David Marshall, Partner
Compensation claims for occupational stress are on the increase, but they may not be limited to employees. Firms also need to be aware of potential claims by partners. The Health & Safety Executive (HSE) defines occupational stress as “the adverse reaction people have to excessive pressure”. Typical causes of excessive pressure on partners might be the result of overwork, lack of control, inadequate support or bullying.
Many City firms (particularly, although not exclusively, in law and accountancy) practise as traditional unlimited partnerships or through limited liability partnerships (LLPs), even though they are businesses with multimillion pound turnovers and hundreds of partners. In theory, an owner of the business should be able to exercise a large degree of control over these matters. However, recent changes to many partnership management structures have lead to the removal, through express terms of the Partnership Agreement, of the traditional rights of a partner under the Partnership Act 1890 to participate in management. Even when the resulting small management board is elected by the partners, and there are some checks and balances on the exercise of its power, the reality is that many partners are deliberately divorced from management – and thus some, or all, control over their work. This may be for very good business reasons and to improve business strategy, direction and performance overall, but it also has the effect of disempowering the other partners. The opportunities for bullying by those entrusted with power are also considerable.
Duty of care
In a similar business environment (for example, a bank or other financial institution), where the business is conducted through a corporate structure, senior executives will usually be employees, and their employer will be subject to a common law duty of care, an implied contractual term of mutual trust and confidence and a duty to assess and minimise risks to health and safety under the Management of Health and Safety at Work Regulations 1999 SI 1999/3242. In Horkulak v Cantor Fitzgerald International [2003] EWHC 1918 (QB), Mr Horkulak was an experienced and senior City derivatives trader who had been “crying and shaking uncontrollably” as the result of bullying by his line manager. The language was “foul and abusive” and, although the Judge accepted that this was common at Cantor, he also found that this was the “hallmark” of the manager’s “dictatorial style”, and thus a breach of the implied term of mutual trust and confidence. Mr Horkulak sought only pure financial loss as a result of the constructive dismissal resulting from bullying. But if he had suffered a recognised psychiatric condition as a result, there is no reason why he could not also have recovered for non-pecuniary loss and associated damage too.
Partnership status
A partner in a professional-services firm might, in fact, be an employee. If so, the firm as ‘employer’ owes the same duties to the ‘partner’ as they would to any other ‘employee’. This can be so even if the ‘partner’ is named on the notepaper of the firm and treated as self employed for tax purposes. In Kovats v TFO Management LLP [2009] UKEAT 0357_08_2104, the Employment Appeals Tribunal (EAT) considered this issue for the first time in the context of an LLP. Mr Kovats was a full member of the LLP and carried out the role of chief investment officer. The EAT agreed with the Employment Tribunal that he was not an employee for the purposes of the employment legislation. However, they pointed out that section 4(4) of the Limited Liability Partnerships Act 2000 effectively applies the same test to membership of an LLP as would be the case with partnership in a traditional partnership. Thus the tribunal first has to consider whether a partner or member of an LLP is in fact an employee. If so, he is entitled to exercise employment rights notwithstanding his status as a partner or member of an LLP. In Kovats, the arrangement was not a sham, and his fixed distribution was held to be a drawdown against future profits. However, in the modern partnership world of infinitely variable remuneration models and increasingly delegated management roles, the answer to this question may not always be as simple as it once was. Certainly, any firm must at least be prepared for a claim that, in terms of protecting health and safety at work, a ‘salaried partner’ or ‘fixed share partner’ is in fact an employee. If a firm defends an action on the grounds that there is no duty to protect the health and safety of a partner because he is not an employee, and that defence fails, the risk of a finding of liability must be very great.
If there is an element of real participation in management of the business, a contribution of capital, or a sharing of profits or losses, then the likelihood is that the partner will be treated as an ‘owner’ rather than an employee. Even in these circumstances, however, the firm can have liability to such a partner for causing work-related stress.
Statutory discrimination and harassment
The provisions of UK discrimination law in respect of sex, race, sexual orientation, transgender status, disability, religion or belief, and age, apply to partners as well as to employees. The legislation inter alia expressly prohibits discrimination in relation to offers and terms of partnership and expulsion from partnership. The prohibition against harassment (“unwanted conduct” “which has the purpose or effect of violating the employee’s dignity” or “creating an intimidating, hostile, degrading, humiliating or offensive environment”) and victimisation for asserting rights also apply to partners.
The peculiarity of a partner effectively suing himself (as one of the partners in the defendant firm) was noted, obiter, by Warren J in Hammonds v Danilunas & Others [2009] EWHC 216 (Ch), but he noted “there can be no doubt that, in the context of section 11 [of the Sex Discrimination Act 1975], a ‘firm’ can discriminate against a woman partner notwithstanding that she herself is a partner in the firm”.
The provisions of the Protection From Harassment Act 1997 can also be relied on by partners in respect of harassment in the workplace, in the same way as employees, although the firm probably won’t be vicariously liable for the acts of a partner towards another partner.
Common law claims
However, in respect of common law claims, the existence and extent of a duty of care is uncertain. There is no clear case law that establishes that a full equity partner/LLP member can bring a claim against the other partners or the LLP for damages for personal injury. This could be expressly provided for in the Partnership/Members Agreement, but it would be very unusual. Section 10 of the Partnership Act 1890 only deals with liability in tort to third parties, and this formulation is repeated in s 6(4) of the Limited Liability Partnerships Act 2000.
The Law Commission’s 2003 Report on Partnership Law pointed out that the Partnership Act 1890 contains no statement of the duty of care a partner owes to the partnership or the standard of care to be imposed on a partner. The old case law suggests that a partner’s duty to other partners was to act without ‘culpable’ negligence.
In the Scottish case of Mair v Wood [1948] SLT 326, one partner brought a claim against the others after being injured on a ship through the failure of another partner to replace floorboards covering the propeller shaft. Lord Keith felt that, while the injured partner could bring proceedings against the individual partner responsible, he had no right of action against the partnership (which in Scotland has a separate legal personality).
In Hammonds Warren J pondered about a possible claim where an employee changing a light bulb fell on one of the partners injuring him in circumstances where another partner had failed to renew insurance. His view, albeit obiter, was that “it would be unsurprising not only to find the partner responsible for the renewal being held liable for not having done so, but also the firm as a whole”. The partner bringing proceedings may have to bear his share of the consequent lost profits, but that should not preclude a right of action. In Tann v Herrington [2009] EWHC 445 (Ch) one partner had failed to disclose a claim on the renewal of the professional indemnity insurance (PII) and the judge found the guilty partner to be wholly liable for the loss. While finding that there had indeed been ‘culpable’ negligence, he was unable to determine much difference in practice between that and mere ‘negligence’.
In practice, a substantial partnership is likely to stand behind one partner if he is sued personally by another partner for breach of duty which causes work-related stress. This is most likely to occur in the case of a bullying claim, where a duty of care is more easily established in respect of an individual. A claim for systemic failing leading to work overload and a breakdown caused by stress would be more difficult to establish against an individual partner, although proceedings against the individual members of the management team might be feasible. Managing partners may wish to consider including an express indemnity from all the other partners in respect of all such claims. However, notwithstanding Tann, it is also entirely possible that the duty owed to an equity partner (and therefore part-owner of the business) might well be rather lower than would the duty owed as employer to an employee of the partnership.
An alternative route might be a claim by an equity partner against the other partners for damages on an account in a claim for dissolution of the partnership with the court exercising its discretion to order a buy out instead). Mullins v Laughton & Others [2002] EWHC 2761 (Ch) 2 WLR 1006 (2003) 4 All ER 94 concerned a partnership dispute relating to an insolvency practitioners’ practice. A group of partners resolved to remove another partner because of concerns about his performance. This involved summoning him to a meeting to expel him without giving him notice of their intention and changing the locks of the offices in advance. Neuberger J said their behaviour was a breach of the duty of good faith, notwithstanding the “relatively tough and abrasive regime”, finding that the partner was “set up” with a view to “shocking or surprising [him] into agreeing to resign”. He then concluded that, although it would be possible for such conduct to lead to an order for dissolution of the partnership under section 35 Partnership Act 1890, that section conferred a discretion and that the court could instead order that the remaining partners buy out the other partner. Most of Mr Mullins’s claims could be dealt with in that way, but in addition to the usual financial partnership remedies, Neuberger J held that in principle, he was also entitled in the account to damages for “loss of reputation” and “career disruption” “as a result of which he thereby lost the opportunity to maximise his reemployment prospects” (following Mahmud v BCCI 1998 AC 20). Although no claim was brought for psychiatric injury, it is submitted that in principle this would be treated no differently.
Prevention better than cure
Most law firms will have policies and procedures in place to prevent or deal with complaints of occupational stress, bullying and discrimination by employees. The HR team are usually heavily involved, but partners can often fall through the net. Even senior HR employees may be reluctant to get involved with partner issues unless their remit is clear. Work-related stress levels have, of course, increased rapidly as a direct result of the recent crisis in the financial markets. The simplest course of action is to adapt the existing preventative measures already in place for senior employees and appoint a senior partner independent of the management team to oversee it. This should reduce stress and improve well-being as well as minimising the potential for claims. Doing nothing is a dangerous strategy, and managing partners should be aware of the potential risks of claims. They should not be dismissed merely on the grounds that partners are not employees.
David Marshall is a personal injury and employment specialist and managing partner of Anthony Gold Solicitors. He is the author of 'Compensation for Stress at Work' published by Jordans in March 2009.
