partnerships (LLPs) may be a relatively simple business model but they have their hidden dangers. This case1 centred on the express terms contained within a Deloitte LLP agreement, with important lessons for business and individual partners.
Out of time
Deloitte have an equity partner notice of retirement as permitted under its LLP agreement. However, the individual had the right to ask for the decision to be reconsidered by the board – and put to a special meeting of the full partnership (some 1700 partners in 13 countries).
Despite an invitation to attend the board meeting, the partner made written representations. The partner was formally told of the board’s decision not to withdraw the notice and, the following day, he repeated his request for a partners’ meeting to be convened – which was refused on the basis that the email was out of time.
A clause in the agreement required that such requests be made within seven days of the board meeting (he was a day late). The partner therefore sought an injunction for specific performance of the obligation to convene a partners’ meeting.
The Court of Appeal ruled in Deloitte’s favour. It said: “[The partner] was one day late in exercising his right to demand that a partners’ meeting be convened. It is entirely understandable that he waited for the board’s decision before doing so. He was assured that he would be informed of the board’s decision by 9 October 2019, but the Board did not comply with that self-imposed
deadline.”
The day after the deadline passed without him having been informed of the decision, he attempted to exercise his right. But Deloitte said he was out of time. The appeal court acknowledged that the partner was “entitled to feel harshly treated”, but Deloitte acted within its legal rights.
What does this mean?
One of the appeal judges emphasised that the court’s role, whether in interpreting the terms the parties have expressly agreed, or considering what they have impliedly agreed, is not to make a better contract for the parties but to ascertain what their contract is.
The partner knew he had seven days from the date of the board meeting to invoke his right, and – as Nugee LJ stated – “no amount of implication can convert that into seven days from his being told the outcome of such meeting”.
In the context of negotiating and drafting their commercial contracts, businesses would do well to note certain further observations made by the court:
· Despite its length and detailed provisions, the LLP agreement was not a well-crafted document;
· The Agreement contained a number of practical difficulties which showed it was “very far from being well thought through”.
To avoid disputes arising out of poorly drafted partnership documents and other commercial contracts, businesses should take specialist advice from experience commercial solicitors before finalising these documents.
1Joseph v Deloitte [2020] EWCA Civ 1457
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