THJ Systems Limited & Anor v Daniel Sheridan & Anor

For an expulsion clause, a serious breach is a material breach which is more than trivial but less than repudiatory. It must have a serious effect on the benefit the innocent party would otherwise obtain from performance. Whether a breach is serious requires consideration of all relevant circumstances, including the contract, the term breached, the breach itself and its actual or potential consequences.

Repeated breaches must have some gravity and collectively amount to something serious. A breach may be remediable if it can be cured for the future, even though past consequences cannot be undone.

An LLP expulsion power vested in the LLP may be exercised by the members other than the member whose expulsion is considered. A persistent failure to provide contractually required advertising may justify expulsion where it deprives the other member of a central commercial benefit and cannot be remedied retrospectively.

THJ Systems Limited and Optionnet LLP claimed declarations and related relief against Daniel Sheridan and Sheridan Options Mentoring Corporation arising from the breakdown of a joint software and training venture.

The principal issue was whether a notice served on Mr Sheridan on 24 December 2015 validly expelled him from the LLP under clauses 19.1 and 19.2 of the LLP Agreement. The alleged breaches concerned webex delivery, copyright notices, advertising of the ONE software, use of prohibited software, provision of information and filing accounts.

The court also determined issues concerning the interpretation of the expulsion provisions, good faith, termination of related agreements, passing off and copyright infringement.

1. Serious and persistent breaches. A serious breach was a material breach which was more than trivial but less than repudiatory, and which had a serious effect on the benefit expected from contractual performance. The court had to consider all relevant circumstances, including the contract, the term breached, the nature of the breach and its consequences. Persistent breaches had to be repeated, non-trivial and collectively serious. The test for whether a breach was remediable was whether it could be cured for the future, even if past consequences could not be undone.
2. The alleged failures concerning the length and scheduling of webexes, copyright notices, prohibited software, provision of information and filing of accounts did not amount to serious or persistent breaches. The obligation to provide a one-hour webex required reasonable availability for teaching and questions, not exactly 60 minutes of formal instruction. The request for a list of webexes required an analysis to be created, rather than production of an existing record.
3. The persistent failure to advertise ONE by a dedicated slide when SOM advertised its own services breached clause 15.2.5. It was serious because advertising and selling ONE was central to the LLP’s business and to THJ’s expected benefit. It was persistent and irredeemable because missed marketing opportunities could not be restored retrospectively.
4. The expulsion power was vested in the LLP and did not require the member facing expulsion to consent or vote. Reading the clause in its commercial context, the LLP acted through the other members. With only THJ and Mr Sheridan as members, THJ could validly act for the LLP in expelling Mr Sheridan. Expulsion was not part of day-to-day management.
5. THJ did not breach the express duty of utmost good faith. Mr Mitchell’s concerns were genuine, had been communicated clearly and were not pursued dishonestly or for an ulterior motive.
6. The notice was valid and Mr Sheridan was expelled on 7 January 2016. The Licence Agreement, Sub-Licence and Ancillary Agreement terminated no later than 25 January 2016. The passing-off and copyright claims failed, although declarations were made concerning copyright in the relevant works. Copyright in the source code had not been infringed, and the alleged communications to the public were not proved with sufficient evidence under section 20 of the Copyright, Designs and Patents Act 1988.