The Nuts and Bolts of a Partnership Dispute
This is the first in a series of short articles covering various aspects of disputes between partners. A partnership is a group of two or more people undertaking business together with a view to profit, excluding LLP’s and companies. (I shall look at companies later).
Any sort of business may be run in partnership and there may be any number of partners, from two right up to hundreds. Most partnerships trade perfectly happily and, even if there are disagreements, they make decisions by majority vote and carry on. However, sometimes things go wrong and the parties so completely fall out that it can’t simply be sorted by a discussion and vote. There may be numerous reasons for a dispute, but how are these disputes resolved?
There are principles that apply to any partnership, but to illustrate these I shall assume a partnership of three: Nut, Bolt and Spanner*, motor mechanics. They have been trading for a few years reasonably successfully. They have £120,000 tied- up in the business and they split profits equally. They have a five year loan agreement and when they took it out they laughingly agreed that they would have to work together for at least that time. It still has two years to run. In the last two years turnover has dropped. Nut and Bolt have realised that Spanner has been fiddling them. For example, when a customer calls Spanner doesn’t always say, “Bring your car in to our workshop on Thursday and we’ll charge you £240 plus VAT”. He will say, “Bring it round to my place on Sunday and I’ll charge you £150 cash”. Spanner takes spare parts from the workshop, fits them at “his place” on Sunday and pockets the proceeds. Nut and Bolt believe he has cost them £60,000 over two years. They want him out of the partnership and they want compensation.
The first big question is whether there is a written Partnership Agreement. This sets out what the parties agreed right from the start. Basic issues include;
- Who is responsible for what?
- How do we pay for our set-up costs and running expenses?
- How do we share profits and losses?
However, many partners begin by assuming that, “We’re mates and don’t need one of those”. They are busy setting-up the business; why waste time and money on paperwork? Well, not having a well-drawn agreement may cost much more in the long term. By the time a dispute has arisen it is too late.
Sometimes the very process of sitting down and thinking about an agreement can help to nip problems in the bud.
If there’s no agreement in writing then we have to look at all the evidence to work out what the partners agreed. The evidence might be in letters, emails or even tweets. On some issues the evidence may be in the accounts. Sometimes there is no hard evidence and we have to look at what the parties each say now. It turns out that partners often simply made assumptions without talking them through.
How might this apply to Nut, Bolt and Spanner?
Spanner might argue; “They always knew that I do odd jobs for friends in my own time- there was no reason this should change. There was no need to say anything, it was obvious. It’s not a breach of the agreement. I’ve done nothing wrong. They didn’t object before, so why do they now?”
Nut and Bolt say that, yes, they knew he did this before the partnership began. They liked his enthusiasm. They just assumed that Spanner would stop when they were working together. There was no need to say anything, it was obvious. In fact, now they think about it, they did know about him doing occasional small jobs for a couple of friends over the years and didn’t think anything of it. What they have found out now is completely different.
We have two completely different assumptions. At the time they were honestly made, even if Spanner has stretched the point afterwards. How can they be resolved?
A well-drawn partnership agreement would have answered this question from day one. Typically the agreement will say that no partner shall work in competition with the firm and must account for any income he receives for work of the type the firm normally does.
If a draft agreement had said this before they began, then Spanner would have realised that “odd jobs for friends” would not be allowed in future. He might have decided not to join with the others. He may have joined but never have started on that slippery slope.
If a signed agreement had said this then Spanner would have nowhere to hide now that he has been found out. If Nut and Bolt had found out early then the partners could have resolved the disagreement quickly just by looking at the agreement. Spanner might have said, “You’re right. I forgot. What have I got to do to put this behind us?” The whole issue could have been ironed out and the three would have remained partners and mates.
On the facts that I have given there has been two year’s apparent cheating and it is probably too late to nip it in the bud. What about Spanner’s comment that “They didn’t object before, so why do they now?” That will be covered in my next article!
* Fictitious example
Stephen Allen, partner