Tribe v Elborne Mitchell LLP [2021] EWHC 1863 (Ch)
An LLP agreement made provision for each member to receive a fixed share of profits and, if there was a balance, distributions from a discretionary fund could be allocated by a decision of the members on a recommendation from the senior member. A former LLP member disputed the distributions in certain years.
The court noted first that where an agreement could give rise to rival interpretations, weight should be given to the interpretation which was more consistent with business common sense (Wood v Capita Insurance Services [2017] UKSC 24). Second, where the agreement gave one party a discretion in making an assessment or choosing from a range of options there was an implied term that the discretion would not be exercised in an arbitrary, capricious or irrational manner, and such a term was difficult, though not impossible, to exclude (Braganza v BP Shipping Limited [2015] UKSC 17, Mid Essex Hospital NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200 and Charterhouse Capital Ltd [2015] EWCA Civ 536). The discretion was also fettered because in the context of an LLP a decision-making power must be exercised in good faith and in the best interests of the LLP. Thus the senior member making a recommendation, and the members collectively in making a decision, must exercise good faith and should not take into account irrelevant matters or ignore relevant ones, and the recommendation or decision should not be outside the range of reasonable proposals that might be made in the circumstances.
Applying these principles, the court held that the Agreement here did not require the members to adopt the senior member’s recommendations, or to adopt or reject them in their entirety. Even if this had been a possible interpretation, it would have been rejected because it made less commercial sense, since it would have removed the opportunity for members to bring their personal knowledge and opinions into a debate, and would have meant that the whole process might fail and have to start again because of the senior member’s failure to include a significant fact or matter. The recommendations did not need to be perfect or include all possible analyses, but needed to be full enough to allow a debate between partners. The court concluded that the recommendations had been reasonable exercises of the discretions to recommend and decide on distributions.
Herberstein v TDR Capital General Partner II LP and others [2021] CSOH 64
A limited partner in a limited partnership registered in Scotland brought an action of count, reckoning and payment against the partnership. This action is a two-part procedure in the Scottish courts whereby a person such as a partner can compel payment of sums due to them in circumstances where they are not aware of precisely what sums are due. The first stage is concerned with whether the defender is liable to account, and the second stage is to ascertain what sum is due. This judgment concerned the first stage.
The court noted that there were advantages in choosing a Scottish limited partnership because under Scots law, unlike English law, partnerships had separate legal personality, but those who sought these advantages must accept the consequence of this choice that Scots law applied. It was fundamental to Scottish law that partners must act with what was referred to traditionally as ‘exuberant trust’ and more recently as ‘utmost good faith’, and the Scottish action of count, reckoning and payment was available to determine the amount due to a partner. The purpose of that action was the payment of sums due, not the provision of documents, which was simply a procedural step. This meant that it was different to the purpose in Inversiones Frieira SL and another v Colyzeo II LP [2012] Bus LR 1136, which was to obtain access to documents so as to enable the limited partners to understand the business in which they had invested. Here the pursuer was not seeking to understand the business, but to be paid what was due to him.
The court declined to depart from the normal two stages of the procedure, since this was not a situation where the pursuer had already received accounts. At this first stage the only question was whether the defenders owed a duty to account to the pursuer, and it held that they did. Partners owed a common law duty to account to other partners, and a duty under s28 of the Partnership Act 1890 to render true accounts and full information to the other partners, and the partnership agreement here did not have the effect of contracting the partners out of that duty. Its provisions simply regulated the administrative accounting procedure on the preparation and form of accounts and did not displace the legal obligation to account. The court expressly left open the question of whether it was ever possible to contract out of the s28 or the common law obligation to account, since that issue did not arise on the wording of this particular partnership agreement. It concluded that the action should proceed to the second stage.