Chapter 14 - The Partnership Agreement (WS1)

what is the basis for division of increases (or decreases) in asset values sometimes known as?

'asset-surplus sharing ratio'

expulsion of a partner:

- Amounts to terminating the contract (the partnership agreement) with the outgoing partner without his consent. - As with retirement, the PA 1890 does not provide for the possibility of a partner being expelled by the others without his consent. There should therefore be provision in a partnership agreement for the possibility of expulsion. - The agreement should state on what grounds the right to expel is to be exercisable and how it will be exercised (e.g. by a unanimous decision of the other partners with immediate effect). - As with a retirement clause, the expulsion clause should also deal with the question of payment for the outgoing partner's share.

what is a partnership asset?

- An asset where beneficial ownership rests with all the partners, although not necessarily in equal shares.

How long is the partnership to last before it may be dissolved either by just one partner who wishes to leave or by all the partners wishing to go their separate ways?

- If there is no provision in the agreement, the partnership can be dissolved at any time by any partner giving notice to the others. - This is a partnership at will. - A partnership cannot be a 'partnership at will' under s 26 if there is any limitation placed on a partner's right to terminate the agreement by him alone giving notice (see Moss v Elphick [1910] 1 KB 846). - The notice of dissolution can have immediate effect and need not even be in writing unless the agreement itself was by deed.

Once agreed in the clauses of the agreement, what must happen if a partner/partners wishes to change the place and/or nature of the business?

- Once agreed, any change would need the unanimous consent of the partners.

If a fixed asset of the partnership (such as premises) is sold, realising an increase or a decrease in its value, how is this to be shared between the partners? If the assets are revalued, without the disposal, to show their current value in the accounts (eg in anticipation of a new person joining the partnership), how is this increase/decrease to be reflected in the value of each existing partner's share in the business, as shown in the accounts?

- Partners may be content to share these increases/decreases equally and, as with income, this will be the effect of PA 1890 which will imply such a term if there is no agreement to the contrary. - However, as with income, there may be circumstances where the partners would agree a different basis for division. -In particular, if there is disparity in capital contributions, the partner who contributes the greater share of the capital may feel that he should receive the greater share of any gain. - The basis for division of increases (or decreases) in asset values is sometimes known as the 'asset-surplus sharing ratio'. - As with all aspects of any agreement, this provision will be a matter for negotiation and the other partners may feel that, if interest on capital is to be allowed, this provides sufficient recognition of the disparity in contributions.

why, in many instances, will dispute not arise?

- There will be evidence of what was intended - Title deeds may indicate who was the owner - but these need not be conclusive since one partner may have legal title in his sole name whilst holding as trustee for all the partners beneficially do that the asset is in fact a partnership asset. - The accounts of the partnership should reveal what capital contributions have been made and should correspondingly record what the assets of the partnerships are - but these may not be conclusive evidence.

Payment for outgoing partner's share:

- Where a person ceases to be a partner by reason of retirement, expulsion, death or bankruptcy and others continue in partnership together, the remaining partners will need to pay for the outgoing partner's share in the business. - In order to avoid any need to negotiate the terms of the purchase at the time, the agreement should contain the appropriate terms. - If the agreement is silent on this and a settlement cannot be agreed at the time, s. 42 PA 1890 becomes relevant.

What does section 24 of the PA 1890 contain?

- a number of provisions concerning the running of the partnership that will be implied into a partnership agreement in the absence of express provision.

why is the drafting of a non-competition clause important?

- a retraint of trade clause which is held to be unreasonable will be void as a matter of public policy. HOWEVER, courts are more likely to uphold a restraint of trade clause when it is to protect the purchaser of a business, rather than to restrict the activities of an individual partner departing from a continuing business.

what would be a suitable ratio for the profits (remaining after salaries and interest on capital) to be shared?

- a suitable ratio should be stated in the agreement. - if salaries and interest on capital have achieved sufficient 'fine tuning', then equal shares may be appropriate. - HOWEVER, the longer-serving partner(s) may negotiate for a higher share to reflect, for example, seniority in the business.

what happens if there is no agreement for the ratio of sharing increases/decreases?

- as with income, PA 1890 will imply that they should be shared equally.

whats the difference between a joint venture and a partnership?

- joint venture is a contractual agreement that joins together two or more parties for the purpose of executing a particular business undertaking. WHEREAS - a partnership is defined as an association of two or more persons to carry on as co-owners of a single business enterprise for profit. Generally, there exists no essential difference between a joint venture and a partnership. It can be seen that a joint venture is considered as a form of partnership. However, a joint venture and a partnership are two separate entities, different from each other: - A joint venture involves two or more companies joining together in business, whereas in a partnership, it is individuals who join together for a combined venture. - A joint venture can be described as a contractual arrangement between two companies that aims to undertake a specific task. Whereas, a partnership involves an agreement between two parties wherein they agree to share the profits as well as any loss incurred. - In a partnership, persons involved are co-owners of a business venture and their aim is making a profit. But in a joint venture, it is not just profit that binds the parties together. Joint ventures can be formed for specific purposes. Normally the companies engage in joint ventures for undertaking certain ventures like research and development which will be expensive in nature and impossible to take the same individually. - A partnership will last for many years until the parties involved have no differences. While a joint venture company will last for only a limited period until their goal is achieved. - The members in a partnership can claim a capital cost allowance as per the partnership rules. Whereas, joint ventures can use as much or as little of the capital cost allowance. - In a partnership, members cannot act according to their wishes because they do not have any individual identity. However, a member of a joint venture can retain the identity of his/her firm or property. - Although a joint venture is very similar to a partnership, a joint venture is generally more limited in scope and duration. - A joint venture is generally considered to be a partnership for a single transaction. Similarly, a joint venture is a less formal relationship than a partnership. - The rights and liabilities of joint venturers are governed by the principles applicable to partnerships. Joint venturers can be held jointly and severally liable for one another's wrongful acts, but a joint venture must have the elements of a partnership. Whereas, if a criminal act is committed through a partnership, the culpable members of the partnership are held criminally responsible, rather than the partnership itself.

why may disputes arise over the factual question of what is a partnership asset and what belongs to a partner individually?

- may arise as a result of the partnership being formed where certain assets which are to be used by the business (e.g. freehold premises or a lease of premises) or a lease of premises) already belong to one of the persons who is becoming a partner and there is no clear agreement as to what was intended as to ownership. - That partner could have continued to own the asset personally (allowing the firm the use of the asset) OR - the asset could have become partnership property , either by its value representing a capital contribution from that partner or by that partner receiving payment from others - A dispute may also arise over an asset which has been acquired during the partnership where there was no clear agreement (either express or implied) as to the partners' intentions as to ownership.

what are some other options of provisions governing dissolution of partnerships?

- notice of dissolution must allow a minimum period (e.g. 6 months) - agree to a duration of a fixed term of a number of years. - provides certainty but is inflexible in committing each partner to the partnership for a certain duration. - this can be criticised if it fauls to provide for what should happen if the partners wish to continue after the expiry of their fixed term. - HOWEVER, this can be dealt with by providing that the partnership will continue automatically on the same terms after the fixed term except that thenceforth it will be terminable by, say, 3 months' notice. - the partnership is to continue for as long as there are at least 2 remaining partners - this provision has the merit of providing some degree of security and stability whilst allowing individuals the flexibility of being able to leave. - In case the departure of a partner might present financial problems of the others in purchasing his share from him, ancillary provisions can be included delaying payment to the outgoing partner so that he is, in effect, forced to lend money to the partnership.

how can disputes between partners, concerning the amount of money they each withdraw from the business, be settled/avoided?

- often a partnership agreement will state a monthly limit on how much each partner can withdraw, perhaps with a provision for periodic review. - the clause may also stipulate the consequences of exceeding the stated limit.

what possibilities may the partnership agreement provide for dividing profits?

- salary - interest - profit sharing

what should provisions governing suitable profit-sharing ratios also state?

- should also state what is to happen in the event of a loss. - in particular, are salaries and interest on capital still to be awarded, thus exacerbating a loss?

what should the agreement set out in terms of work input?

- should set out the degree of commitment expected of each partner. - the term might require the partner to work in the business full-time or part-time or even not work at all (being a dormant or sleeping partner) - Often the agreement will be expressed in more general terms so that, for example, a full-time working partner 'must devote his whole time and attention to the business'. In order to reinforce this rather widely expressed obligation, often there is further provision to the effect that such partners must not be involved in any other business whatsoever during the partnership. -This absolute bar is enforceable and does not fall foul of the public policy issues which may make such covenants in restraint of trade void after termination of the relationship of the partners

what will the PA 1890 imply, the absence of contrary agreement, in terms of work input?

- that all partners are entitled to take part in the management of the business, albeit without any obligation to do so.

How far is the scope of the Act?

- the Act is rather limited in scope and inevitably cannot do more than treat all partners equally.

why do many of the terms in the Partnership Act need to be varied by the agreement between the parties?

- the PA is over 120 years old and cannot be expected to meet modern business practices, so many of its terms will need to be varied by the agreement between parties.

what should be stated in the agreement in order to avoid there being a dispute over the available evidence or no clear evidence of intention?

- the agreement should stipulate what are the assets of the partnership (e.g. by referring to a list contained in a schedule to the agreement)

what does the enforceability of any contract made by a partner in breach of the PA depend on ?

- the application of s.5 of the PA 1890

if there is a dispute, what circumstances are likely to trigger it?

- the dispute may arise on dissolution when it becomes necessary to establish how much each partner is entitled to receive. - It may be that a profit is made out of a particular asset. - any or all of the partners may incur liability to capital gains tax or inheritance tax by reference to a particular asset and wish to claim certain reliefs. - liability to tax and the availability or amount of certain reliefs will depend on whether the asset is or is not a partnership asset.

what is the purpose of salaries of differing fixed amounts (before any surplus profit is divided between partners)?

- the purpose of differing amounts is to ensure that certain factors are reflected in the partners' incomes. - these factors might include different amounts of time devoted to the business and the different degrees of skill and experience of the partners.

are there any implied terms preventing an outgoing partner from setting up in competition with the partnership or joining a rival business?

- there will be no implied term preventing an outgoing partner. - there should always be a provision limiting an outgoing partner's freedom to compete with the firm to protect the business connections of the continuing firm (to preserve its customers and employees) and to protect its confidential information.

why should the name of the partnership be stated in the agreement?

- this means that it is fixed and any partner can insist as a matter of contract on there being no change to it. - the firm name may be different from the business (or trading) name, in which case both names should be stated in the agreement.

s 33 PA 1890

- unless there is contrary agreement, the death or bankruptcy of a partner will automatically cause dissolution of the entire partnership. - Therefore, it is appropriate to add a further provision that on the death or bankruptcy of a partner the remaining partners will automatically continue in partnership with one another on buying out the deceased or bankrupt partner's share in the business. - Again, with a joint venture between companies, the agreement will need to provide a mechanism for unwinding the joint venture if one party goes insolvent.

what consequences would partners face for ignoring the terms of the agreement?

- whatever is agreed along these lines is binding between the partners - any partner who ignores any such restriction/term in the agreement would be acting in breach of contract.

what are the disadvantages of a partnership at will?

- whole of insecurity and instability. - a partnership agreement will frequently restrict the right of partners to dissolve the partnership.

what other forms of restraint of trade clauses are there?

A 'non-dealing clause' seeks to prevent the former partner from entering into contracts with customers or former customers or employees of the partnership which he has left. A 'non-solicitation clause' merely seeks to prevent him from soliciting contracts from such customers or employees. Both types of clauses are less restrictive of the former partner's freedom to continue his trade and therefore more likely to be held enforceable, provided that the effect of the clause is limited to what is reasonable for the protection of the firm's legitimate interest.

when can a partnership not be 'a partnership at will'?

A partnership cannot be a 'partnership at will' under s 26 if there is any limitation placed on a partner's right to terminate the agreement by him alone giving notice (see Moss v Elphick [1910] 1 KB 846).

Moss v Elphick [1910]

A partnership cannot be a 'partnership at will' under s 26 if there is any limitation placed on a partner's right to terminate the agreement by him alone giving notice.

what is a partnership at will?

If there is no provision in the agreement, the partnership can be dissolved at any time by any partner giving notice to the others.

what does the word 'retirement' mean in the context of partnership law?

In the context of partnership law, the word 'retirement' does not mean being eligible to collect the old age pension. It means leaving the partnership, perhaps to follow other business opportunities.

Does the 1890 Act offer any guidance as to what would be implied in the absence of express provisions concerning absence from work?

No

what is a type of commonly used non-competitive clause?

One type of clause commonly used to restrain an ex-partner's activities is a clause which seeks to prevent the person from being involved in any way in a competing business. The key issues to address in drafting such a clause (a non-competition clause) are: (a) What is the clause aiming to protect? There must be a legitimate interest; this will usually be the firm's business connections, its employees and/or its confidential information. (b) Is the clause reasonable, as drafted, for the protection of that interest? It must be limited as to its geographical area and as to its duration, and both the area and the duration must not be greater than is reasonable for the protection of the legitimate interest in question.

S. 35 pa 1890

Relevant in situations where a partner is 'locked into' a partnership by an agreement which contains no provision allowing him to dissolve the partnership or even to retire. on certain grounds, the court can make an order for dissolution. This effectively enables the partner to break his agreement with his partners without being liable for breach of contract. If none of the grounds in the Act are satisfied, the partner has no escape without being liable for breach of contract.

what is an example of a scenario where a non-competition clause will most likely be void?

Suppose, for example, that the partnership of X, Y and Z carries on business as double glazing installers throughout Cheshire and North Wales, where all three partners are fully involved throughout the area. Their agreement contains a clause stipulating that, on leaving the partnership, a partner will not work in any way in the building trade for 10 years in England or Wales. This clause will be void because it is unreasonably wide on all three aspects. If the clause had stipulated that, on leaving the partnership, a partner would not work in the business of double glazing installation for 12 months throughout Cheshire and North Wales, this might be valid and enforceable.

does a partner have the right to retire from the partnership whenever he pleases?

The PA 1890 provides for retirement but only for a partnership at will by dissolving the partnership under s 26. - The agreement may contain provisions on duration which will have the effect of preventing retirement other than by the partner acting in breach of contract (such as a fixed term with no get-out provisions). - Even if there is no provision on duration, strictly a partner's exit route is by dissolving the entire partnership by giving notice. - It would then be for the others to re-form the partnership if they could reach agreement with the outgoing partner for the purchase of his share. - It is usually desirable therefore to have express provision governing the question of when a partner can retire (without dissolving the partnership so far as the others are concerned) and of payment for his share by the others.

when does a dissolution go into effect?

The notice of dissolution can have immediate effect and need not even be in writing unless the agreement itself was by deed.

Byford v Oliver 2003

This case concerned the heavy metal band, 'Saxon'. Over the 20 years of its existence, the line-up of the band had changed but the claimant had been there throughout that time. It was held that he owned the name and goodwill of the band, not the defendants. The claimant would therefore have been entitled to register the name 'Saxon' as a trade mark, but the defendants were not.

Arbitration

To avoid the expense, delay and adverse publicity arising out of litigation between partners, the agreement may provide that certain disputes should be referred to arbitration. Usually the disputes in question will be described as those arising out of the interpretation or application of the agreement itself rather than disputes over the running of the business.

what will need to be included in an agreement in a joint-venture between companies?

a decision-making mechanism

what are the advantages of a partnership at will?

allowing each partner freedom to dissolve the whole partnership at any time and for any reason

which decisions require unanimity?

changing nature of the business or introduction of a new partner anything contained in the agreement (e.g. type of business) is a term of the contract between the partners and therefore cannot be altered without the consent of all parties to the contract.

s.32 PA 1890

defines the basis on which partnerships of any type are to be dissolved, subject to alternative agreement between the partners.

what does the length of a partnership agreement depend on?

depends on the imagination and thoroughness of the partners and their advisers.

Each partners function must also be stated/described in the agreement:

e.g. - a sleeping partner's role might be defined as being limited to attending meetings of the partners and the agreement would state that he has no authority to enter into contracts on behalf of the partnership. - the agreement might state that a particular partner (with limited experience) only has authority to make contracts with specified limits, thereby partly defining his role.

Partners may be content to share income profits of the business equally...

if there is no evidence of contrary agreement, this will be the effect of the PA 1890 which will imply such a term.

In cases of dissolution will the value of an asset owned just by one partner be shared? (even if there is a profit)

no

is there any implication that a partner must devote his full time and attention to the business?

no HOWEVER - wilful neglect of the business (as opposed to a degree of laziness) may mean that the other partners are entitled to be compensated for the extra work undertaken by them.

Unless the agreement provides to the contrary, how will all partnership decisions be made?

on the basis of a simple majority (where each partner has one vote) EXCEPT in decisions on changing nature of the business or on introduction of a new partner, which require unanimity

why might interest be allowed on partners' capital contributions before any surplus profit is divided between partners?

simply to reward partners i proportion to their contribution to the financing of the partnership

what should the agreement state in terms of financial input?

the agreement should state how much financial capital each partner is contributing and, possibly, deal with the question of future increases in contributions , if such increases are anticipated.

when does a partnership exist? what does this cause?

the existence of a partnership is established when the statutory definition in s.1 of the PA 1890 is satisfied. this means that the date specified in the agreement will not necessarily be correct therefore, but it is desirable to specify a date from which the parties regard their mutual rights and responsibilities as taking effect.

What should the terms (concerning payment for outgoing partner's shares) deal with?

the terms that may be appropriate for inclusion in the agreement will depend on the circumstances, but they should deal with the following: a. whether there is to be a binding obligation on the partners to purchase the outgoing partner's share, or whether they are merely to have an option to purchase. Apart from the question of certainty as to what will happen, these alternatives have differing tax implications. In order to obtain business property relief for inheritance tax, an option to purchase is preferable. b. the basis on which the outgoing partner's share will be valued. c. provision for a professional valuation if the partners cannot reach agreement between themselves. d. the date on which payment will be due (or dates, if payment by instalments is agreed) e. an indemnity for liabilities of the firm if these were taken into account in the valuation.

any losses may be shared equally...

this will be implied by the PA 1890 if there is no evidence of contrary agreement

s.42 PA 1890

under this section, if a person ceases to be a partner and others continue in partnership but there is a delay in final payment of the former partner's share, then the former partner or his estate is entitled to receive either interest at 5% on the amount of his share or such share of the profits as is attributable to the use of his share.