When a partner has fallen out with his fellow partners, he will want to know what options he has. He will need to understand the nature of the legal relationship with his partners. Those who take legal advice at that point can find the results surprising. Those who take action before taking advice may regret it.
When does a partnership arise?
It is obvious that if the parties have signed up to a written partnership agreement, everyone will be clear about the fact that they are in a business partnership. If the partnership agreement is well drafted, the precise terms of that legal relationship will also be clear.
If there is no written agreement, the position can be a little murkier and the rules which apply are those set out in the Partnership Act 1890 (“the Act”). As the date of this statute might suggest, the Act does not necessarily deal with partnerships in the way one might expect in the modern-day business environment.
Section 1 states: “Partnership is the relation which subsists between persons carrying on a business in common with a view of profit”. If those conditions are satisfied, then a partnership will have been created (whether or not the individuals in question appreciate the significance of this).
What are the terms?
In the absence of any written agreement, the provisions of the Act will apply to define the relationship between the parties. However, a well drafted agreement will almost certainly exclude most of the provisions of the Act so that the parties can refer to the written agreement itself in order to understand the relationship that they have entered into and its consequences. With a shorter partnership agreement, the Act may still apply in parts so the parties may need to refer to the Act itself as well as the agreement.
Entering into a partnership without a written partnership agreement can have a number of surprising and unintended consequences. For example:
- Unless the partners have specifically agreed that the partnership is for a fixed period, and in the absence of a written partnership agreement saying otherwise, any partner may at any time terminate the partnership. He does not need to have any reason to do so. This may well be to the financial and commercial disadvantage of the other partners. This would be a “partnership at will”;
- A partnership at will is automatically dissolved on the death or bankruptcy of any partner. Once again, this may be to the financial and commercial disadvantage of the other partners;
- If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that other business.
Since these and other provisions of the Act can have unintended and unsatisfactory consequences, they are usually excluded or amended by a written partnership agreement.
If you are thinking of entering into a business relationship with someone else, you have several options as to how you do this. If you decide to set up a company, different provisions apply. However, once you realise that by starting to run a business with someone else you are likely to be forming a partnership, make sure you understand how the relationship will work. If possible, manage that relationship and enter into a written partnership agreement before any difficulties arise.
In the event that any difficulties arise, each partner may need to obtain separate and independent legal advice so as to ensure that they understand the terms of the partnership and the strengths and weaknesses of their negotiating position. This may depend upon a number of factors e.g.
- do they want to continue with that business, or do they want to leave?
- do they want to set up a competing business?
- do they need any assets of the business?
- how much is their share of the business worth?
Due to the provisions of the Act, it can be better for both parties to negotiate a deal than for one to serve a notice terminating the partnership on the other. Therefore take advice before taking action and be prepared to negotiate.