Solving partnership problems
Partnerships can carry on for years without anyone even thinking about the partnership agreement. Then a problem arises and the partners discover that the agreement is inadequate, out of date or – worst of all – might not even exist. A well-designed partnership agreement can help solve a number of problems.
The basic problem is that the provisions of the Partnership Act 1890 apply where there is no specific agreement to the contrary. For example, under the Act, it is not possible to expel a partner.
An out of date or non-existent partnership agreement could make it difficult to deal with the problem of an under-performing partner. A partnership agreement might give the majority the right to expel an individual partner or at least the power to alter a partner’s status, maybe changing them to a salaried partner.
Different problems can arise if a partner leaves of their own accord. It might be desirable to be able to place an outgoing partner on ‘gardening leave’ to protect the partnership’s business interests. Once a partner has actually left, a restrictive covenant can prevent them from soliciting the partnership’s clients. But covenants must be carefully constructed or they could turn out to be unenforceable.
Partnership agreements should be up to date with changes in the law generally – especially discrimination law. Agreements should therefore provide for parental leave, comply with sex discrimination legislation, and take account of the recent changes regarding age discrimination – particularly the abolition of the default retirement age of 65.
Firms that have grown in size may be especially vulnerable. What worked for a small three or four person partnership may no longer be appropriate. Decisions that could once be taken by all the partners may now have to be delegated to an individual or a small group.
Every partnership should have a proper partnership agreement and then review it regularly.