Five things that you should know if you become involved in a partnership dispute

Broadly speaking, most partnerships in the English (and Welsh) legal jurisdiction are either partnerships governed by the Partnership Act 1890 (“Partnerships”, governed by “the Act”) or Limited Liability Partnerships governed by the LLP Act 2000 and the LLP Regulations 2001 (“LLPs” governed by “the LLP Act” and “the Regulations” ).

Partnerships have “partners” and LLPs have “members” – but they are often both referred to (as in this article) as “Partners”. The rules relating to them are similar but, in some respects, crucially different.  Solicitors, doctors, dentists, architects and other professional advisers commonly use Partnerships and LLPs as their business vehicles – so do businesses run by families and friends.  Partnerships and LLPs are both quite different from limited companies (the most popular and common business vehicle) in the way that they operate.

Those differences are, however, quite “niche” and that means that, unless you are familiar with disputes in Partnerships and LLPs there is scope to miss opportunities (and avoid pitfalls) when disputes arise between outgoing Partners and continuing Partners. Of course, any error made will be used to the advantage of your opponent.

Five (Partner-specific) points that arise fairly commonly where Partners fall out with each other

1. Many Partnerships and LLPs don’t have a concluded, formal, binding, agreements in place. Surprising – but more common than you would think. Where that is the case a host of default provisions under the Act and the Regulations apply, although it is possible (and desirable) to modify those default regimes and that is commonly done. Failing to do so can have undesirable consequences, including the fact that it is impossible for any partner to be expelled without dissolving the business. There needs to be prior express agreement between all the partners to permit any expulsion – so if you are looking to expel a partner (or if you are facing a potential expulsion) check that the power to do that exists.
2. Following on from 1. – where new partners join or leave the business, any existing agreement (including one permitting a Partner to be expelled) may be swept away as a matter of law and a new partnership may be formed – one which operates under the default regimes, as above. That can happen unless everyone expressly agrees to the same terms. So check that, even if you once had a well drafted Partnership or LLP agreement, it is still in place. Check whether everyone has signed up or expressly agreed to the agreement – old partners and new partners alike.
3. Whether or not there is an agreement in place to modify the default regimes, always bear in mind that your obligations to your partners continue – even where you have been subjected to breaches of your partners’ obligations to you.  At no point (as may be the case in other contracts, outside the scope of partnership law) can you treat yourself as discharged from further performance of your own obligations, just because of the breaches of others. It’s a rule of partnership law that, even in extreme cases, two wrongs do not make a right – whatever happens you will have to behave in accordance with the relevant default regime or agreement governing how Partners should treat each other.  You may be able to terminate a Partnership, or give notice to leave an LLP, but that may still leave you subject to continuing obligations, such as…
4. Most Partnerships and LLPs set out restrictions on what an outgoing Partner can do (such as working for clients, soliciting work from clients and poaching staff to any new business they join). In contracts of employment the extent and duration of such restrictions are limited quite tightly by what the court sees as their reasonableness and whether they amount to a “restraint of trade”.  That can be beneficial to an exiting employee – restrictions drafted too widely may be unenforceable. However, where restrictions apply to a partner, the court is likely to approach such restrictions in a more relaxed way and is more likely to uphold them. So outgoing partners and continuing partners should be aware that post termination/retirement restrictions typically can and do bite. Even where an outgoing partner has been treated very badly before their departure.
5. Partners enjoy the same rights as employees in relation to discrimination and protection from bullying and harassment – and the right of a partner to bring a claim in the Employment Tribunal (effectively a public forum) means that where partners are treated badly, they may be able to do something about that, publicly. Crucially, it is impossible for even the best drafted Partnership or LLP agreement to exclude that right. Any requirement for disputes to be dealt with confidentially by way of arbitration, rather than in court (which is common in professional firms) can be overridden when it comes to those types of statutory protections.  Partnerships and LLP may find themselves exposed to unwanted publicity. The threat of such claims can be powerful in the hands of an outgoing partner and need to be dealt with carefully.

If you are involved in a Partnership or LLP  dispute, or can see one on the horizon, take specialist advice. You will be glad that you did.

This article was written by Andrew Cromby, a commercial litigator and partnership expert at the London office of Weightmans LLP and is for general information only. If you require specific advice please contact Andrew at Weightmans on: andrew.cromby@weightmans.com.