In the event that parties to a partnership do not have an appropriately drafted partnership agreement, they are leaving themselves open to various risks as a result of the essentially ungoverned nature of partnership law.
What is a Partnership?
Section 1(2) of the Partnership Act 1890 (the “1890 Act”) states that a partnership is a “relationship which subsists between persons carrying on a business in common with a view to profit.”
When two or more people carry on any form of business together with a view to profit but without incorporating as a limited company, they form a partnership, even though this may be unintended.
However, there is no requirement that the partnership arrangements must be in writing. The 1890 Act, in essence, offers a default partnership agreement.
The 1890 Act may be viewed as a default partnership agreement whose terms apply to every partnership if they are not excluded. For this reason, it is crucial for partners and their advisors to be aware of all the rights and duties which are implied by the 1890 Act and then to decide which of them are appropriate for the partnership and which of them should be modified by the terms of the Partnership Agreement.
There are a number of ways in which the 1890 Act is inappropriate for most partnerships, examples of these are as follows:
- There is no right under the default 1890 Act to expel a partner. It doesn’t matter how unprofessional or negligent a partner is, his co-partners may not expel him from the partnership in the absence of a right of expulsion.
- In every partnership at will, regardless of the number of partners, any one partner may dissolve the partnership by simply arriving at a partners meeting and giving notice orally that the partnership is dissolved.
- If a partner dies the partnership will automatically dissolve under the terms of Section 33 of the 1890 Act and may be wound up by the wish of any one partner. There is no general right in law to acquire a deceased partners share and this will lead to the surviving partners to a situation where they have to enter negotiations with the deceased partner’s estate to purchase the shares. Therefore, a written Partnership Agreement should provide that the death of a partner will not dissolve the partnership but instead that the deceased partner’s shares may be purchased by the surviving partners pursuant to an agreed valuation mechanism.
- There is no general power to retire under partnership law. Thus, the only possibility for a partner who wishes to retire in the absence of a retirement provision is for him to dissolve the partnership.
It is important that parties to a partnership have a carefully drafted agreement excluding certain rights and incorporating and setting out others.
For advices on partnership law please contact Ray Fitzpatrick, David Lavelle or Barbara Lydon.
28 May 2015