Partner expulsion case offers lessons to LLP firms and their partners

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Kingsley Napley – Just before Christmas, the High Court ruled on a dispute regarding the expulsion of a partner from one of the Big Four under the firm’s 2017 LLP Agreement (LLPA).
 

The case Joseph v Deloitte NSE LLP concerned a challenge from David Joseph, a Swiss-based partner at Deloitte, to a decision by the firm to dismiss him.

The legal issue in dispute – whether the firm is obliged to convene a special meeting of the full partnership (consisting of some 1,700 equity partners) to consider the Claimant’s expulsion – is narrow, but the case is of broader interest to LLP firms and partners with important lessons for both.

Background

On 23 July 2019 the Board of Deloitte served notice of retirement on the claimant, confirming his exit with effect from 31 January 2020.  In the meantime he was placed on garden leave.

Under the LLPA the termination of a partner’s membership of the firm by the Board involves three stages:

  • Stage 1 – notice of retirement.
  • Stage 2 – where the partner “feels aggrieved”, the partner has the right to present their case at a Board meeting.
  • Stage 3 – then if the partner is “still aggrieved”, the partner within seven days of the Board meeting may notify the Chairman that he or she wishes the Board to convene a special meeting of all the equity partners to review the Board’s decision.

In this case the Claimant was told by the Managing Partner that the next Board meeting was in Oslo “on 2 October… [and] the final Board decision following this meeting will be communicated to you by no later than 9 October”. 

On 1 October the Claimant sent the Chairman a written summary of his case and indicated that on medical advice he would not attend the Board meeting in person. The Board met as planned next day and decided to uphold their earlier decision to terminate the Claimant’s partnership. However, this was not communicated to the Claimant, and so on 10 October – eight days after the Board meeting – he wrote to the Chairman asking when he would receive their decision and indicating that if the Board had not changed their decision then he would want them to convene a full partners meeting under stage 3 above.

In response the firm sought to explore with the Claimant what he hoped to achieve and any alternative way forward, but when it became clear that he was insisting on his right to call a special meeting of the full partnership to hear his case, Deloitte took the point that the Claimant’s request was out of time because it was made on the 8th day after the Board’s meeting.  

The Claimant’s unsuccessful legal challenge

The Claimant’s case was that his request for a full partners’ meeting to hear his appeal was not out of time on the proper interpretation of the LLPA. He argued that Deloitte’s suggestion that communication of the Board’s review decision was not necessary for time to run was in breach of clauses in the LLPA requiring the Board to communicate their decisions with reasons, and governing the duty of fairness and good faith owed by the partners to each other. He pointed out that without knowing the outcome of Board review, the partner cannot know if he is “still aggrieved” and so this precondition to the exercise of the right of appeal at stage 3 cannot exist.

Having promised to communicate their decision to him within seven days, he argued that it was not just and equitable for the Board to be allowed to refuse his request for a full partners’ meeting.

The Court disagreed and held that the LLPA was “clear and unambiguous” in its provision for a seven day appeal deadline from the date of the Board meeting itself, rather than from communication of the decision.  It emphasised that the LLPA is a carefully drafted legal document governing the relationship between “a sophisticated user group” of equity partners who could be expected to have entered into it “with their eyes open” (to its strict time limits).

Implications for LLP firms and partners

This case is part of a broader trend in commercial cases towards strict contractual interpretation and an emphasis on the natural meaning of contracts.  Individual LLP partners should be aware that legally they are in a very different position to employees.  The legal theory is that all partners are of equal bargaining power when they enter into their partnership agreement (even if in reality this is far from true) and so they should be held strictly to the rules of the firm. This applies not only to time limits, but also in other areas (for example, enforcement of non-compete restrictive covenants).

This case is also a reminder to firms that it makes sense to keep their LLP agreements and governance arrangements under review, particularly as they expand. The right to appeal against expulsion at a special meeting of the full partnership might make sense for smaller firms, but will rarely be appropriate at larger ones. At too many firms, partner exit and expulsion mechanisms are impractical.

Lastly this case is a reminder of the legal costs when cases go to court. In a costs judgement the Court considered the parties’ legal costs (£300,000 for Deloitte and £138,000 for the partner) and ordered the partner to make an interim payment of £125,000 towards Deloitte’s costs, with the proportionality of the rest of Deloitte’s costs and the partner’s liability for them to be determined separately. This highlights the need for real care on partnership exits, to avoid costly litigation.

Author –

Andreas White is a partnre at Kingsley Napley

This article was first published in Accountancy Daily on 27 January 2020.

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