Hitting the wall: navigating partner exit disputes before they derail your LLP

When it comes to partnerships, legislation provides the legal framework, but it’s the partnership agreement that gives voice to the relationship between partners. An effective agreement is one that covers every stage of that relationship, from day-to-day governance through to the mechanics of an exit.

While nobody likes to consider a worst-case scenario, litigation trends reveal that partner exits from LLPs and traditional partnerships are becoming increasingly contentious. To help avoid this, it’s becoming more common to use bespoke fiduciary duty frameworks in drafting partnership agreements that sit alongside, and refine, the default statutory and equitable duties.

When creating this framework, consider expressly restating and tailoring the core duties of partners in commercial matters, designing a clear conflict management process, setting out equitable opportunity and non-compete provisions, establishing formal information and reporting oversight, and setting out proportionate remedies for breach that reflect the expectation of partnership fairness.

Taking these steps will go a long way in preventing the most common battlegrounds in a partner exit described below.

Valuation of the departing partner’s interest

Without a clear and objective valuation mechanism, calculating the fair value of a departing partner’s interest, particularly where the exit is involuntary, can become a protracted and conflict-riddled exercise.

A draconian valuation clause, or one that gives the remaining partners a wide discretion over how the exiting partner’s interest is valued, will be vulnerable to challenge. In Braganza v BP Shipping Ltd [2015], the Supreme Court confirmed that where a contract gives one party a discretionary power affecting the other, that discretion must be exercised rationally, for a proper purpose and following a fair process. In practice, this means that powers commonly found in partnership agreements, such as triggering a compulsory transfer or adopting a particular valuation approach on exit, cannot be exercised arbitrarily. They must be used in a manner that is consistent with their intended contractual purpose.

Restrictive covenants

Restrictive covenants are another frequent flashpoint. The key principle is that the partnership’s right to protect its legitimate business interests must be balanced against the departing partner’s right to earn a livelihood. The courts have consistently held that any restriction must be reasonable and go no further than necessary in terms of scope, duration and geographical reach.

Alternatives to blanket non-compete clauses such as non-solicitation, non-dealing and non-enticement covenants and a well-crafted confidentiality clause can provide substantial protection without preventing the departing partner from trading altogether.

Gardening leave provisions also serve as a useful protective function, keeping the exiting partner away from clients and colleagues during the notice period. Bear in mind, though, that the courts will look at the cumulative effect: where a lengthy gardening leave period has already been served, a further lengthy post-termination restriction may be viewed as disproportionate.

As with valuation, the Braganza principles apply here too, and any discretion exercised by the remaining partners in enforcing restrictive covenants must be rational and follow a fair process.

Contested exits: compulsory retirement and expulsion

In the case of Clyde & Co LLP v Winkelhof [2014], the Supreme Court held that a partner in an LLP can be a ‘worker’ for certain statutory purposes.

The decision introduces an important limitation when enforcing clauses in the partnership agreement relating to the compulsory expulsion of a member by the other members. The partners cannot rely on a contractual right to expel if the real reason for the expulsion is a protected disclosure, a protected characteristic or another ground prohibited by the Equality Act 2010.

Where the partnership agreements confer a discretion on the partners to, for example, determine misconduct or material breach as an expulsion trigger, decision‑makers must follow a fair, evidence‑based process.

When making decisions relating to compulsory retirement and related matters, we advise clients to make every effort not only to behave lawfully but ensure that their conduct is accurately documented at every step. This includes recording the aims and evidence behind every material decision.

Dispute resolution

We’re seeing a clear trend towards tiered dispute resolution clauses that prioritise early, proportionate settlement.

On dispute resolution itself, a tiered approach works well in practice. Start with internal escalation in the form of timetabled negotiation meetings within a few days of the dispute arising, with a genuine commitment to finding a way forward. If that doesn’t resolve matters, build in a mediation step or in the case of narrow technical issues, expert determination. Arbitration can serve as the final tier, with appropriate carve-outs for urgent injunctive relief and limited summary court applications.

The need for preparation

A well-drafted partnership agreement, supported by fair processes and clear governance, is the single best investment you can make to avoid the cost and disruption of a contested exit. If it’s been a while since you last reviewed your agreement, now is the time to do so.