Successful business partnerships ultimately depend on good relations being maintained between the partners but, if there is a falling out, a professionally drafted partnership agreement at least means that you know where you stand. The clear and unambiguous wording of one such document enabled the High Court to finally resolve a dispute concerning a family farming partnership.
The partnership initially comprised seven members. The agreement on which it was based set out in detail what was to happen if any of the partners resigned, died or otherwise ceased to be a partner. Outgoing partners had the benefit of a put option – they could give notice to the continuing partners, requiring the continuing partners to buy them out. Similarly, the continuing partners had the benefit of a call option – they could require outgoing partners to sell them their share of the business. In both instances, the price payable was to be fixed by an accountant.
Put options were exercised after two of the partners resigned and another died. The price payable by the continuing partners in each case was agreed. However, a dispute arose as to whether late payment had caused the relevant sums, initially payable by instalments, to become payable in a lump sum.
The agreement provided for 20% of the purchase price to be payable immediately to outgoing partners or their heirs, so long as they vacated any home that was owned by the partnership. The remaining 80% was payable over a 10-year period, in 40 quarterly instalments. However, the partnership agreement also provided that, if any of those instalments was in arrears by more than 21 days, the whole price would immediately become payable – this was called the “acceleration clause”.
In upholding claims brought by the two outgoing partners, and the executor of the estate of the other, the Court found on the evidence that the acceleration clause had been triggered and that they were entitled to receive full payment for their shares in the business immediately. The acceleration clause was clear and unambiguous, was workable and, on the facts of the case, made commercial sense.
If the original partners had not had a partnership agreement, the disputes arising would undoubtedly have taken far longer to resolve, and the cost of resolution, in terms of lawyers’ fees would have been far greater, and maybe even have exceeded the total value of the business.
If you need any advice about partnership agreements, please contact Roy Colaba on 0121 698 2231 or r.colaba@sydneymitchell.co.uk
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