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Why you should avoid being a Partnership at Will
Whenever you enter a new partnership, it is vital to have a written partnership agreement, to avoid it being deemed a Partnership at Will, governed by the Partnership Act 1890 (the “Act”). Here, Sana Sadiq, senior solicitor at BMA Law, explains the pitfalls of this default arrangement.
What is a Partnership at Will?
A Partnership at Will is a form of partnership that operates under the default terms set out in the Act, and can have unintended results. It is a partnership of undefined duration that can be terminated by any partner at any time. A partnership will be deemed to be a Partnership at Will unless contrary evidence can be shown.
To show contrary intention there must be an express (in writing) or an implied (by conduct) agreement which shows that the partnership is not a Partnership at Will.
It can be difficult to reflect by conduct alone that the business is not a Partnership at Will. This is why a written partnership agreement is the preferred option. A written partnership agreement will override the default statutory provisions that would otherwise govern the partnership and provide all partners with much needed security.
Where a partnership is operating under the terms of a written partnership agreement, it is important that the agreement is regularly updated, otherwise the partnership is at risk of becoming a Partnership at Will.
In CheemavJones, where two GP partners were joined by three incoming GPs, the court concluded that the negotiations of new partnership terms between the five partners (albeit never concluded in a written agreement) superseded the original executed agreement (executed only between the two “old” partners), and therefore created a partnership at will between the five partners.
In this article we look more closely at why you should look to avoid being part of a Partnership at Will.
What does a partnership at will mean?
The 1890 Act, given the date, is considered ‘out of date’, and does not take into consideration the intricacies of operating a general medical practice in the 21st century.
The following is a non-exhaustive list of the implications of a Partnership at Will: –
Capital and Profit/Losses. The Act dictates that all profits and losses in both income and capital are divided equally. Therefore all partners are liable for any debts incurred by the business, and all profits are shared equally, which may not be the desired outcome.
Majority Decisions. All decisions are made by simple majority (except in the case of changing the nature of the partnership business). Where there is an even number of partners, this increases the likelihood of deadlock, which could lead to lengthy unresolved disputes.
Expulsion. It is not possible to expel a partner from the partnership, the only option being to end the partnership by dissolution.
Dissolution. There are no limits on dissolution. Any partner can bring the partnership to an end on giving notice at any time.
Death and Bankruptcy. The partnership will automatically come to an end in the event any partner retires, dies, or becomes bankrupt.
What does a Partnership at Will not address?
Partnerships at will are outmoded systems that do not reflect the intricacies of modern businesses. The following is a non-exhaustive list of issues that are not addressed by a Partnership at Will:
Unequal Capital and Profit/Losses. Partnerships at Will do not account for circumstances where individual partners hold unequal shares in capital. The Act only provides for an equal split of the profit and losses.
Duties The Act provides that every partner may take part in the management of the business. It does not consider the different obligations of clinical and non-clinical partners, or GP and nurse partners. The Act does not determine who the Senior Partner will be, or who will take up the role of Clinical Director or PCN representative. The Act makes no provision for the different levels of authority delegated to partners holding such roles.
Unanimous Decision Making. The Act does not provide for any decisions that require unanimous agreement by all the partners.
Leave Entitlements. The Act does not provide for absences and locum cover. There is no framework in relation to entitlement to leave, who will bear the locum costs in such circumstances, and to what extent absent partners are entitled to profit share.
A probationary period for new partners. The Act does not allow for a probation period to allow existing partners to gauge the professional and personal suitability of any new partner, or for the new partner to gauge the suitability of the practice for their long-term involvement. Admitting unsuitable partners could lead to friction and increase the likelihood of partnership disputes.
Exit arrangements – voluntary/involuntary. The Act does not account for retirement, expulsion or suspension. If a partner leaves (whether voluntary or involuntary), the partnership dissolves automatically.
Dispute resolution. The Act does not provide a method by which to approach and resolve partnership disputes, making partnership disputes inherently disruptive and very costly.
As you can see, written partnership agreements are incredibly important to give you the framework to operate the business in a manner that suits all parties.
If the default provisions in the 1890 Act are unsuitable for the partnership (which in most cases they will be), it is vital that you operate the practice on the terms of a legally valid written partnership agreement. This will allow you to clearly set out the terms that have been agreed between all partners.
BMA Law’s Partnership Drafting service
We have a wealth of experience in drawing up and completing practical, sector-specific and bespoke agreements. Our fixed fee service means we can guide you through the potentially tricky process, without worrying about spiralling fees