It is an established principle in law that if a fiduciary, a person who holds a position of trust, breaches that trust, for example by making a secret profit, then he has not only to account for any gains he has received as a result of that breach but also forfeit the remuneration he was entitled to for the services rendered. This rule usually applies to agents who are acting on behalf of principals.
However, in the recent case of Jeremy Hosking v Marathon Asset Management LLP the High Court found that a profit share payable to a member of a limited liability partnership (an ‘LLP’) was capable of being subject to forfeiture where the member was found to have breached his fiduciary duty to the LLP.
Mr Hosking was one of three founding members of Marathon which was an investment management business. As such Mr Hosking was entitled to a share in the profits of the business. Mr Hosking retired from Marathon in December 2012. However, following his retirement Marathon discovered that Mr Hosking had breached his contractual and fiduciary duties by having discussions with four of Marathon’s employees in July 2012 about the possibility of setting up a competing business. Marathon therefore commenced arbitration proceedings against Mr Hosking.
The Arbitrator awarded Marathon compensation of £1.38m for the losses suffered as a result of Mr Hosking’s breaches and held that Mr Hosking should forfeit 50% of the profit share payments that he had received in respect of the period from July to December 2012 (i.e. the period when he was in breach of his fiduciary duties) which amounted to a figure of £10,389,957.50.
Mr Hosking appealed on the grounds that the share of profits in a partnership was not subject to the rule of forfeiture for breach of fiduciary duty. His primary argument was that the rule related to remuneration for services rather than to a share of profits.
The High Court disagreed. In what has been hailed by some as a landmark decision, the Court found that a profit share payable to a partner or LLP member (as in this case) could potentially be subject to forfeiture and whilst the principle had mainly been applied to agency cases its rationale extended more widely and could be applicable to other fiduciaries as well. The Judge found that the absence of a provision for forfeiture in the relevant contractual documentation did not mean that the principle of forfeiture could not apply.
This decision is of particular importance to partners and members of limited liability partnerships particularly where there are partnership disputes. If you are involved in any commercial dispute then the Commercial Dispute Resolution Department at Blacks Solicitors can assist. Please contact Luke Patel on 0113 227 9316 or by email at “LPatel@LawBlacks.com”.