A Spanner in the Works
This is the second of a series of short articles covering various aspects of disputes between partners. Read the first.
Here’s a re-cap: Nut, Bolt and Spanner* have been trading for a few years reasonably successfully. They’ve £120,000 tied- up in the business and split profits equally. They have a five year loan agreement which has two years to run. In the last two years turnover has dropped. Nut and Bolt have realised that when a customer calls Spanner often says, “Bring it to my place on Sunday and I’ll charge you £150 cash”. Spanner takes spare parts from the workshop, fits them at “his place” and pockets the proceeds. Nut and Bolt believe he’s cost them £60,000 over two years. They want him out of the partnership and compensation. They have no written Partnership Agreement.
My main point in article one was to highlight one huge benefit of a written agreement. It’s too late for that now, so what about Spanner’s argument that:
“They always knew that I do odd jobs for friends in my own time before we worked together and they knew I continued afterwards. Maybe it wasn’t in line with our original agreement, but you both knew and nodded it through, so that changed the agreement. They didn’t object before, so why complain now?”
Nut and Bolt say that, now they think about it, they did know about Spanner doing occasional small jobs for a couple of friends over the years and didn’t think anything of it. It was trivial. What they have found out now is completely different. So, by ignoring little problems have they given Spanner a green light to do private jobs for anyone?
A well-drawn partnership agreement would have answered this question. Typically the agreement will say that the fact the other partners choose to take no action over a breach of agreement does not mean that the agreement has changed, or that similar conduct in future is allowed. The breach is not “waived”. In other words, if we let you get away with it once or twice this does not mean you can get away with it three times. If you do it again then we can claim compensation for all three. This would dispose of Spanner’s argument.
In this case, however there is no written agreement, so where do we go from here?
Let’s begin by assuming that a judge would decide that the parties had originally intended that no one would do any private jobs. (I shall look at this more fully in a later article).
Changing agreements by behaviour
Over time an agreement can be changed by the partners’ behaviour. Once a pattern has become established then it may well have become the new agreement. This could happen for many reasons and all partners might be happy. E.g. partners may originally agree to share all work equally, but over time the pattern develops that Nut deals with accounts, Bolt with the stores and Spanner the workshop. It’s not what they originally agreed, but it worked and everyone was happy.
If Spanner openly did work for two longstanding friends for years, then this could change the agreement, particularly if he told Nut and Bolt about it and they never objected or said it was fine. He may have asked permission the first time, but it was so easily given that he didn’t bother afterwards. Spanner’s position may be stronger if he could show that Nut and Bolt also do “private jobs”.
However, these circumstances will only change the agreement so far. It may be that Spanner has varied the agreement to allow him to do private work for those two friends; but only them. Even then there may be limits. Nut and Bolt may have impliedly agreed that “Those two need their car serviced, say, twice a year and that’s fine, but no more than that.” There is no evidence that Nut and Bolt agreed to do work for anyone other than those two, especially customers who phoned because they wanted a job done by Nut, Bolt and Spanner. There is no evidence that Nut and Bolt agreed that Spanner could take the firm’s stock without paying, even if to supply to those two friends. The reason Spanner concealed what he was doing is that he knew Nut and Bolt would object. How could Nut and Bolt have agreed to things that they didn’t know about?
Spanner’s position would be even weaker if Nut could say that he has only ever done one “private job”, it was for his father and he told both Bolt and Spanner about it in advance and they gave permission- “just this once”. This would demonstrate that the original agreement still held and that any partner needs permission to do any such work.
So, agreements can be changed over time, but dishonest, concealed actions will not change the agreement; they will be breaches.
This is all very well, but if there is disagreement between the partners about what they agreed in the first place and no clear evidence to point the way then how can we decide what the original agreement said?
Confused yet?! This is the topic covered in my next article so watch this space.
*Please note: this is a fictitious example
Stephen Allen, partner