Internal Disputes and Departures

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Chapter 9

Internal Disputes and Departures

9.1 GENERAL PARTNERSHIPS

This section deals first with possible mechanisms for dispute resolution (see
9.1.1–9.1.3), then with possible outcomes (see 9.1.4–9.1.8), and finally with the particular issues arising on the departure of a partner (see 9.1.9).

9.1.1 Internal methods of dispute resolution

If the partners themselves can resolve a dispute, this is likely to be the cheapest, quickest and most private option. A well-drafted agreement can assist by eliminating or at least reducing the areas of possible confusion and conflict, and by specifying alternative methods for resolving disputes (see
9.1.2).

9.1.2 Alternative dispute resolution

A dispute may only be submitted to alternative dispute resolution (ADR) if all parties agree. Rather than trying to reach agreement when a dispute arises, it is sensible to provide for some form of ADR in the partnership agreement, since if a dispute cannot be settled internally, it is unlikely that the parties will be then able to agree on any ADR procedure. In addition, Civil Procedure Rules 1998¹(CPR), r 1.4 requires parties to consider methods of ADR and thus, even without a clause in the partnership agreement mandating or permitting ADR, it will become relevant if court proceedings are issued.

¹SI 1998/3132.

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Arbitration is a process by which an arbitrator, who is appointed by the parties, reaches a decision on the dispute which is binding on them. An arbitration clause in a partnership agreement is binding on the parties and should specify how an arbitrator is to be appointed, what powers he will have, and any right of appeal. If such a clause exists then the court must grant a stay of any court proceedings if an application for such a stay and a referral to arbitration is made (s 9 of the Arbitration Act 1996). The potential advantages of arbitration as compared to litigation are privacy, speed, party autonomy and flexibility over the process, and greater finality since the options for appeal are usually more limited than in litigation. It can, however, be more expensive, as an arbitrator’s fees may be considerably greater than those of the court. The Chartered Institute of Arbitrators maintains a register of qualified arbitrators and can assist in setting up an arbitration, including the appointment of an arbitrator.

Mediation is a process by which disputing parties engage the assistance of a neutral third party, the mediator, to act as a facilitator. The mediator has no authority to make any binding decisions, but helps the parties to resolve their dispute by negotiated agreement. The parties have nothing to lose (other than the time and cost involved in the hearing) and any party may abandon the procedure at any time. A mediation clause in a partnership agreement cannot be used to force a resolution, since participation in mediation is voluntary.

Two of the main bodies that deal with mediation in the commercial arena are the Centre for Dispute Resolution (CEDR) and the Alternative Dispute Resolution Group (the ADR Group). Both are networks of independent mediators, who can provide a range of ADR services.

9.1.3 Litigation

In the absence of an arbitration clause, any partner has the option of going to court to resolve a dispute (see further 10.1.2). There are, however, significant disadvantages to this course of action. Firstly, it exposes the dispute to public scrutiny, which may deter partners, potential partners, employees or clients from future involvement with the partnership. Secondly, it is likely to increase acrimony and reduce the likelihood of the partners continuing in business together thereafter. Thirdly, it can be very expensive, and the judgments given in some partnership disputes include adverse judicial comment on the lack of proportion between the sums at issue and the costs of the litigation. Fourthly, it is unlikely to produce a speedy outcome.

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9.1.4 Impact on the partnership agreement

Whatever the resolution of the dispute, it is likely to be appropriate to amend the partnership agreement, or indeed draft one where none previously existed, in order to reflect the resolution and avoid a similar dispute in the future, and to provide improved dispute resolution procedures.

The partnership relationship is based on contract, and as a matter of contract law one party may accept a repudiatory breach of contract by the other and thereby bring the contract to an end. In Hurst v Bryk²(see also 7.1.6), the House of Lords held that this did not affect rights which had already been acquired and so the partner who had accepted the breach remained liable for the debts of the partnership. Lord Millett (with whom three of the other four members of the court agreed) further argued, obiter (because the lower courts had decided the point differently and it had not been appealed), that even if repudiation and acceptance of that repudiation occurred, it would not terminate (i.e. dissolve) the partnership relationship as opposed to the partnership agreement. In Mullins v Laughton,³the court approved and applied this dictum, and further held that since the contract and the relationship were indivisible, the partnership agreement also could not end until the partnership was dissolved. In Golstein v Bishop,⁴the High Court applied the same reasoning to a two-partner firm, an approach which was approved by the Court of Appeal although it decided the case on different grounds.

9.1.5 Departure of a partner

A partner may leave the partnership in a number of ways: by death or bankruptcy, by expulsion (see 9.1.6) or, subject to contrary agreement, by giving notice to the other partners (see further 11.1.1).

In the absence of contrary agreement, ss 26(1) and 32 of the Partnership Act provide that any partner may retire by giving notice to all other partners and that this will result automatically in the dissolution of the partnership (see

²Hurst v Bryk [2000] UKHL 19, [2002] 1 AC 185.

³Mullins v Laughton [2002] EWHC 2761 (Ch), [2003] Ch 250.

⁴Golstein v Bishop [2013] EWHC 881 (Ch), [2013] Ch 131; [2014] EWCA Civ 10, [2014]

Ch 455.

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11.1.2). It is advisable for the notice to be in writing to reduce the possibility of future disputes as to whether it was properly given.

The issues arising on departure are discussed at 9.1.9.

9.1.6 Expulsion

There is no power to expel unless it has been expressly agreed (s 25 of the Partnership Act). It is advisable to include provision for suspension when grounds for expulsion are suspected. It may also be advisable to include a provision that the partner being suspended or expelled does not have a vote on the decision.

The courts have laid down two conditions which must be satisfied if an expulsion is to be valid.

Firstly, the agreed grounds for expulsion must cover the particular complaint. In Snow v Milford,⁵a partnership agreement contained an expulsion clause which included three grounds: (1) permitting partnership property to be charged with a private debt; (2) doing ‘any act to the discredit or injury’ of the partnership; and (3) failing to discharge a debt to the partnership. The complaint which led to the expulsion was that the partner, ‘[b]eing a married man’, had ‘committed adultery with various persons in the city of Exeter’ and been divorced by his wife. The court held that the expulsion was unlawful, since the reference to the discredit or injury of the business was to be read in context as referring to a pecuniary effect. The actual ground relied on was therefore not covered by the expulsion clause.

Secondly, the partners must exercise the power to expel in all good faith. In Blisset v Daniel,⁶the court held that the expulsion of a partner without cause or explanation was ineffective because it was done in bad faith. The expulsion was not for the benefit of the partnership as a whole, but simply a response to a threat by another partner that he would leave if the expulsion were not carried out.

The procedural requirements of good faith have been discussed in several judgments. In Barnes v Youngs,⁷a partner was expelled without warning and

⁵Snow v Milford (1868) 18 LT 142, 16 WR 554.

⁶Blisset v Daniel (1853) 10 Hare 493, 68 ER 1022.

⁷Barnes v Youngs [1898] 1 Ch 414.

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Internal Disputes and Departures 117 without being given the chance to explain. It was held that the expulsion could not be effective when carried out in such a way. However, in Green v Howell,⁸

the court upheld the expulsion of a partner who had not been given a chance to explain. It ruled that Barnes was not authority for the proposition that the partner must always be given due warning prior to expulsion but only that, on the facts of that case, the expelling partners lacked good faith. In Barnes the cause of the expulsion – that the partner was living with a woman to whom he was not married – had existed at the outset of the partnership and the other partners had always been aware of this. By contrast, the cause in Green – a partner’s diverting profits from the partnership – was so flagrant a breach of his duties that the expelled partner must have been aware of what he had done wrong and had had ample opportunity of contesting the expulsion. There was thus no lack of good...