Partnership disputes can be notoriously messy. The distinct disadvantage to a partnership when it comes to a dispute is very the advantage when it is being set up; its informality.
The fact that you can have in place a partnership without any formal documentation means that individuals can find themselves in partnership sometimes without even knowing that they are, and then in a dispute without knowing what the rules are.
The key to dealing with partnership disputes is, therefore, understanding their informality; understanding the advantages that that brings; but also the disadvantages and being able to utilise those pros and cons to achieve a successful resolution.
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Individuals cannot enter into a business through a company without deliberately intending to. Equally, they cannot trade on their own as a sole trader without meaning to.
Individuals can, however, unwittingly enter into a partnership without having anticipated its consequences.
That lack of formality and the absence of a written agreement can often lead to disputes. At the same time, a fallback in legislation is the Partnership Act of 1890, which is a very brief piece of statute that leaves a large amount of matters to be determined and is inevitably vague as well. That, in turn, leads to further disputes. Expertise in this area is, therefore, critical.
Changes in scope
The changes to partnerships over time can lead to further disputes. Even where partnership agreements have been entered into, and a written contract exists. If formalities and agreements are not followed, the departure of one partner or the joining of a new partner can lead to disputes. Individuals believe they have a partnership governed by a written contract; when in fact they have only what is an unplanned partnership at will and a worthless piece of paper.
A "partnership at will" is a partnership that can be terminated by any partner outside of the terms of the agreement. This means that the survival of the partnership and its ongoing work could be at risk.
Disputes between the partners can, therefore, arise commonly when new partners have joined, and formalities have been overlooked. Still, the consequences of those potentially small disputes can be enormous for the future of the partnership.
The scope of a partnership can also broaden and change over time across a range of businesses far beyond, what was intended when they were initially set up. The development of limited liability partnerships has led to a new range of disputes.
That, in turn, can often lead to disputes between partners when individuals wish to take businesses in different directions; or when, for example, succession planning becomes a significant issue. Our expertise covers dealing with a wide variety of partnerships across a wide range of sectors and a wide variety of industries.
A partnership has to be carried out to make a profit; however, profit does not necessarily have to be made. Charitable and not-for-profit concerns cannot constitute partnerships as they cannot have the intention to make a profit. However, there are few if any restrictions of the scope of businesses, industries and sectors a partnership can cover.
Assets and drawings
Owning property in common or sharing a gross return does not of itself create a partnership; though sharing net profits is evidence of a partnership.
How the capital of the partnership; the property owned by the partnership and its profits and losses are dealt with is unsurprisingly common causes of dispute.
In the absence of a written agreement, all partners are entitled to share equally in the profits of the business and must contribute equally towards the losses, whether in capital or income. In practice, that does not cover the myriad of different situations that arise in partnerships. Where, for example, new partners have joined, or various capital contributions have been put in place disputes can often occur.
The desired retirement of a partner and/or succession planning is a common cause of the issue. A partner can retire by their own volition; however, its consequence upon a partnership again either under a written agreement or in the absence of a written agreement can be drastic.
This can often be the case as a new partner does not as a result of admission usually take on the liability for anything done before admission.
A partnership will have existing liabilities, and there can be significant disputes over the scope of liabilities taken on and the liability of the new partner for those.
In short, whether it be the scope of a partnership; its unplanned or undocumented effects; the objective of the partnership; how it will distribute profits; can all be the cause of disputes.
Alternatively, a partnership dispute can often arise because partners have a general breakdown over the running of the business and how it can go forward; and the unique characteristics of partnerships can lead to drastic consequences for partners once a dispute takes hold.
Our expertise covers both the management of partnership disputes but also how to avoid them. Either avoiding a dispute moving to litigation; or the quick and early resolution without harm to a business can be critical to the partnership's survival, and our expertise covers that.
Our recent partnership dispute cases include:
- Acting for the partners in a solicitors' practice in dispute and regarding dissolution;
- Advising the partners in a doctors practice regarding liability disputes and capital contributions;
- Acting for partners in one of the UK's largest firm of accountants regarding the removal of some partners; disputes over capital and future income and the status of the partnership
- A dispute over whether a partnership did exist with what was growing into a large waste recycling business; and if so the terms upon which that business was carried out.