Partnership disputes – avoiding the risks

Drafting partnership agreements can be complex, so can drafting dissolution agreements and advising clients in the event of dissolution of partnerships, however it is relatively rare for claims to arise out of errors of a technical legal nature in this area of practice.

As with most areas of practice, problems more often arise out of management issues rather than legal issues. Rarely is the cause of the claim ignorance of the legal position. Most often, the cause is –

• lack of clarity about the scope of the solicitor’s instructions
• failure to draw some matter to the attention of the client
• failure to manage the client or the client’s expectations
• leaving some aspect of matters unattended to.

Examples

Let’s look at some examples of the sort of situation that can cause client dissatisfaction and claims and ways in which these situations could have been avoided. Bear in mind that this page is not about the law and nothing should be taken as a statement of the correct legal position. The intention is simply to demonstrate how to better control the risks associated with this particular area of practice and to stay in control.

Example

Firm A acted for P when P entered into a partnership with three others. The partnership has been sequestrated and P claims that he was never advised, and was therefore unaware, that entering into a partnership put his own personal assets at risk.

What were the firm’s instructions? Merely to draft a partnership agreement or also to advise on all aspects and implications of entering into a partnership with unlimited liability. Unless this is made absolutely clear at the outset, there is inevitably the potential for misunderstanding. Terms of engagement ought to describe the scope of the work and responsibilities which are/are not being taken on.

With the advent of Limited Liability Partnerships in addition to Limited Partnerships, there are more options open to clients when entering into partnerships and more to explain in terms of the options and their relative implications.

Example

Firm B acted for Q in the dissolution of a partnership. Q subsequently alleged that his taxation position had been prejudiced by the manner and/or timing of the dissolution of the partnership.

The firm in this case were able to point to explicit provisions in their terms of engagement stating that there were likely to be taxation implications; that the client should refer these aspects of the matter to his taxation advisers and that the firm would have no responsibility for these aspects of matters.  

Example

Firm C acted for both R and S in drafting a Partnership Agreement. R withdrew from the partnership and S carried on the business as a sole trader having bought out R’s interest. S subsequently alleged that he had suffered a loss as a result of Firm C’s failure to incorporate a provision entitling either party to acquire a retiring partner’s interest at a discount to valuation.

It is beyond the scope of this article to consider the application of the Conflict of Interest Practice Rules, however it is suggested that as well as considering whether you are permitted to act for more than one party in relation to the constitution or dissolution of a partnership, serious consideration ought to be given to the question of whether or not it is “safe” to do so from a Risk Management perspective.

Even if the Rules permit you to (continue to) act for more than one party, circumstances may emerge in which it is extremely difficult to continue to represent the best interests of both parties at the same time.

Example

Firm D acted for T when he resigned from his partnership with U and V. T alleges that Firm D failed to advise him to contact the partnership’s landlords to have himself released from the tenants’ obligations under the lease. T is being held liable for outstanding rent.

These brief facts do not reveal whether Firm D would bear any responsibility or have any liability for the situation in which T finds himself. What measures might have helped the firm avoid this situation arising in the first place or to have a preemptive response to such an allegation?

• Checklist of points to be addressed when advising clients about the implications of dissolution, continuing responsibilities and liabilities
• Checklist of action to be taken by the client in order to terminate the partnership and his liabilities as partner. Clear advice to the client about the action to be taken in order to give effect to the agreement including notification to customers etc. with a suggested timescale and indication of the consequences of failure to attend to this timeously

Example

Firm E prepared a partnership agreement for a partnership established by their client W and W’s wife and son. The business subsequently ran into difficulties and has now failed with substantial debts. Although Firm E maintain that Mrs W was never a client of the firm and that they were not representing her interests when drawing up the partnership agreement, Mrs W is alleging that the firm ought to have advised her of the implications of entering into the partnership.

It may be appropriate to issue a “non-engagement letter” to a party to a contract in order to make it plain to that party that the solicitor is not representing the interests of that party – because the solicitor has chosen not to act for that party on account of conflict of interest or for other reasons.

Example

Firm F represented X when he entered into a partnership with Y. X is now complaining that the terms of the partnership agreement are unfavourable to him and are unduly generous to Y. It is maintained by the Firm that they pointed out to X the potential harshness of the relevant provisions at the time the agreement was being adjusted and that X insisted he was content to accept the position.

This situation could arise in the context of drafting/revising any type of contract. If the provisions in the contract prove to be disadvantageous to the client, he may seek to allege that his solicitor has failed to protect his interests properly whereas the client may be the author of his own misfortune.

When it comes down to a question of credibility, the client’s version of what was (not) discussed is liable to be preferred to the solicitor’s contrary version. It is therefore crucial to record properly and contemporaneously advice given and instructions received. In cases where the client is reluctant to accept advice or insists on agreeing provisions which are (potentially) adverse to the client’s interests, it is probably appropriate to have your advice and the client’s instructions recorded in writing.

Summary – How to address the risks

The potential omissions or oversights, misunderstandings or breakdowns in communication in these examples could be addressed by a combination of the following -

• comprehensive terms of engagement in order to make as clear as possible the party or parties you are acting for, the scope of the work and your responsibilities and to assist in managing the client and the client’s expectations
• checklists or case plans to assist in managing the progress and completion of the work and to help ensure that no “loose ends” are left unattended to.

The information in this page is (a) intended to provide guidance on matters of practical risk management and not on issues of law and (b) is necessarily of a generalised nature. It is not specific to any practice or to any individual and should not be relied on as stating the correct legal position.

Alistair Sim is Associate Director in the Professional Liabilities Division at Marsh UK Limited (e-mail: Alistair.J.Sim@marsh.com)