Varying partnership agreements by conduct?

Posted: 7th March 2019

contractPartnership agreements commonly set out the percentage of profits and losses to be respectively enjoyed and borne by each partner. Such terms can subsequently be varied by conduct but, as a High Court case showed, written documents will generally prevail in the absence of compelling evidence.

The case concerned two partnership agreements between two dentists each in respect of one dental practice. The female dentist was married to the nephew of the male dentist. The latter did not work in either practice, but he and his family had provided the greater financial contribution to the partnerships.

Both agreements provided that profits and losses would be equally shared between the partners. However, during the first practice’s initial two years of operation, the male dentist had consented to the female dentist receiving all the profits. A dispute crystalized after the female dentist and the nephew divorced and the matter was submitted to an arbitrator for resolution.

The arbitrator found that the partnership agreement in respect of the first practice had been varied by the course of dealings adopted by the dentists so that the female dentist was entitled to 100 per cent of profits generated on an ongoing basis. The variation was signalled by the male dentist’s conduct in instructing the partnership accountant that the female dentist was to have 100 per cent of the profits in the first two years of trading and in signing the relevant accounts.

In overturning that decision, the Court noted that the partnership agreement stated in terms that any variation ought to be in writing and executed as a deed. The arbitrator had erred in law in overlooking the need for clear and unambiguous conduct from which it could reasonably be concluded that there was an intention to vary the agreement.

The male dentist’s sacrifice of his profit share in the first two years of operation could reasonably be interpreted merely as a waiver of his entitlements for that period, rather than an abandonment of his rights over the longer term.

In respect of the second practice, the arbitrator had found that the female dentist was entitled to 65 per cent of profits on the basis of the greater work she had put into the business. Also overturning that decision, the Court found that there was no conduct or agreement that could, as a matter of law, amount to a variation of the partnership agreement. The male dentist had in any event been afforded no opportunity to deal with that issue and the arbitrator’s decision was thus infected by a serious procedural irregularity.

Amending the arbitrator’s award in line with its ruling, the Court found that there had been no variation of either partnership agreement and that the partners had thus been entitled to share profits and losses equally throughout. Costs orders made by the arbitrator were also varied to reflect the changed outcome of the proceedings.