Partnership Disputes Lawyers

Citilawyers provides strategic advice in both protecting and enhancing the interests of our clients in the resolution of complex Partnership Disputes. These disputes can be difficult because Parties are not just commercial counterparts; they are jointly and severally liable for Partnership debts, owe fiduciary duties, and are typically tied together by both personal and financial relationships.

Similar to Shareholder Disputes, Partnership Disputes need to resolve quickly and efficiently to preserve the value of your business asset.

What is a Partnership?

A Partnership, as defined in the Partnership Act 1892 (NSW) is the relationship between two or more persons, companies, or company trusts who wish to carry on a business for profit.

Types of Partnerships

There are three types of Partnerships governed by the Act.

1. Normal PartnershipIn the normal Partnership, each party is equally responsible for managing the business and holds unlimited liability for the debts and obligations the business may incur. Section 24 of the Act governs the rights and duties of Partners in a normal Partnership.
2. Limited PartnershipIn this arrangement, one or more parties have limited liability for the debts and obligations of the business, whilst the other parties hold unlimited liability. The liability of the party is proportional to their investment in the business. Essentially, a limited liability Partner acts as a passive investor, and does not take part in the operations or management of the business. This type of Partnership must be registered with NSW Fair Trading.
3. Incorporated Limited PartnershipThe partnership has the legal capacity and powers of an individual, and well as the powers of a corporation. In this Partnership, there must be one general partner and at least one limited partner. The agreement must be in writing, serving as a contract, and must be registered with NSW Fair Trading. This partnership can:
   • Enter contracts.
   • Acquire, hold or dispose of property.
   • Appoint and act as agents.
   • Create, confer or vary interests in the partnership.

What causes Partnership Disputes?

Partnerships operate on mutual agreement and shared obligations. If a party to the Partnership fails to meet their legal or contractual responsibilities, disputes will follow. The most common causes starting disputes include:

• Disagreements over financial contributions,
• Disagreements over profit distributions,
• Disputes over business strategy, direction, control or decision-making,
• No clarity in roles, responsibilities or expectations,
• Breach of fiduciary duties, or allegations of misconduct,
• Business decisions made without the consent of all parties.

Three key features of the Partnership Act capture most disputes, meaning Partnerships without enforceable agreements can become costly and complex.

1. Mutual AgencyUnder section 5 of the Act, every partner who does any act that is carrying on the usual business dealings of the partnership, binds all other parties to such actions. This means that one partner can bind other parties to dealings without their knowledge.
2. Liability of PartnersUnder section 9 and section 12 of the Act, every partner in an agreement, other than in an incorporated limited partnership, is liable jointly and severally with all other parties for all debts and obligations of the business. This means all partners are liable for any potential debts or breach of duties incurred by one party. Further,

   Note: for an incorporated limited partnership, every general partner is jointly liable.

3. Fiduciary DutiesUnder the Act, partners each owe fiduciary duties. These duties continue until the partnership is wound up.
   • section 28: Duty to render Accounts
   • section 29: Duty to account for private profits
   • section 30: Duty not to compete

Common types of Partnership Disputes

1. Partnership at will vs fixed-term partnershipA partnership at will has no fixed term and can be dissolved by any partner giving notice under section 26 of the Act. This is the default position of an unwritten agreement.

   A fixed-term partnership runs for the agreed time and can only be dissolved prior to the end period in defined circumstances: by agreement, court order, or fiduciary breach.

   The different types of partnerships can cause disputes. The presence or absence of a written agreement is decisive, and where the relationship has run for many years without a written agreement, dissolution rights become significantly more flexible.

2. Partner Exit and ExpulsionOccurs when one party wishes to leave, or the remaining partners wish to remove a partner, the available mechanisms is dependent on the agreement:
   • Written agreement: exit and expulsion typically follow the contract between parties. For more details, see our contract disputes page.
   • No written agreement: section 25 provides no majority of partners can expel unless a power expressly allows them to do so. This means, dissolution can either be negotiated or enacted via section 26 of the Act.

   These disputes commonly concern the valuation of the exiting partner’s interest, treatment of goodwill, retention, and ongoing liability.

3. Dissolution of the PartnershipDivision 4 (for general partnerships) of the Act outlines the ways in which partnership may be dissolved.
   

   Method	Section	Trigger
   Expiration of fixed term	S 32(a)	The agreed term ends
   Completion of single undertaking	S 32(b)	The venture is completed
   Notice by any partner (at will)	S 32(c)	Any partner gives notice
   Death or bankruptcy of partner	S 33	Subject to contrary agreement
   Illegality of partnership	S 34	Any event making the business carried out to be unlawful
   Court order	S 35	Partner’s incapacity, prejudicial conduct, persistent breaches, business being carried at a loss.

4. Accounts on DissolutionOnce a partnership has dissolved, the accounts of the exiting partner must be taken. This type of dispute generally occurs over the accuracy, valuation, and timing of asset distribution. Section 39-43 of the Act outline the steps for accounts on dissolution.

   The rule on distribution on final settlement is strict and must followed to avoid further dispute.

5. Goodwill on DissolutionGoodwill is one of the most disputes issues in a partnership dissolution. Goodwill is part of the partnership’s assets and should be valued and divided like any other asset. In practice, the goodwill of a partnership is often inseparable from the continuing partners who retain it.

   Common dispute triggers include:

   • Valuation disagreements
   • Restraint of trade
   • Appropriation
6. Misconduct or breach of Fiduciary DutiesIf one partner has acted improperly, the other partners have remedies available.

   These include:

   • Account of profits under section 29
   • Equitable compensation
   • Damages for breach of the agreement
   • Injunctive relief to restrain ongoing conduct
   • Dissolution under section 35

How to settle Partnership disputes

There are options available to settling Partnership disputes:

• Negotiation and Mediation

  Negotiation and Mediation are often the first steps taken to resolve these disputes. In this process, parties communicate their concerns and together work to find a mutually beneficial solution. Mediation utilises a neutral third party to facilitate discussions and reach resolution. Mediation can be a less costly and time-consuming process.

• Litigation

  If negotiations are ineffective, or the disputes involves complex issues, litigation may be necessary. Our Litigation Team will provide strategy to find solution for both the best interests of you and party and the business.

How Citilawyers can help

Our team can provide:

• Strategic advice on disputes, from the beginning of a contention through to litigation
• Negotiation of Partner exit arrangements
• Strategy for dissolution options, accounts, injunctive and equitable relief
• Advice of liability of partnership debts and obligations

Early advice is essential once a Partnership dispute emerges. Our Team can help clarify your rights and obligations, assess the risk of litigation, and develop strategy for the most effective path to resolution.

Through negotiation, mediation or litigation, our Team can help protect your business interests and achieve a fair resolution.