What Happens When Partners Must Compulsorily Retire? UK Court Decision Examines The Issue

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Fox & Partners – The Court of Appeal’s judgment in Joseph v Deloitte NSE LLP [2020] EWCA Civ 1457 is a lesson in the importance of properly construing and strictly following the terms of a partnership agreement. The implications for partners, but also firms in relation to their decision-making processes, particularly in light of the pandemic, are significant.

The facts

The case concerns a challenge to the compulsory retirement of an equity partner from Deloitte.

The LLP agreement specified a three-stage procedure. The board has a right to issue a notice of retirement (stage one). The partner then has a right to ask the partnership board to meet to reconsider its decision to issue the notice of retirement (stage two).

Then, if the board ‘has not withdrawn the notice of retirement’ and the partner is ‘still aggrieved’, the partner has a right ‘within seven (7) days of the date of such board meeting’ to notify Deloitte they wish the board to convene a partners’ meeting to, ‘review the board’s decision to issue a notice of retirement’.

Mr Joseph exercised his stage two right and filed written submissions. He was informed by the managing partner that this would be considered at a meeting on 2 October 2019 and that the board’s decision would be communicated to him by no later than 9 October. However, Deloitte did not comply with that self-imposed deadline.

On 10 October, Mr Joseph wrote to Deloitte noting he had not been told the board’s final decision (as he had been told he would be) and exercised his stage three right to convene a special partners’ meeting. As the board had met on 2 October and decided not to withdraw the notice of retirement, Mr Joseph was one day late in exercising his stage three right. Deloitte later declined his request.

The arguments

The Court of Appeal held that time ran from the date of the board meeting and not the date the decision was communicated to the partner. It was held that the predominant purpose of the seven-day period was to provide the advantage of certainty. The clause imposed a strict deadline. The Court of Appeal acknowledged that the price of certainty is the potential for complications and unfairness.

Mr Joseph contended that where communication of the board’s resolution was delayed beyond the date of the board meeting, it was implied that the time period for demanding that a partners’ meeting be convened would be extended so as to be seven days from when that communication was read by the partner. The Court of Appeal found that this would be to rewrite the clause to provide for a different rule and would conflict with the express words.

Mr Joseph unsuccessfully argued that an estoppel arose. When Deloitte informed Mr Joseph of the date of the board meeting, the only representation made was that he would be informed of the decision by 9 October. Nothing was said or implied about the time within which he had to exercise his right to demand that a partners’ meeting be convened.

The Court of Appeal acknowledged Mr Joseph was entitled to feel harshly treated, but the claim for damages for breach of contract (he had sought an order for specific performance at first instance) failed.

The implications

Joseph demonstrates that where a partnership agreement uses clear and unambiguous language, a term will not be implied merely because it appears fair or merely because one considers that the parties would have agreed it, if it had been suggested to them. The Court of Appeal emphasised the role of the court, whether in interpreting the express terms or considering what the parties have impliedly agreed. It is not to make a better contract for the parties, but to ascertain what their contract is.

A partner’s decision whether or not to appeal an expulsion or compulsory retirement decision to the full partnership body (where this right is afforded) and on what basis, often involves balancing significant reputational, tactical and legal considerations. It is rarely a step that either the firm or the partner relish. Once the commitment is made, Joseph underscores the importance of assiduously following the express terms of the partnership agreement.

The Court of Appeal in Joseph did not think the relevant clause was ‘well-thought through’. In the context of the pandemic, firms ought to be reviewing their partnership agreement and considering whether procedures require amendment.

The expulsion and compulsory retirement provisions should be carefully checked and properly construed. Notice provisions also need to be checked and meticulously followed.

Furthermore, with so much partnership decision-making being done by video conference or telephone, particular attention needs to be paid to quorum, remote attendance provisions and voting requirements. Amendments to the agreement may be in order to ensure the partnership can function effectively in a virtual environment. This is particularly so where the partnership body is expanding with lateral hires or promotions.

The costs

The case also highlights the substantial costs of getting it wrong. To this point, rather than a fight about the substantive merits of a decision to retire, this case has been about the right to have that fight.

Following the first instance decision, the trial judge ordered Mr Joseph to make an interim payment of £125,000 towards Deloitte’s costs, with the balance (Deloitte’s schedule of costs was over £300,000) to be determined at detailed assessment.

The possibility of further fighting about costs underscores the importance of getting it right, but also the benefits of achieving settlement and preserving market reputations. 

Claire Plumb is an associate and Ivor Adair a partner at Fox & Partners

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