When business partnerships go wrong (and how to avoid it)
Our dispute resolution team deals with many partnership disputes and in the vast majority, no partnership agreement has ever been set up, says Paul Gordon.
When business partnerships go wrong, the most extraordinary battles can ensue and the effects can be far-reaching. More often than not, partnerships are formed by friends and relatives in times when everything is going swimmingly – the last thing on their minds is to set down what will happen if and when the arrangement comes to an end.
Without a proper written agreement, by and large partnerships are governed by a statute that is well over 100 years old. Because the Partnership Act 1890 is so ancient, it is unable to address many of the issues that arise in today’s business affairs.
The Act defines a partnership as ‘the relation which subsists between persons carrying on a business in common with a view to a profit’. This is not only misleadingly simplistic but, more worryingly, it illustrates how easy it is for someone to be operating in a partnership arrangement without necessarily realising it.
Considering this, along with the consequences of having no proper partnership agreement in place, it is hardly surprising that when such business relationships break down, there is often a deep sense of injustice and cause for dispute.
Take, for example, a small partnership undergoing some difficulties. In the absence of a proper agreement, the terms of the Act will kick in. So if one partner dies or is made bankrupt, the partnership is automatically dissolved. Or say one partner wants to exit the partnership, he can require the partnership to be dissolved and the assets sold. Most of us – particularly if the business is thriving – would consider these ‘options’ to be onerous and unacceptable.
The obvious and practical way to ensure that you are in control of your business is to create a partnership agreement that sets out your wishes on questions such as:
- what the partners will do and whether there are any restrictions on them
- partners’ obligations and responsibilities
- what rights and benefits partners will have
- details of capital invested from each partner
- partner indemnity provisions
- what will happen in the event of retirement, death, or resignation of a partner.
It is also worth bearing in mind that the actions of one partner can bind the others. Partners can also be liable for the debts of a partner without limitation (although we can advise on limited liability partnerships).
In short, partnerships can be created easily and informally but they are much harder to finish. Talk to us about setting up a proper agreement that will not only protect you but will ensure that, whatever happens within the business, it happens in the way you intend.
Partner Paul Gordon has specialised in dispute resolution since qualifying and has handled a broad range of commercial matters, including intellectual property, director and shareholder disputes, and engineering and construction cases. He has acted for many notable clients including American Express, PizzaExpress, and a number of major financial loan companies such as GE Capital and Morgan Stanley, as well as many businesses with local interests.