Partnerships in professional practices involving lawyers, accountants and GPs are like marriages. Disputes can arise and may not be resolved easily.
What do you do if one of your partners is consistently breaching the obligation to act in good faith and you have tried to resolve it through discussion and negotiation without success, leaving your position untenable? From our experience, and as a result of a recent landmark case, we suggest that you consider the key steps below:
- Read your partnership agreement. It may set out the circumstances in which the partnership can be dissolved and this should be considered first.
- In the absence of a provision in the partnership agreement, consider whether you can dissolve the partnership in accordance with section 35(d) of the Partnership Act 1890. To succeed you will need to demonstrate that the defaulting partner has willfully or persistently committed breaches of the partnership agreement or otherwise conducted himself in partnership matters in such a way that it is not reasonably practicable for you to carry on the business of the partnership.The recent case of two solicitors, Joseph Golstein and Colin Bishop, has given a valuable insight into the type of conduct or behaviour that could amount to a wilful or persistent breach and/ or be sufficient to entitle a partner to dissolve a partnership.
Both agreed in 2007, to become partners and to form a new practice. It was also agreed that the partnership would last for at least 4 years. The relationship between the two broke down early on and it eventually ended in June 2010. Both felt that the other party was not pulling their weight or respecting their position in the partnership in one way or another.
The deputy judge at first instance expressed the view that there is no need for there to be a final incident or a last straw, which causes your position as the non defaulting partner to be untenable. Instead, it could be the cumulative effect of a partner persistently acting in bad faith over an extended period of time that could entitle you as the non defaulting partner to dissolve the partnership.
- Review your partner’s actions carefully and assess what impact their conduct has had on you and whether that conduct entitles you to bring the partnership to an end.
- Think about whether your partner’s actions have caused your position to become untenable? In Bishop v Golstein, it was held that the failure by one partner to provide draft accounts to the other; a decision to actively exclude the other partner from the business and the instruction and encouragement of members of staff to act contrary to the other partner’s instructions were sufficient to cause the non-defaulting partner’s position to become intolerable.However these are by no means the only examples of bad faith.You will need to consider your own personal circumstance carefully. In particular, you must consider the whole course of your partner’s conduct, and not just one incident, to assess whether its cumulative effect is such as to satisfy the test in section 35(d).
If it does, then you may be entitled to serve notice to bring the partnership to a premature end. You should however seek legal advice before doing so.
- Keep a note of the issues as they arise but be careful to record that your note is prepared for the purpose of taking legal advice. In this way, the note is privileged from disclosure. Otherwise, it may have to be revealed in the event of litigation and could give rise to an argument that you were not acting in good faith towards your partner.