Canada: LLPS & Partnerships - Team Moves And Compensation
Last Updated: April 5 2017

Jonathan Chamberlain discusses team moves, international issues and securing compensation for the damage caused.

Download podcast

Subscribe via iTunes

In this podcast, Jonathan Chamberlain looks at the risks and options for a Partnership or LLP on a team moves, international issues and securing compensation.

Partners and individual LLP members also need to understand the rights and obligations on a team move.

Transcript

Siobhan Bishop: Welcome to the third podcast in our series on LLPs and partnerships. This podcast, with Jonathan Chamberlain, a partner in our Employment, Labour & Equalities team at Gowling WLG, discusses international team moves and getting compensation for the damage caused. These issues will be relevant to all sectors operating business through an LLP structure or partnership as well as individuals who need to understand their rights and obligations if they want to exit such a structure.

So, firstly, Jonathan when someone is looking to leave an LLP or partnership and possibly take their team with them what kind of things are these people concerned about?

Jonathan Chamberlain: There's the kind of things that they are concerned about and the kind of things that they should be concerned about. People approach this with assumptions about what the law is and those assumptions can, in my experience, differ radically from what the law actually is. So, the base set of assumptions that people work with are that the post termination restraints, the so-called restrictive covenants that you find in an LLP deed, don't work; everybody knows that, it's common knowledge. Similarly, it's common knowledge that nobody ever fights these things and they hate it, it's never worth it, nobody wants to wash their dirty laundry in public. And even if that is the case, then there are easy dodges. You can always get round these kind of things because everybody always does, don't they? But by far the biggest single principle of assumed law is that, "I haven't done anything wrong". I am a good person, what I want to do is right and there are always excuses as to why you can take these particular clients, because the company didn't really care about them anyway and I brought them in and they're mine and it's my relationship and I went to school with them and I'm friendly with them on LinkedIn etc., etc., etc. These are my staff and if I'm gone, they won't have any work to do and, of course, they will want to come with me and the company didn't really rate them anyway etc., etc., etc. People make what are frankly excuses for breaches of their legal obligations. I'm not judging whether they are wrong from a moral perspective at all but in terms of what their black and white legal obligations are and their assumptions about what their legal obligations are, there is a frequently a very large gap.

Siobhan: Okay, so if that is what the individual and perhaps the whole team is thinking, what can the business actually do, what is the actual position?

Jonathan: Well, the first point to note is that the assumption that restrictive covenants, post termination restraints, non-competes, don't work is simply wrong. They frequently do work. There are a couple of hurdles that the company has to clear, they are well known. The covenant must protect a legitimate proprietary business interest and it must go no further than is reasonably necessary to do so. Once the company has cleared those hurdles, those legal hurdles, then the gateway is open to them to actually make these things stick. Also, what people who are planning a team move often don't realise is that it is almost certain that any team move is going to involve a breach of duty. Those conversations by the water cooler, those hints, those understandings are almost certainly always a breach of one's duty as a member of the LLP.

Now, it is becoming increasingly more common for wronged LLPs not to rush to Court and then get an injunction, as they always used to do, but instead to try and seek to get compensation. This is a new trend. It always used to be said that you've got a window of opportunity of a few weeks to stop this and, after that, forget it. Well, thanks to changes in the law, development in case law that we will be coming onto later, that's no longer the rule, as it were. LLPs are increasingly willing to use the tools at their disposal and to seek compensation, substantial compensation, when a team leaves and a chunk of business goes with it.

Another thing to bear in mind is that Judges were not born yesterday. So, one of the things that people assume, just to go back to what I was saying a moment ago, is that we won't get caught. We haven't used the company email server, we're speaking in code. Well, even if there's no hard black and white evidence in front of a Judge, then they are willing to put together the picture by drawing inferences from what people's behaviours have been. So, if everybody resigns simultaneously, then a Judge is clearly going to twig that something odd has been happening here, to pick a crude but obvious example. Finally, discovery is a hugely powerful weapon. Disclosure, as the Americans call it. That you have to produce to the Court, in the course of litigation, to the other side, the evidence that will enable them to pin their case on you. Even if you get away with it in the first few weeks and there isn't enough evidence to go and get an injunction, then in the course of the claim for damages, which we spoke about a moment ago and which we are going to come onto later, then you will have to turn over the texts, the emails from the private accounts, the business plans, all the things that you used and put together to make this happen. For substantial LLPs, for a team move to be successful, somebody, somewhere will have had to put together a spreadsheet indicating to the receiving organisation why this was a good deal. That spreadsheet will turn up in the course of litigation. So, companies and LLPs are not powerless or supine in the face of this.

Siobhan: So what other kind of information can be uncovered with discovery and how can that be helpful as well?

Jonathan: Discovery is such a powerful tool and there are some more things that it is worth noting. One can, for example, apply for early discovery. There is a choreography to litigation, a series of stages that one goes through and discovery has its place in that, early on, pre the middle. But it is possible to accelerate that; to say to the Court look we need to see this stuff early. It is possible to do it in the course of or before applying for an injunction, if the need is pressing enough, that does not very often happen but it can be done. Another thing worth noting is that you can apply for discovery against a third party. It's expensive, it's time consuming but again it can be done. So, if someone else holds the records, if someone else has the evidence here, you can go to them and say disgorge the documents. And the final point to come back to, and it is to some extent repeating what I said earlier, discovery is comprehensive. With the proliferation of electronic records, not just documents, but emails, but text, but WhatsApp, but Facebook, but even some people use the communications tools on their games consoles to try and evade detection. All of these things can be caught by the discovery process and all of them can be managed. There are hugely powerful software tools that exist to unearth the information and people are surprised, shocked, horrified at what can come out.

Siobhan: Okay, so that's very sobering. But one of the main questions a business would want to know is how much they can actually get in terms of damages?

Jonathan: Well, how much is, obviously for the lawyer, who can't count, an impossible question to answer. But we can talk about the principles. There are lots of ways, lots of legal routes to financial compensation. I think the principle three are ordinary damages, what are called Wrotham Park damages, that is what I want to concentrate on today, then finally the idea of the account of profits. Ordinary damages were, in this context, frankly, not much practical use. They are the damages that you see in any breach of contract case, an LLP agreement is after all simply a contract, and they are those flowing naturally, arising naturally, from the loss. Now, if a big chunk of business has walked out with the team, then causation establishing that the loss of profits going on for future years can be attributed to this breach, as opposed to a new service offering, dissatisfaction with the existing service offering etc., etc., can be really, really hard to prove. Which is why there used to be so few claims for damages. It was never really worth it. An injunction to stop the team move from happening, to slow it down, was always the preferred method. However, we now have this concept of Wrotham Park damages. Wrotham Park was the name of the case and it is nothing to do with LLPs and it is actually nothing to do with post termination restrictions, restrictive covenants in LLP or even employment contracts. It's actually a case in real estate, it's a land law case, and it's about the breach of a restrictive covenant, interestingly the same terminology, over land and how do you account for damages caused by breach of that restrictive covenant? Effectively what the Court said, and I paraphrase here, is that you can ascribe a capital value to that breach and that value is well how much would the wrongdoer, the person who breached the covenant, have had to pay to the person who has the benefit of that covenant to get a release. In land law, that clearly has a market price. The conceptual leap is that now, in the context of LLP agreements and employment contracts and directors and fiduciary duties, which we will be coming onto in a moment, then it has a market price here too and the Court can work out what that market price is. Now, how that is actually done in practice is, at the moment, very much more an art than a science, there isn't a lot of developed case law in this area. But what we are seeing is that more claims are being brought on this basis and more claims are being settled on this basis. Cash is changing hands.

The final one that I wanted to talk about was the idea of the account of profits. Now a member of an LLP almost certainly owes fiduciary duties to other members of the LLP. Fiduciary duties are, if you like, super duties, over and above those set out in the contract. A director of a company owes fiduciary duties to shareholders, a trustee owes fiduciary duties to beneficiaries. The significance of this term is that, if you can establish if someone is a fiduciary, then a remedy that is available for breach of fiduciary duty is an account of the profits that the fiduciary, the former fiduciary, has made from their breach. Now immediately you can see the significance of that in a team move context. Because if the business goes with the team, as frequently happens, as is frankly the purpose of the team move, then the LLP, the partnership that has lost the team, can say, well you may have got the team, you may have got the clients, I want the money back. I want the profits that you make from that business because they belong to me because of your breach of duty and the breach of duty is almost certainly that somebody inside will have been the ringleader, they will have been the recruiting sergeant and it is their duty to alert their partnership to the fact that a team move may be taking place, that a competitor is after this chunk of business. They are supposed to sound the alarm, they're not supposed to organise it and deliver it on behalf of the competitor. That is why I said right at the start of this that any team move is almost certainly going to involve a breach of duty, it may well be a fiduciary duty and it opens the way to this alternative remedy.

Siobhan: So if there is an international team move how does that affect the equation and what kind of ways can you go about bringing a claim in those circumstances?

Jonathan: International partnerships are becoming more common as firms look to service global clients and they use a variety of structures to do so. So, we see that some accountants and law firms adopt the model of a kind of holding entity, a Swiss Verein, an English LLP and sometimes partners who are members of the local LLPs can also be members of this holding entity, it varies enormously from partnership to partnership, but members will owe duties to the partnership in their home country and, possibly, the holding entity as well and this is where it can get really very, very complicated. The basic LLP agreement should contain a provision as to governing law and that provision, if properly drafted, should say that it governs disputes, not just about the agreement itself, but also those arising in connection with it and that clause should, on the face of it, catch the kind of issues that come up from a team move, the tortious issues, the breach of duty, the inducements of breach of duty, those kinds of things which are not referable back to the black and white of the contract, but are inherent in the duties that an LLP member owes. However, the Rome Convention, which is an EU treaty, governs transnational issues, claims, like this and that is much more complicated and not at all clear. So, although the basic starting point is that, in this commercial context, which an LLP agreement is, then the parties are free to agree the governing law and we are starting off with, say English law, it can develop from there. The basic principle, under the convention, is that the applicable law for torts is the law of the country in which the damage occurs. And that is irrespective of the country in which the event giving rise to the damage occurred or where the indirect consequences of that might be. That's Article 4 of the second Rome Convention for the detailed mind.

Now, if you are looking at a cross border move, then that suggests if it is orchestrated out of London and the Italian partners, who are being poached, have some of their profits paid back through the London partnership, you are talking then about a revenue stream which is generated in Italy but the loss of which is ultimately felt in London. So that is where, one might say, the damage occurs. But you can see a perfectly respectable argument for saying that the damage occurs in Italy. Well, never mind, because on the face of it we've agreed, in the LLP agreement, that the governing law is English law anyway so we don't have to start fighting this under Italian law, whatever that is, and I don't know. But there is another article of the Rome Convention, Article 6, which states that the law applicable to a non contractual obligation arising out of unfair competition, and that's clearly what we're talking about here, shall be the law of the country where the competitive relations or the collective interests of consumers, I love this sort of treaty language, are or are likely to be affected. Well, in our scenario, you can see a very strong argument for saying that that's happening in Italy, because that's where the clients are being hit. And the Explanatory Memorandum to the second Rome Convention talks about impeding competing supplies by enticing away a competitor's staff. Article 6, where this provision is contained, is mandatory, which is to say that you can't contract out of it. So, even though in the English LLP agreement we've said that all this is covered by English law, if this applies, then actually it's Italian law. There's a further complication. Article 6(2), a little sub-clause of this, says that in the situation where the act of unfair competition effects exclusively the interests of a specific competitor, which in the context of a team move it's quite likely to, then we're back on Article 4, which is the one that says it's where the damage occurs and in that one, of course, we're back to the contract, although we are now not back to the contract, possibly, because we've gone through Article 6. Look, you see what I mean, this is horrendously complicated okay and that's just the 'Noddy guide' that I've given you. So, really this stuff is very, very difficult and requires careful thought and planning on both sides.

Siobhan: And finally, what would be your top recommendations to a business facing a team move?

Jonathan: Well, I think I would give some dos and don'ts to both the remaining business and the people leaving and they actually look pretty similar. I would say to everybody take this seriously, take it particularly seriously if you're thinking of moving. Your obligations mean something, they have consequences, those consequences could involve you paying out a lot of money and therefore, and this is my second point, do factor that into your business plan. You're going to need somewhere allowing to account for potential costs and compensation in moving and if that means the numbers no longer make sense, then you may want to think about staying put and finding another solution to whatever your business problem is at that stage. You can easily see how you can flip that advice if you're talking to the company that's facing the total loss of the team. Take this seriously, don't assume that there is nothing you can do, you can do things. But don't then rely on the lawyers and the Courts to rescue your business for you. What I always say to businesses in these circumstances is, look, this is going to cost you whatever it is going to cost you, tens of thousands, hundreds of thousands. Are you going to be able to protect your business more by spending that on me? I sincerely hope that is the answer, but it frequently isn't. You would do much better by handing over that cash to your marketing director and getting out into the market and protecting and rebuilding your business that way. Don't let anger cloud your judgement at that point.

As to the don'ts I would say to everybody involved, first and foremost don't destroy the evidence. I was speaking earlier in this podcast about discovery and how much information can be found and how damaging it can be and sometimes people hear that and think heck, I must destroy everything involved. If you do that, two things are likely to happen. Firstly the Court will draw adverse inferences, if it suspects that evidence has been destroyed, and they will be more likely to impose remedies on you which may effectively be punishments and sanctions than if you had come clean. And secondly destroying evidence is a contempt of Court and can, ultimately, end up in a jail cell, and I've seen people come very close to that, it's not a hollow threat. Commercially, the most important don't is don't let this affect the clients. If you're losing people, offer the existing clients a positive alternative, don't drag them into this battle, they will hate you for it. And that equally applies to the people who are going and sometimes they make the mistake of thinking that the clients are on their side, that they're their clients and that's the whole rationale of the team move. Very few people are your clients, are yours, belong to you, in the sense that they are willing to become pawns in your chess game of litigation, it almost never works out like that.

Siobhan: Thank you very much Jonathan. As we mentioned at the beginning, this is the third of our series of three podcasts on LLPs and partnerships. The first one covered the employment status of partners and LLP members and how to manage those risks and the second podcast covers the risks and options when someone leaves the partnership or LLP. Both of those other podcasts are available now and you can listen to them on our website and in the meantime we hope you found this podcast useful and if you have any questions on this topic please do not hesitate to contact Jonathan and he would be delighted to help you. Thank you.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Press Releases from this Firm
Recent Content from this Firm
By Georgi Paskalev (Articling Student), Benoit Yelle
By Ian Chapman-Curry
By Helen Davenport
By Suzanne Sabourin
By Megan Martins
By Chris Brierley, Catherine Phillips
By Lewis Retik
By Ronald Doering
By Jake Huang, Jamie Rowlands
By Roberto Aburto, Sarah Willis
Tools
Print
Font Size:
Translation
Channels
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.