PARTNERSHIPS: THE PARTNERSHIP ACT

(A) THE PARTNERSHIP AGREEMENT v THE PARTNERSHIP ACT Do partners need a partnership agreement? According to UK law, a partnership automatically comes into being when parties are “carrying on a business in common with a view of profit”. As a partnership is automatically (1) made once this definition is satisfied, there is therefore no legal requirement for a written partnership agreement to be in place. So, as is often the case, relations between partners start off very well and they have every intention of putting a formal agreement in place. Then, once the business is up and running, the reality of working life takes over and no agreement is ever drawn up. Things then go wrong and working relationships may turn (2) unpleasant. It is at this point that the partners are advised that in the absence of a partnership agreement the archaic rules set out in the (3) articles of the Partnership Act (1890) will (4) rule the business, often with unwelcome consequences. In this situation, partners are usually most concerned about the rules regarding the management and (5) closure of a partnership.

(B) THE MANAGEMENT OF A PARTNERSHIP UNDER THE ACT s.24(5) of the Act states that ‘‘every partner may take part in the management of the partnership business’’, and, s.24(8) states that ‘‘Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners’’. Exceptions to this include the situation where a (6) all instead of a majority decision is needed in relation to admitting new partners (s.24(7)), or if the partners wish to change the (7) kind of the partnership, (s.24(8)). In addition, under s.25 of the Act the partners are (8) stopped from (9) evicting another partner and so in this case the only option would be to dissolve the partnership, and therefore, a clause should be included in the agreement detailing any (10) reasons for allowing the partners to do this.

(C) DISSOLUTION OF THE PARTNERSHIP UNDER THE ACT There are some circumstances set out in the Act which will trigger dissolution. If a partner wishes to retire or resign from the partnership and no fixed term has been agreed, then in accordance with the Act, all he or she needs to do is give notice to the other partners. If a partnership is for a fixed term or entered into for a “single adventure or undertaking” then the partnership will dissolve on the expiration of the fixed term or the conclusion of the purpose (adventure) or undertaking. In addition, the Act provides for the dissolution of the partnership on either the bankruptcy or death of any partner. This is also the case when an event occurs which makes it unlawful for the partnership to continue or a partner makes an application for dissolution to a court. The court can decide to dissolve the partnership if a partner other than the party suing (a) becomes incapable of performing his or her part of the partnership contract; (b) has been guilty of conduct which in the opinion of the court is calculated to prejudicially affect the carrying on of the business, or, (c) wilfully and persistently commits a breach of the partnership agreement. The court can also end the partnership when it can only be carried on at a loss or when the court feels that it is “just and equitable” that the partnership be dissolved.

(D) DISSOLUTION AND MANAGEMENT UNDER THE ACT – A RECENT CASE In the case of Cheema v Jones (2017), the parties, who were both doctors, entered into a partnership agreement in April 2016 to work as partners in a medical practice. Soon after, they decided to expand the business and invited three more doctors to join the practice. All concerned agreed that the new five-member partnership would commence from 1 July 2016 and they instructed solicitors to prepare a new partnership agreement. However, at some time after 1 July, but before that new partnership agreement was concluded, a dispute arose between Dr Cheema and Dr Jones that led to Dr Cheema taking sick leave due to anxiety. Matters came to a head when Dr Cheema returned to work and was prevented from seeing patients and refused access to medical records. Dr Cheema, relying on the original partnership agreement, obtained an interim injunction from the High Court which restrained Dr Jones from breaching the April agreement until the matter was properly resolved. However, by the time the case came to trial, a notice purporting to dissolve the new, five-member partnership with immediate effect had been served on Dr Cheema.

Following a full hearing of the matter, the judge presiding over the case refused to grant Dr Cheema a permanent injunction on the basis that the original partnership had been dissolved when the other three doctors joined the practice. At that point, due to the absence of a written agreement, a ‘partnership at will’ had come into effect that included all five doctors. That partnership had also come to an end by the service of the notice of dissolution. In rejecting Dr Cheema’s subsequent challenge to that decision, the Court of Appeal found that the original judge had made no error of law. The partnership at will had taken the place of the original partnership and the fact that the former had not been set out in writing did not affect that conclusion.