Avoiding the own goal – expulsions and ensuring your firm behaves in good faith -despite foul play!

Expulsions often blaze bright and furious. Usually, the individual Partner or Member has behaved extremely badly, leading the firm to consider the draconian step of expulsion. The temptation is to meet fire with fire. As human a reaction as that is, it must be resisted.

Expulsion is not the same as summarily dismissing an employee. There is no statutory right to expel. In order to have a legal right to expel a Partner or Member, there must be a power in the Partnership or LLP Agreement permitting expulsion. If there is no power, then you cannot expel – see Eaton v Caulfield [2011] EWHC 173 (Ch).

The expulsion clause will set out the process that must be followed. Whatever the clause stipulates must be implemented with care and precision. Clauses will be strictly construed and applied. Even if the behaviour of the Partner is egregious, the terms of the clause as to process should be followed with care.

The ways in which an expulsion can be attacked include that the power has been exercised otherwise than in good faith.

Two cases neatly summarise situations where good faith principles have been used to strike down an expulsion as invalid. In Blisset v Daniel 68 ER 1022 a Managing Partner wanted his son to become joint Managing Partner. Another Partner, Mr Blisset, opposed this on the basis that the young man was not ready for the role, and that he didn’t agree with the role being a joint one. The Managing Partner was outraged and went around the other Partners, drumming up a ‘charge sheet’ of reasons to remove Blisset. The court struck the expulsion down as in bad faith; a fraud upon the power, malicious, vindictive and so forth.

In Moody v Jones [2021] EWHC 3443 (Ch), a property Partnership, one Partner operated the business day-to-day, while the other one had put in money. The investor Partner started asking searching questions. The Partner managing the property took offence and expelled his Partner. Among other bases on which the court said the expulsion was invalid was that it was for a collateral purpose, namely to frustrate the attempts to obtain information.

The judge in Moody put it neatly and clearly: “As an incident of a partner’s duty to act in good faith, it is necessary that a partner serving an expulsion notice (or a notice of dissolution that is of like effect) should do so acting bone fide for the benefit of the firm as a whole, and not for the serving partner’s own ends”.

That warning is well made. As tempting as it may be, if management or the LLP throw caution to the wind and do not act in good faith and in the best interests of the business, then they open the door to a claim that the expulsion was invalid and/or for damages flowing from wrongful expulsion. Just because the individual has acted in bad faith, does not relieve the firm of the obligation to act in good faith. Two wrongs still do not make a right. It is better for management to play it by the book and act in good faith in a manner which can genuinely be said to be in the best interests of the firm.

If emotions are allowed to run riot, then the consequences may be a thumping own goal.

This article was authored by Jeremy Callman, Barrister, Ten Old Square.