Mr Flanagan was a former fund manager and member of an LLP. He asserted that Liontrust Investment Partners LLP (Liontrust) had committed repudiatory breaches of the contract between them as set out in the LLP agreement.

Mr Flanagan had purported to accept those breaches on the basis that, as a result, he was entitled to treat the LLP agreement as having been terminated, at least so far as he and Liontrust were concerned, and he became a member of Liontrust subject to the default rules contained in the Limited Liability Partnerships Regulations 2001 (SI 2001/1090) (2001 Regulations).

Mr Flanagan argued that the effect of this was that, rather than merely being entitled to receive his £125,000 annual fixed profit share and no share in the equity, he was entitled to an equal equity share in Liontrust, and Liontrust had lost its contractual entitlement to remove him as an LLP member. Accordingly, Mr Flanagan sought a compulsory buyout of his share under section 994 of the Companies Act 2006, and indicated that he estimated the value of his share to be in the region of £8 million.

While finding that certain of the alleged breaches were repudiatory in nature, the court rejected Mr Flanagan's claim on the basis that the doctrine of repudiatory breach is implicitly excluded in relation to LLP agreements. It ruled that it would be offensive to common sense, and contrary to the reasonable commercial expectations of the parties, if the effect of the doctrine were to permit Mr Flanagan to share in Liontrust's profits on a basis of notional equality with the other members, when the LLP agreement gave him only a fixed allocation of income profits and no entitlement to any capital profits.

It is well established that the doctrine of discharge for repudiatory breach does not apply to ordinary partnerships governed by the Partnership Act 1890.

However, the courts have not previously had to make a determination in relation to whether the doctrine would apply to LLP agreements as referred to in section 5(1) of the Limited Liability Partnerships Act 2000 (2000 Act) (section 5).

Mr Flanagan asserted that none of the reasons for which the courts have found that the doctrine does not apply to partnership agreements is applicable to LLPs. For example, he highlighted the fact that:

In response, Liontrust argued that the position advanced by Mr Flanagan would involve setting up a scenario where:

Having two sets of competing rules governing the entitlements of members could give rise to a number of unintended and impractical consequences, in particular, in respect of decision making and percentage profit shares.

The court considered the matter in detail and concluded that the repudiation doctrine was implicitly excluded by the 2000 Act.

It noted the practical difficulties that would ensue if, as suggested by Mr Flanagan, the rights and obligations of one member or group of members were subject to the default rules and others remained subject to the LLP agreement. The court said that it is all but self-evident that the co-existence of two different contractual regimes governing the same LLP is likely to lead to results that are legally incoherent and could only be resolved by further agreement between all the members.

Accordingly, the court held that the statutory regime should, if reasonably possible, be construed in a way that avoids this possibility. It went on to find that the statutory regime implicitly excludes the common law doctrine, at least where there are more than two members.

This is a significant decision that will be welcomed by LLPs but is likely to disappoint lawyers acting for claimants in LLP disputes.

Had the court found that the doctrine of repudiatory breach applied to LLP agreements and that Mr Flanagan was entitled to the windfall sum that he was claiming, it is possible that a series of copycat claims by disgruntled members would have followed.

The judgment offers welcome clarification of a previously uncertain area of the law. It is difficult to argue with the court's conclusion that the application of the default rules to some members but not all of them would be offensive to common sense, and contrary to the reasonable commercial expectations of the parties.