A partnership is a contract between persons to carry on business in common. The terms of the agreement determine the legal rights and obligations of the partners. The agreement may be as formal or informal as the parties decide. It should be in writing, so as to provide greater certainty.
The Partnership Act 1890 determines what rules apply in relation to particular matters if nothing is stated to the contrary in the partnership agreement. There are some fundamental rules in the Partnership Act which cannot be changed by the term of a partnership agreement.
The existence of a partnership agreement is determined in the same way as any other contract. It may arise from conduct, verbally, by informal documents or by a formal partnership agreement. A formal partnership deed is desirable as it leads to greater certainty in relation to the legal relationship and rights of partners.
Where there is a partnership agreement, it will usually govern the position. In some cases, there may be a partnership agreement, but it may not reflect the actual practice and relationship of the parties. In this case, it may be supervened by another verbal or implied agreement.
Desirability of Partnership Agreement
It is desirable to have a partnership agreement to regulate the terms of the partners’ relationship. It is usually appropriate in order to ensure that some of the more inconvenient and inappropriate default Partnership Act rules are changed.
There is considerable freedom and latitude in relation to what might be provided. The partnership agreement need not be in writing. However, a written partnership agreement is desirable from the perspective of certainty.
In the absence of a well-drafted written partnership agreement, there is a higher risk of disputes and litigation. The position is governed by an implied agreement or by the Partnership Act. The Partnership Act is antiquated and does not deal with some matters at all. The may be disagreements as to how the Partnership Act applies and whether is varied by an implied agreement.
There may be disagreement as to what the terms of the implied agreement are. There may be disagreement as to how they apply to the circumstances.
A partnership must be for the purpose of a business. The partnership agreement should specify the partnership name, the nature of the business and the duration. A partnership may be perpetual, for the joint lives of individuals or for a fixed term.
There is a duty on partners to act in good faith in their dealings with the other partners and to disclose all matters relating to the partnership. Partners owe each other fiduciary duties and are not entitled to make a secret profit in their dealings with outsiders. A partner must account for partnership income and opportunities received by him, in the course of the partnership. A partner is obliged to use due care and skill in the conduct of the partnership business.
A partnership may be for a fixed term or fixed purpose. Subject to the agreement providing otherwise, it may be terminated by notice. After a fixed term partnership ends, a partnership can continue as a partnership as will. This means that it can be terminated by any partner. Most written partnership agreements provide that they cannot be terminated, by a partner giving notice to do so. An alternative mechanism, providing for the consent of a majority of the partners may be substituted.
It is desirable to provide that the partnership continues beyond the retirement or death of individual partners.The agreement should vary the Partnership Act provision that the partnership is dissolved in these cases so that there is no automatic termination.
There may be provision by which the surviving partners may or must buy out the departing / deceased partner’s share. Insurance may be taken out to finance this obligation or option. A number of variations exist.
The partnership agreement should specify what capital contributions are to be made by the partners. Property or other assets may be contributed by the partners. It may be transferred to the partners or could be leased, licensed or made available in another way.
Contributions of assets should be expressed in money. Assets should be valued, and the value should be expressed in the capital accounts. Funds contributed by partners in excess of their agreed capital contribution will generally be by way of a loan.
Unless it is agreed to the contrary, the profits and losses of the partnership business are to be shared equally. It is necessary to set other partnership shares and profit sharing ratios in the partnership agreement. There is complete flexibility in defining the profit and capital sharing arrangements.
The profit sharing ratios may, for example, be fixed percentages. There may be a provision allowing a junior partner an increasing share over time. The share split may be decided annually and allocated by an equity committee or by a senior partner. A points basis may be used, depending on factors such as length of service, earnings, etc.
In the absence of an agreement to the contrary, each partner is entitled to participate in the management of the partnership. This may not reflect the particular needs and circumstances of the business. For example, a dormant or sleeping partner would not normally have management rights on a day-to-day basis.
The voting rights of partners in making key the decisions should be set out. The general rule is that ordinary decisions are made by majority vote. It may be desirable to provide that certain important decisions require the consent of all partners or a certain percentage of them.
Day-to-day management may be delegated to a manager who may work in accordance with the guidelines or under the direction of the partners or a committee of the partners. Some businesses provide for an executive committee to manage or supervise the management of the partnership business.
Partners should undertake obligations in relation to the provision of services for the partnership. They may commit to spend substantial or a minimum specified time working in the business.
There are usually provisions preventing partners competing with the partnership. There is usually a restrictive covenant prohibiting and restricting certain dealings by partners which may damage the partnership after they cease to be partners.
The following are matters which are commonly dealt with in partnership agreements
- duties and obligations of the partners
- Authority and responsibilities of the partners
- decision-making procedures, including partners’ meetings, quorum
- duty to provide services, salary, holidays and absence
- ownership and use of partnership assets
- capital and loan contribution
- return on capital
- profits and loss sharing ratios
- withdrawal of capital
discretionary profit share
- accounts, accounting procedures, rights of access to books
- death and purchase out
- discipline and expulsion
- withdrawal of capital
- termination and winding up
- dispute resolution
Disputes and Expulsion
It is desirable to provide a mechanism for the resolution of partnership disputes. Under the default provisions, differences as to ordinary matters in the course of the partnership business are decided by a majority. However, a change in the nature of the partnership or outside the scope of the partnership business will require the consent of all partners.
References and Sources
Partnership Act, 1890
Partnership Law 2000 Twomey M. Butterworths
Lindley & Banks on Partnership: (19th Revised edition) 2016 Banks, Roderick I’Anson
Partnership & Llp Law (8th edition) 2015 Morse, G.
Partnership Law (5th Revised edition) 2015 Blackett-Ord, Mark; Haren, Sarah;