Partnerships – when differences of opinion become legal

It is rare to see a decision surrounding the facts of a professional services partnership dissolution. However, substantive insight to the application of legal principles surrounding the dissolution of partnerships was given in the case of Bishops v Goldstein earlier this year.

The partnership of two lawyers was originally to be for the defined term of four years with guaranteed levels of profits to be paid to Mr Goldstein, one of the partners. It terminated early in this case by the agreement of Goldstein and Mr Bishop as a result of Bishop’s conduct.

If Goldstein had brought himself within section 35 (d) of the Partnership Act 1890, where one of the grounds confers a discretion on the court to give a decree of dissolution, he would have been able to claim for damages for breach of the terms of the partnership agreement.

The High Court Judge had already found (a) if, rather than dissolve by agreement, Goldstein had sought a dissolution under section 35 (d) of the Act he would have succeeded; (b) the conduct of Bishop which had by then made it not reasonably practicable for Goldstein to carry on operating the business; and (c) the breaches detailed had indeed been the cause of the earlier, consensual, termination of the partnership.

Points (a) and (b) were not disputed but (c) was challenged on the basis that it was not the conduct that brought the partnership to an end by consensual agreement. Technical points concerning the partnership being terminated by repudiation as a result of Bishop’s conduct and relating to the ‘last straw’ doctrine were pleaded.

The Court of Appeal found that such doctrines had no application in partnership law. In particular, the specific breaches were symptoms of a more fundamental failure by Bishop to comply with his partnership duties.

The court made it clear that it should not be assumed that damages would be the only appropriate remedy in the case of a partnership agreement breach. Partners owe duties to each other, for example, the duty of good faith, imposed by law by virtue of the nature of the relationship.

The agreement no doubt sets out important parts of the details and terms of that relationship. It may be that some forms of breach of duty would better be treated as giving rise to claims for compensation in equity, or a liability to account, rather than a simple claim for contractual damages.

If one party seeks to squeeze the other out or otherwise conduct themselves in a manner which makes it intolerable or impracticable for the other to carry on the business, and this causes the innocent party to dissolve or agree to the dissolution of the partnership earlier than would have otherwise occurred, then it is necessary for the law to recognise some means whereby the innocent partner can be compensated for consequential loss.

It may in the end be little more than a matter of terminology whether compensation is described as damages for breach of the partnership agreement. SJ

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