Is your Partnership Agreement up to Scratch?
A recent case involving a GP practice has again brought into focus the importance of ensuring an appropriate partnership agreement is in place, and the need to update the agreement as the partnership evolves.
In Samrath Singh Cheema v Stephen Jones, Reshma Rasheed, Mita Roy & Meenakshi Rawal the GPs' partnership was governed by the terms of a written partnership agreement. However, the court considered that when three new partners joined the practice without signing the written agreement the partnership became a partnership at will. In this case all that was needed to dissolve the partnership was for one of the partners to serve notice of dissolution, because the terms of the written partnership agreement no longer applied.
How Did this Happen?
Upon commencing practice together, Dr Cheema signed a partnership agreement with Dr Jones. Soon they wanted to take on new partners. The decision was taken to accept three new doctors to join the practice and a new partnership agreement was prepared.
The three new doctors started work and took part in weekly practice management meetings with Dr Cheema and Dr Jones. Meanwhile, the proposed new partnership agreement was not signed, and before they got round to it, a dispute arose. Dr Cheema's fitness to practice was questioned by the other doctors, which led to Dr Jones sending a notice to all the partners purporting to dissolve the partnership immediately. Did this notice effectively dissolve the partnership? And if so, what governed the relationship between the doctors?
The Court of Appeal decided the five doctors clearly considered each other as partners. They had started off as a partnership at will, with an intention to enter into a new written partnership agreement in future - which they never got round to doing. This partnership at will superseded the old written partnership agreement between Drs Cheema and Jones and there was no evidence that the new doctors had ever agreed to be bound by the old partnership agreement.
As the doctors were operating as a partnership at will it could be dissolved by any partner at any time. Dr Jones had therefore validly dissolved the partnership at will, and the partnership's practice had to be wound up. Accounts were prepared to divide the partnership's assets.
Lessons to be Learned
Complications often arise where draft agreements are prepared but not signed, or are signed by some partners but not others. Another common situation which causes issues is where formalities are set out in a partnership agreement as to how a new partner is to be admitted, but that procedure is not followed.
Cheema is in line with established partnership law authority on these issues and highlights the importance of agreeing to and updating the terms which govern how your partnership will operate. The case again confirms the dangers of not entering into an appropriate written agreement and of failing to keep an existing document updated. Take home point: make sure that when you are taking on a new partner, they sign the partnership deed on or before the date they join. If you leave it till later you risk finding yourselves in the same position as the partners in Cheema v Jones.