Advising start-ups on the right business structure for them is a big part of what we do. Should you form a limited company? Is a partnership or limited liability partnership (LLP) more appropriate? Maybe you should run your business as a sole trader. Each vehicle has advantages and disadvantages. If forming a company you’ll be obliged to adopt articles and memorandum of association and perhaps a shareholders agreement to set out how you are going to run the company and who has responsibility for what. When it comes to partnerships – which we consider in this article – you don’t actually have to have a formal agreement in place. That said, we’d always advise you to do draw up a partnership agreement so that when decisions of the partnership or partner responsibility are questioned there’s a clear roadmap that will usually remove uncertainty and reduce the possibility of expensive, resource-draining legal disputes.
When creating a partnership agreement it’s essential to think carefully about the detail. If there’s a dispute over the terms, judges will interpret the agreement in accordance with strict contractual principles – even if this leads to unfairness for individual partners. The 2020 Court of Appeal case of Joseph v Deloitte is a useful illustration of this point. The case involved Deloitte, a global partnership with some 1700 partners but the decision should be taken on board by anyone involved in running a partnership – no matter how large or small the business.
Deloitte is an accounting firm with a global reach. The partners are all party to the LLP’s partnership agreement. The Joseph v Deloitte case arose when the partnership board issued Mr Joseph, an equity partner, with a Notice of Retirement (the mechanism used under the partnership agreement to expel a partner from the firm). Mr Joseph objected to the Notice and, in accordance with the agreement, invoked his right to ask the board to reconsider the decision to issue the Notice.
Whilst Mr Joseph was entitled to put his case forward in person to the Board, he sent written representations because of illness. In the event the Board decided not to change its decision to issue the Notice of Retirement. However it failed to communicate this decision to Mr Joseph. It was at this point that the dispute leading to the court case arose. The partnership agreement stated that when – as here – the Board didn’t change its decision, the partner.
..if still aggrieved..may within seven (7) days of the Board meeting notify the Chairman that he or she wishes the Board to convene a special meeting of all the Equity Partners to review the Board’s decision to issue a Notice of Retirement..
In fact Mr Joseph did not request the special meeting until 8 days after the Board meeting. Relying on the seven-day limitation (in bold above) the Board refused Mr Joseph’s request. Mr Joseph argued that he could not have known if he was ‘still aggrieved’ about the Board’s decision when he didn’t actually know the outcome of their review into that decision.
Following a close analysis of the 95-page long partnership agreement the Court of Appeal found in favour of Deloitte. All judges conceded that Mr Joseph was ‘entitled to feel aggrieved’ but the firm had acted in accordance with its rights under the agreement. The seven-day limit within which any request for a special meeting had to be made was unambiguous. It was in the agreement to provide certainty – but as one of the judges remarked:
‘As is often the case with strict deadlines, the price of certainty is the potential for complications and unfairness’.
It’s striking to note the unanimity with which the Court of Appeal judges accepted that Mr Joseph had been harshly treated by Deloitte’s insistence on enforcing their strict legal rights. The judges all rejected the appeal with reluctance and were critical overall of the partnership agreement and the way it had been drafted. However their hands were tied.
Those in partnerships should bear in mind that it isn’t the role of the court to re interpret an agreement that has been signed willingly by the partners – all experienced, highly skilled professionals (or as one of the judges in the Deloitte case put it ‘a sophisticated group of signatories’).
As far as the courts are concerned partners are all on an equal footing when agreeing to be bound by a partnership agreement. This contrasts with employees who may have contractual terms imposed on them and who may enjoy greater protection under the law in situations like the one Mr Joseph found himself in.
The case also serves as a reminder of the importance of keeping your partnership agreement up to date and having it reviewed regularly by a lawyer. This is particularly the case if there are major changes to the partnership. In Joseph v Deloiite the clause at the centre of the case was described as not being ‘well thought-through’ – one wonders if the case could have been avoided if a periodic review of the agreement had recommended the clause be redrafted. Legal costs in the case were in the region of £450,000!
We advise on all forms of business structure and draft bespoke partnership agreements and shareholder agreements. For more information please contact director Shubha Nath at Nath Solicitors on 44 (0) 203 670 5540 or contact the firm online.
"Shubha Nath is my go-to lawyer. She provided my department with commercial legal services for the best part of 10 years. She listens carefully to what the business requires, is clear in her explanation of complex legal agreements and frameworks and is incredibly fast at turning round documents. I was so impressed by her I've recommended her company Nath Solicitors to other businesses."Testimonial From Bernard McKeown
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Client comment on company incorporation and advice on a shareholders agreement prepared by Shubha Nath. We felt well advised and Shubha protected our interests immaculately and we are truly very grateful to her for all her help in securing our interests. Director Food Company.Director of a Food Company