If an aggrieved partner disagrees about his contractual terms, that firm can become vulnerable to dissolution.
The Partnership Act of 1890 says that without agreement to the contrary, a firm is a partnership at will. It can be dissolved at any time by any partner giving notice of dissolution to the other partners. The business must then be wound up, with any net residue being divided between the partners.
This is the ‘nuclear option’ in partnership law for any unhappy partner. It is sometimes used to secure substantial concessions from the aggrieved partner’s firm, such as the relaxation of restrictive covenants.
There are a number of ways in which a firm can be or turn itself into a partnership at will.
* Partners in some firms are so preoccupied with setting up the practice and bringing in the business that they never take the time to agree proper partnership terms. They rely upon an unratified draft and a spirit of trust between partners. That business is built on sand.
* Firms with partnership agreements may have agreed to provisions such as dealing with retirement and expulsion of partners, but not with the actual duration of the partnership. A common assumption is the implication that the partnership has been established for an indefinite term, which is not necessarily the case. A partnership at will can occur unless the deed deals expressly with dissolution and states that the partnership will continue, for example, for the joint lives of some or all of the partners, or until the expiry of a fixed period or dissolution on a basis prescribed in the agreement. That was the view of Lord Browne-Wilkinson, in Walters v Bingham (1988), (although that case has been subject to criticism).
* Fixed term partnerships have their own difficulties. What happens if the partners continue in business after the fixed term set out in the deed has expired? The law does not imply renewing the fixed term; the firm continues in business as a partnership at will. There are a few City law firms that adopt this approach, but it is rarely an attractive option for professional firms. The impending expiry of a fixed term partnership (even where it is likely to roll into a further fixed term on agreed terms) can be unsettling; it provides a natural (and often recurring) point for otherwise stable partners to reconsider their position in the firm.
* When a firm’s composition changes due to the departure of a partner, this can result in the firm converting into a partnership at will. Without a contrary agreement the original partnership ceases to exist and a new partnership comes into being. The previous firm’s partnership deed will not automatically apply to this new partnership, therefore the new partnership can be dissolved immediately or at a future date specified when a partner issues a dissolution notice. The deed should set out the terms on which the partners for the time being conduct business under the name of the firm, and provide that, following a retirement or expulsion, the firm continues to subsist as between the continuing partners.
* The changing composition of a firm can also cause problems when appointing new partners. Unless there is a provision to the contrary, the partnership ceases to exist when a partner is appointed, and is replaced by a new partnership of the continuing partners plus one. If that new partner does not expressly agree partnership terms with the other partners, as was the case in Firth v Amslake (1964), the new firm is likely to be a partnership at will governed by the Partnership Act. Several law firms have unwittingly converted themselves into a partnership at will by failing to finalise terms with new partners. Once an individual has been publicly appointed and declared as a partner, it may not be legally possible to impose upon them partnership terms they may disagree with.
Firms should ensure that no individual is appointed or announced as a new partner until they have formally agreed in writing to the specific partnership terms that apply to them. The
partnership deed should provide for new partners to be appointed to the firm, and should confirm that the deed governs all partners who practise under the firm’s name from time to time.
Where there is a dispute as to the status of the partnership, the burden of proof falls on the party claiming that it is not a partnership at will to establish the existence of express terms to support that claim. The importance of having an appropriate partnership deed that applies to all partners becomes self-evident. Diligent management of the partner appointment and departure process also provides an important shield against the claims of a disgruntled partner.
Clare Murray and Jo Walker specialise in employment and partnership law at Fox Williams. Murray is the honorary secretary of the Association of Partnership Practitioners.
