Limited liability partnership disputes: what do partners need to know?

A limited liability partnership (LLP) is a business structure in which aspects of partnerships and corporations are combined.

This flexible characteristic makes LLPs an attractive option for business owners and professionals since LLP members are not personally liable for the partnership's debts. This makes them particularly appealing among professional services firms such as law firms, accountants, and architects.

As is common in any business arrangement, disputes may arise between the partners of an LLP. These disputes can be inevitable, ranging from disagreements over management to breaches of the LLP agreement.

What is an LLP?

An LLP is a separate legal body that can enter contracts, own property, and be sued in its own name. In contrast to corporate shareholders, the partners have the power to manage the business directly.

The Limited Liability Partnerships Act 2000 sets out the structure and operation of LLPs. Under the hybrid system of company law and partnership law that governs an LLP, members are not personally liable for the debts or obligations of the LLP. Of course, there are exceptions to this, such as in cases of fraud, breaches of the law, or wrongful trading.

The partnership agreement – known as an LLP Agreement – establishes the rights and duties of its members. The LLP Agreement is integral to the way in which the LLP functions as an entity as it stipulates, for example, how the profits should be distributed and dispute resolution processes.

Common causes of LLP disputes

There are various factors that can contribute to disputes arising within an LLP, the most common causes being the following:

• Management and control
• Breach of the LLP Agreement
• Financial disputes
• Misconduct
• Exit disputes
• Implied partnership terms

The most common disputes within LLPs concern management and control since disagreements over the governance of the business and operational control are frequent sources of conflict. This is particularly evident when one member may feel as though they are excluded from key decisions or that the LLP is being mismanaged.

Breaches of the LLP agreement and financial disputes often go hand-in-hand since disputes may arise if one member accuses another of misappropriating funds or breaching their fiduciary duties. As a consequence of these two factors, members may then accuse each other of misconduct. Such allegations can lead to serious legal disputes and may even require legal action against individual members.

When the LLP agreement is not clear on certain terms, disputes over a member seeking to leave the LLP and partnership terms can arise. Exit disputes become particularly prevalent when matters such as the valuation of their interest in the business and whether they are entitled to a buyout come to the fore. In the absence of clarity in the agreement, the law may impose duties on members based on principles of fairness and equity, resulting in disputes between members when one believes another is not meeting implied obligations.

Resolving LLP disputes

When these types of disputes arise, the members of an LLP must address the issue promptly and professionally. These disputes can be resolved through negotiation and mediation, arbitration, court proceedings, winding-up and dissolution.

The first step in resolving a dispute within an LLP is often direct negotiation between the parties involved. Although informal discussions can be a way to resolve these disputes, mediation is often utilised to resolve LLP disputes since it is confidential, cost-effective and ensures a mutually acceptable resolution.

Arbitration is a form of alternative dispute resolution (ADR) in which a neutral person – known as an arbitrator – listens to both sides of the dispute and then makes a binding decision. Arbitration is often more time and cost efficient than going to court as well as providing more privacy.

Additionally, even if the LLP agreement does not contain a clause that warrants arbitration in the event of a dispute, both parties can still agree to do it voluntarily.

If negotiations, mediation, or arbitration fail, the parties may need to resort to formal litigation in the courts.  

The courts can provide a resolution by ordering remedies such as:

• Compensation for financial loss (damages) caused by a breach
• Injunction orders to prevent a member from taking certain actions, such as competing with the LLP or disclosing confidential information
• Dissolution of the LLP for extreme cases where the dispute has become unmanageable
• Declaratory judgment on the rights and obligations of the members under the LLP agreement

Under the Limited Liability Partnerships Act 2000, an LLP can be voluntarily dissolved with the consent of all members or by applying to the court if there are grounds for dissolution.  Dissolution can be complex and involves liquidating the LLP's assets, settling any outstanding debts, and distributing the remaining assets to the members.

Considerations for avoiding LLP disputes

To minimise the risk of disputes arising within an LLP, the following considerations should be made:

1. Clear LLP agreement
2. Dispute resolution clauses
3. Regular communication
4. External advice

It can, therefore, be demonstrated that while LLPs offer significant advantages, disputes can arise quickly. By setting out clear terms within the LLP Agreement and key measures for dispute resolution, members can reduce the risk of issues coming to the fore and ensure that their LLP continues to operate smoothly. If disputes arise, understanding the legal processes available can help members protect their interests and resolve issues effectively.