The Importance of Partnership Agreements

The primary legislation governing a general partnership formed under English law is the

Marina Akram Partnership Act 1890 (‘PA 1890’). Other legislation affecting partnerships includes the Companies Act 2006, which regulates partnership names and trading, and the Insolvency Act 1986 which is applied to partnerships with modifications set out in the Insolvent Partnerships Order 1994, SI 1994/2421.

PA 1890 defines ‘Partnership’ as a relationship which subsists between persons carrying on a business in common with a view of profit. The partnership will be subject to fulfilling the criteria of the definition of a partnership in PA 1890. Whether or not the criteria has been met is a question of fact.

The partnership cannot acquire its own rights, obligations or hold property in its own right, as it is not a separate legal entity. Therefore, it is worth noting that each partner owes a duty of good faith to their fellow partners in all partnership dealings, each partner is an agent of the partnership and can possibly bind the partnership and the other partners, by any action undertaken in the ordinary course of business. Similarly, a partner is jointly liable with the other partners for all obligations and debts that the partnership may incur while they are a partner.

What is a Partnership Agreement?

A Partnership Agreement is a written agreement that defines the partnership, the relationship between the partners and their contractual obligations.

The PA 1890 preserves the law regarding the rules of equity and common law relating to partnership but does not provide a complete code of partnership law. Therefore, a Partnership Agreement provides the framework for the day-today running of the business, likely areas of dispute between partners and procedures for dealing with them should they arise.

What should a Partnership Agreement include?

A Partnership Agreement can be drafted at any time and to meet each partnership’s needs, and may cover matters as follows:- • Category of business; • Description of partnership's share, assets, authority, liability (restrictions and allowance); • Accountants name, bank name and premises; • Description of all partner's duties and responsibilities to the partnership and the other partners; • Capital and income allocation (inc. full time/part time share agreements); • Holiday, maternity/paternity pay and leave, sick pay and other entitlements for partners; • Use of business vehicle, if any; • Distinguishing between partnership property and property that personally belongs to an individual partner; • Retirement/Expulsion/Termination of the partnership; and but not limited to; • Decision making processes and method of settling disputes.

Default provisions in the absence of a Partnership Agreement

The PA 1890 sets out a number of default provisions explained below that will apply to the operation of a partnership if no specific agreement is entered into. These default provisions, or any provision in a written agreement, may be varied by the consent of all the partners and such consent may be either expressed or inferred from a course of dealing: - • all partners are to share equally in the capital and profits and contribute equally to losses; • the partnership must indemnify any partner for payments and liabilities incurred in the ordinary and proper conduct of the partnership’s business; • every partner may take part in the management of the partnership business; • no partner is entitled to any remuneration for acting in the partnership business; • no person may be introduced as a partner without the consent of all existing partners; • any differences as to ordinary matters connected with the partnership business may be decided by majority vote but a change in the nature of the business

requires unanimous consent; • no majority of the partners can expel any partner unless a power has been conferred by express agreement; and • where no fixed term has been agreed for the duration of a partnership, any partner may terminate the partnership by giving notice to the other partners.

The standardised approach can be problematic and unfair. Having a Partnership Agreement can help avoid conflict by preempting any potential disagreements.

Benefits of having a Partnership Agreement

A Partnership Agreement can benefit in various ways: 1. It offers clarity as regards to concerns on distribution of profits; 2. It reinforces any unwritten rules as regards the business therefore decreasing the possibility of misinterpretation between partners; 3. A written agreement can assist to prevent expensive and time-consuming court proceedings in the event of a disagreement. 4. A Partnership Agreement will override the default provisions of the PA 1980.

Conclusion

Many partnerships, especially family-owned businesses, do not have a Partnership Agreement. A Partnership Agreement should be regarded as an investment. Therefore, we strongly advise that all partnerships/businesses should have a recent and carefully considered Partnership Agreement which is tailored to their business needs.

If you don’t have a Partnership Agreement and your business has been operating for a number of years, it is not too late to formalise the requirements of your business in a written agreement. Further, if you have a Partnership Agreement, it should be checked frequently, especially if there is a change in circumstances.

For further advice on Partnership Agreements please contact Marina Akram, Commercial Litigation Solicitor, at Silverback Law on 0844 967 2700 or marina.akram@silverbacklaw.co.uk.