More on Partnerships

It seems to be the season of partnership disputes. We have lately been asked to advise on a number of business disputes between partners in a business, shareholders in a small company or unit holders in a unit trust. Unfortunately in too many cases there is a poorly drafted agreement or even worse no agreement at all.

This makes it much harder to define the rights of individual partners or to give clear advice about a way forward. This adds to the expense and when there is no document setting out clearly what the rights of the respective parties are there is more scope for argument. When the lawyers get involved the arguing becomes expensive very quickly.

Prevention is much better than the cure. A well drafted agreement will clearly set out the expectations of each party and is tailored to fit the business being operated. It will also have a clearly defined mechanism for resolving disputes, for determining the value of a parties’ interest and the way in which such interest will be paid out. It might cost more to set up a proper agreement at the outset but in the long run it can save tens of thousands of dollars.

Recently we provided advice in a matter where the business relationship had broken down and one partner wanted to force the other out and acquire the business. Our client didn’t want to leave. They had a fairly well drafted partnership agreement. The partner who wanted to force our client to exit had not been working full-time and didn’t want to return to full-time work. By having regard to the partnership agreement we were able to point out that it was a breach of the agreement to not devote sufficient time and energy to the business of the partnership. We were also able to point out that our client could not be forced to resign and did not have to accept the offer put to them. It was also pointed out that the partnership could not be dissolved and that if the partner did not want to continue in business with our client that the only option would be for them to retire. This is exactly what happened. The agreement set out how their interest was to be valued and our client acquired the business on terms that they were very happy with.

In another recent example there was no partnership agreement. The relationship had broken down and the partners were having difficulty communicating with each other. With the parties potentially unable to agree on a sale/purchase of their respective interests and in the absence of a partnership agreement the only real avenue to end the relationship would be to dissolve the partnership. In this case this would mean the cessation of trading and sale of all assets. If there is no agreement on how this would be done then a Receiver would have to be appointed to manage the sale, payment of liabilities and accounting to the partners. This could end up being a very expensive lesson for all of them.