Partners subject to forfeiture principle – landmark high court ruling

It is established law that agents who breach their duties can be deprived of their remuneration. However, following a landmark High Court ruling, that forfeiture principle has been extended to profit shares paid to equity partners and members of limited liability partnerships (LLPs).

Following an investment manager’s retirement from the highly successful business he founded, the partnership launched arbitration proceedings. The arbitrator found that the man had breached the fiduciary duty that he owed the partnership in making plans to set up a rival business. He was ordered to repay almost £10.4 million of the profits he had received from the partnership during the relevant period.

In challenging that decision, the man argued that the forfeiture principle had no application to partnership profits, the distribution of which was always a matter of contractual bargain. The arbitrator’s ruling was also said to be inconsistent with the terms of the deed by which the partnership was established.

In rejecting his complaints, however, the Court found that profit shares paid to partners or members of LLPs can potentially be subject to forfeiture. Whilst the forfeiture principle could doubtless be excluded by contract, the arbitrator was justified in concluding that the profits paid to the man were in substance remuneration for the performance of his executive duties.