UK: The Risk Of Uncertain Partnership Arrangements

Last Updated: 24 November 2017
Article by James Fairbairn and Rob Francis

The risks for partnerships operating without a written partnership agreement in place are well known. A recent Court of Appeal case is a useful reminder that these risks can arise in the period after new partners join a business but before a new formal agreement is signed.

Cheema v. Jones and others

In Cheema v. Jones and others [2017] EWCA Civ 1706, the Court of Appeal considered a dispute in relation to a medical practice. Two doctors had a written partnership agreement (the Original Agreement) and invited three further doctors to join them in the practice. The new doctors started working at the practice whilst the terms of a new partnership agreement were negotiated.

Prior to signing the new agreement a dispute arose. Cheema (the Appellant), who was one of the original partners, apparently suggested (to one of the new partners) that the other original partner, Jones, should retire. Jones was informed and "berated [the Appellant] in unflattering terms". The dispute escalated. The Appellant was ultimately prevented from seeing patients and accessing medical records. He issued proceedings, based on the Original Agreement, to enable him to return to the practice.

The crux of the claim, by the time it came in front of the Court of Appeal, was which agreement governed the relationship between the five doctors.

The Original Agreement needed the Appellant to agree to dissolve it. The Appellant argued that the Original Agreement still existed and the three new partners were not admitted as new partners. The other four doctors argued that a "partnership at will" was created between the five doctors. In the absence of an express or implied agreement as to how it will come to an end, a partnership at will exists indefinitely, but can be dissolved at any time by one partner serving notice on the other partners. As a result, the four doctors argued that the new partnership was dissolved by a notice they had served, and they were therefore free to set up another partnership without the Appellant.

The Court of Appeal agreed with the four doctors. Put simply, the new doctors had started working at the practice and on the facts in this particular dispute this created a new partnership between the five partners. As the negotiations focused on a new partnership agreement between all five doctors, and there was never a reference in those negotiations to the Original Agreement as a fallback position, the court concluded it should infer that the original partners intended to abandon the Original Agreement. The fact that the new agreement was never signed did not change this. Given that the partnership existed between the five doctors without a formal written agreement, it was deemed to be a partnership at will. Therefore, contrary to what the Appellant had presumably expected before the dispute arose, it could be easily dissolved without his consent.

What this means

In situations where someone is invited to join existing partners in a business, if the new partner is unaware of the existing agreement or claims not to be bound by it (the obvious example is that those involved started negotiating new terms), then the new partner's arrival may well create a new partnership between all of the partners and cause the existing written agreement to cease to be effective.

The terms of such a new agreement will depend on the facts. It is understandable that existing partners may assume that until a new written agreement is in place the old terms will apply, but that may well not be the case. The Cheema case is a salient reminder of the importance of formalising the partnership agreement in writing as quickly as possible. Such an agreement needs to accurately reflect the key arrangements and negotiating these can take time. If this negotiation process occurs concurrently with the new partners taking part in the business then a new unwritten partnership arrangement may well arise.

As this case shows, unintended consequences can follow. Given the assets, liabilities and goodwill involved in a medical practice, the original partners understandably wanted to ensure the partnership could not be easily brought to an end. The Original Agreement required unanimity on key decisions, including dissolving the partnership, and the original partners may well have presumed (before the dispute arose) this continued until the new agreement was in place. However, the court decided that a partnership at will applied prior to the new written agreement being in place, and this significantly lowered the threshold to dissolve the partnership.

The absence of a written partnership agreement can have other uncertain consequences. These will depend on the facts of any situation. When a partnership is dissolved its assets are pooled and after paying off the partnership's debts and liabilities anything remaining is distributed between the partners. If one partner brought substantially more assets into the partnership, yet it comes to light that the other partner had incurred significant liabilities on behalf of the partnership, the first partner may receive far less than he expected on dissolution.

In conclusion, when a partnership is formed or new partners join the business, it is in the best interests of all involved to ensure (if at all possible) the formal written agreement is in place prior to those involved carrying on the business together. Otherwise, a dispute arising whilst the new terms are negotiated could well produce unforeseen and unpleasant outcomes.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions