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A Guide to Partnership Disputes

Partnership disputes essentially fall into two categories – those partnership governed by a Partnership Agreement and those governed by (the default partnership terms set out in) the Partnership Act 1890.

Partnerships with Written Agreements

Professional Partnerships will typically be operated under a sophisticated partnership deed, professionally drawn and regularly reviewed and updated.

Such an agreement will usually include provisions governing how disputes will be dealt with, setting out the terms and mechanisms of partner exits and retirement and containing formulas for the calculation and payment-out of an exiting partner’s interest.

The agreement will carefully set out partners’ duties and obligations, the rights of different classes of partner, financing and profit sharing arrangements and management structures and procedures.

Where disputes arise there will likely be dispute resolution processes which involve escalation from minor issues through to processes for expulsion – those dispute resolution processes might include defined processes or forums for determination (e.g. arbitration) or perhaps mediation.

In a professional partnership, there will likely be provisions in relation to professional standards and governance.

Most Partnership Agreement will incorporate ‘Restrictive Covenants’ limiting a former partner activities after exit, often restricting competition, limiting dealings with former clients or customers, and protecting the continuing business from the recruitment of its employees by the former partner.

Crucially the Agreement will likely contain a clause declaring that the partnership is not dissolved by the service by a partner of a dissolution notice.

Typically, disputes and disagreements will be addressed within the ‘contractual wrapper’ which is the Partnership Agreement – although disputes may reach the civil courts where, for example, post-termination restrictions (or confidentiality provisions) need to be enforced, where there are disagreements as to factual matters underpinning a dismissal or as to the interpretation and application of the Partnership agreement itself.

The continuing partners in such a situation are well advised to seek legal advice well before the disciplining, or dismissal, of a partner. A wrongly interpreted provision, or a process pursued without observing proper process and objectivity, can prove very costly and damaging to the business.

Often when partnership relationships start to deteriorate, the underlying problems are not addressed quickly; human nature is such that we tend to ignore failings in the expectation and hope that they will improve. Invariably they do not, but the wrongdoer may proceed blissfully unaware of their failings, whilst for the other parties, frustrations grow. Often, by the time the issues are ultimately addressed views have become entrenched, an outcome already determined (even if subconsciously), making it very difficult to act objectively. 

It is here where external advice from a lawyer can be invaluable – the lawyer able to step back and dis-passionately view behaviours and advise on process. It is also where a non-partner Practice Manager can really add value, often working in tandem with the external lawyer, to ensure fair process. Time spent and advice sought at this stage will minimise the risk of potential litigation.

Partnership at Will

Partnerships without a written agreement are often referred to as ‘partnerships at will’ – to say that they are partnership without an agreement would be wrong as what essentially amounts to a default partnership agreement, is implied by the Partnership 1890. There a few pieces of applicable legislation as old, and that in itself, should act as a warning against reliance on the provisions of the Act.

The default terms could be the subject of an article in themselves but they include provisions that all partners are entitled to:

  • participate in management,
  • an equal share of profit,
  • an indemnity in respect of liabilities assumed in the course of business; and
  • not be expelled by other partners.

An 1890 Partnership ends on the death of a partner, unless an agreement is made prior to such death. Crucially, a partner is entitled to serve notice of dissolution, immediately bringing the partnership to an end – even if the other partners would wish it to continue – such an act potentially having serious accounting, insurance, tax and legal issues.

Under a partnership at will there are no dispute resolution procedures to follow and matters run the risk of being played-out in the public forum of the civil courts at great cost and distraction.

There is no provision in such partnerships to expel a partner, admit a new partner and there are no restrictive covenants to protect the business, if a retirement or exit occurs.

In such partnerships it is even more important for both parties to seek advice – particularly in the event of conflict – and addressing such issues of conflict is far better done in advance of dispute, than seeking to do so afterwards. With suitable intervention legal proceedings can often be avoided.

Partnership Court Proceedings

Disputes are heard in the High Court, the type of proceedings will vary depending on the matters in issue, but will often include injunction proceedings, for example restraining an exiting partner from breaching restrictive covenants.

Proceedings will be time consuming, typically taking 14-18 months to conclude (although certain types of application are often expedited). The losing party will usually be ordered to make a significant contribution to the winning parties costs and respective parties’ positions can be improved through the making of timely settlement offers.

The English civil courts are a public forum, creating the risk of publicity for partnerships. Some partnership deeds make provision for determination of disputes using the alternate process of Arbitration, which takes place in private.

Litigation should not be entered into lightly and, no matter how strongly held views are, most parties are surprised by the costs and commitment involved in litigation.

Mediation and other ADR

Increasingly, disputes are being settled using ADR and particularly mediation, a process where a mediator facilitates settlement discussions between the parties, and seeks to broker a compromise as an alternative to litigation. Mediation often takes place after the parties have obtained legal representation and when court proceedings have been commenced. The success rates of mediation are high and it is a useful tool in avoiding the full costs, and disruption, of court proceedings.

Increasingly, partnerships are taking the step of ‘early neutral intervention’ – the process can take a number of guises - but essentially an independent party is engaged to intervene and address issues between the parties before they become significant issues or disputes. The focus is on ensuring the parties communicate and understand the concerns of the other parties so that hopefully the issue can be addressed and conflict can be avoided.

The intervener is often the partnership accountant (where not conflicted) or an external lawyer – Ashfords provides such a service – who is briefed to address the issues which have arisen. The instructions will often come from a practice manager (or the partnership accountant) who has identified the issue, and recognises the benefit external assistance could bring. The intervener may undertake a number of sessions, perhaps with the affected partner, the management board and other interested stakeholders. He or she will take time to understand the issues, to encourage open communication and to even suggest solutions or processes to help the parties overcome their difficulties.

Examples have included addressing significant differences between partners as to the direction a business should take; addressing succession issues between ‘family’ partners wishing to bring their own offspring into the business; addressing partners who’s commitment to the venture was perceived not to match that of the other partners; and addressing issues of underperformance.

The key benefit of such early intervention (apart for the obvious avoiding of conflict) is that at the early stage the range of potential outcomes is significantly wider than it will be once conflict has taken hold. Often by the time litigation occurs, the question may be “was the partner validly expelled, or not”, whereas with early intervention, negative behaviours might be ‘nipped in the bud’ with performance improving for the benefit of all, or the parties might identify differing desires from the business and agree a timely and managed exit of a partner, with goodwill maintained (and a range of outcomes in between).

Conclusion

The key ‘take-aways’ for partners, are these:

  • It’s crucial to have a properly prepared Partnership Agreement in place – once it’s in place it should be reviewed and updated regularly as the business develops
  • Where issues start to arise within the partnership, they should be addressed promptly. Unaddressed issues have the potential to fester and rarely improve – early intervention will almost always pay dividends
  • Those dealing with disciplinary or conflict issues must remain objective and with ‘fairness’ at the forefront of their minds – when one is close to the business it is often difficult to be objective – professional advisers, practice managers and mentors can be hugely beneficial here, even if only to provide a ‘sense check’.
  • Consider ‘early neutral intervention’ or mediation – an investment of time and cost at the early stages is likely to save lead to huge time and costs savings later – one should never under-estimate the costs to business of dis-harmony and distraction.

 Andrew Perkins is a partner in Ashfords Dispute Resolution team specialising in shareholder, LLP and Partnership Disputes and providing Early Neutral Intervention services.

 

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