It is all too common for business partners to operate on trust alone. In an ideal world this would suffice; however, unfortunately, in the event that a partnership exists, and the business relationship does breakdown, or other things go wrong, the partners are then left at the mercy of the Partnership Act 1890 (“the Act”). This is outdated and often comes with very unintended consequences.
The Act defines a ‘partnership’ as “the relation which subsists between persons carrying on a business in common with a view of profit”. This definition is very wide, and it is a matter of fact whether a partnership actually exists – that is the case whether or not the parties involved actually consider themselves to be in partnership.
Partnership disputes are generally complex and costly, not to mention hugely stressful. As such, a well drafted partnership agreement which accurately reflects the parties’ intentions and which includes key provisions (such as what happens upon retirement, death, illness, dispute, breach) can ensure that the way forward is clear, and the partners know where they stand.
It is important to note that in the absence of a partnership agreement, the provisions of the Act will apply – the following are some key provisions which may well have disastrous consequences:
Capital & Profits
Regardless of what capital each partner contributes to the business, Section 24 of the Act will imply that the partners are entitled to share equally in the capital and profits of the business and must contribute equally to any losses the business suffers.
This would almost certainly be inadequate where capital investment into the business in unequal or in instances where it is intended that one partner devotes more time to the business than the other.
It is important that the partnership agreement accurately reflects the amount of capital initially introduced by each partner and what the parties’ capital and profit-sharing intentions are. It may also be desirable to stagger profit shares based on the length of service of each partner.
Partnership Property
Section 20 of the Act defines ‘partnership property’ as including “property originally brought into the partnership stock or acquired……for the purposes and in the course of the partnership business”. In the absence of agreement, no partner has the right to an asset which is used by the partnership and, in default, upon dissolution any assets will be sold in order to discharge any partnership liabilities. Any surplus will thereafter be divided amongst the partners.
It is not uncommon for individual partners to retain ownership of property or assets used for business purposes or to allow their assets to be used for such purposes. It is important that the partnership agreement makes explicit reference to what property and/or assets belong to the partnership and what belongs to the individual partners. This could otherwise lead to disputes as to whether a particular asset is treated as an asset of the business.
Maternity/ paternity pay/ adoption leave
As can be expected given when it came into force, the Act is silent on this point and there is therefore no implied entitlement for the partners to receive maternity or paternity pay or adoption or parental leave. Whilst there are statutory minimums in place which are provided for in other regulations, the partnership agreement could include enhanced benefits.
Retirement
In the absence of express provisions in the partnership agreement or agreement between all partners, retirement from a general partnership cannot occur. Rather, under Section 26 of the Act, the retiring partner can serve a notice which will have the effect of dissolving the partnership. It would be open to the remaining partners to reform the partnership; however, the potentially lengthy dissolution process would still need to be followed. In the context of a medical practice partnership, this could have unintended consequences as it would likely result in the loss of the medical services contract that the partnership holds.
For this reason, most partnership agreements will include detailed provisions dealing with voluntary and compulsory retirement, the process to be followed and how the retiring partner’s share is to be valued and dealt with. These normally include that the business can continue after the partner in question leaves.
Expulsion
If, for example, a partner commits a serious breach of duty towards their business partners or the partnership, the remaining partners may consider expulsion.
The Act expressly states that no majority of partners can expel any partner unless there is express power to do so in the agreement between the partners. Absent this, in order to remove the offending partner, the partnership will either need to be dissolved or an agreement reached with the offending partner that they will leave the business. This could be difficult at a time that will likely be fraught with emotion.
The partnership agreement should include a detailed clause dealing with when the right to expel a partner arises, including the grounds for expulsion (such as a misconduct) and how such a decision is to be made. Thought should also be given to a possible “green socks clause” under which there is no requirement to give a specific reason as long as that decision is considered to be in the best interests of the partnership.
If the partners try to expel an offending partner without an express power or if they fail to follow the correct procedure strictly this decision can be subject to challenge, and the offending partner may be entitled to claim damages, including for any loss of earnings.
GP Partnerships
Within the context of GP Partnerships, it is important to be mindful of the regulations that govern the provision of medical services. These include provisions for the giving of notice in the event that a dispute arises, as well as when the constitution of the partnership changes. There are also detailed regulations prohibiting the sale of goodwill in medical practices which will need to be adhered to in the event of any dissolution and/or valuation of an outgoing partner’s interest.
It is vital that early legal advice is sought in the event of a dispute so that the parties know where they stand and the options open to them and so as to minimise any impact on the day to day running of the business.
How can we help?
Our Commercial Disputes Team have significant experience in resolving disputes arising in the context of partnerships and other business.
