Can a partnership at will be dissolved simply on notice?

Imagine that your partnership is on the cusp of concluding a large transaction which has the potential to be immensely profitable. The partnership agreement does not include a fixed term for the partnership, and can instead be terminated on one partner giving notice to the others (referred to as a “partnership at will”).

Unfortunately, prior to the conclusion of the transaction, one of the partners falls out with the rest of the partners. Motivated by his own self interest and contrary to the best interests of the partnership, that partner decides to engage directly with the prospective entity in a personal capacity and at the same time serves notice to dissolve the partnership.

As notice has been served, the partnership at will is dissolved and simultaneously the serving partner benefits personally from the conclusion of the lucrative transaction. Can this happen without the remaining partners having any right of redress?

The Partnership (Guernsey) Law, 1995 (the “Partnership Law”) sets out the grounds for dissolution of a partnership at will and states at section 31(1)(a) that it is “dissolved if entered into for an undefined time, by any partner giving notice to the others of his intention to dissolve the partnership”.

For the purposes of this article we will examine the position of a partnership at will and in particular what factors must be considered for the valid service of a notice of dissolution. In doing so the following questions arise: i) what factors and circumstances (if any) must be considered for a just and fair service of the notice of dissolution by a partner upon a partnership at will, ii) whether the factors which motivated the termination must still comply with the partner’s overriding fiduciary duty and iii) whether the absence of good faith might be considered as a ground to prevent dissolution.

The Guernsey Royal Court clarified the axiomatic principle in Ogier v Jeffreysⁱ that “every member of a partnership owes a duty of the utmost good faith to every other member”. However, in order to consider if the Court might extrapolate that duty to the service of a notice of dissolution (and in the absence of any Guernsey authority on the issue) we will need to consider persuasive authority to gauge how Guernsey law might be developed.

Lindley and Banks on Partnershipⁱⁱ consider that in circumstances where the notice is served for an improper purpose or some element of mala fides then in those circumstances the court would not uphold the notice. Lord Lindley observed that “… the court can restrain an immediate dissolution and sale of the partnership property, if it is appears that irreparable mischief will ensue from such a proceeding.”

It follows that the service of a notice of dissolution must be exercised in accordance with a partner’s overriding fiduciary duty. In the English decision of Neilson v Mossend Iron Co¹, Lord Watson when referring to a partnership at will said “… it is an implied term of such a contract that each partner has the right instantly to dissolve the partnership whenever he thinks proper. The right must, of course, be exercised bona fide, and not for the purpose of deriving an undue advantage from the state of the firm’s engagements”.

Closer to home, it is instructive to consider  the Jersey decision of Canon v Nicol². In considering the customary law, the Court³ turned to Pothier who said that “a partnership with no limit may be dissolved by any partner subject to two conditions: it is a prerequisite that such notice must be given in good faith and it is also a prerequisite that the notice should not be given at an ‘unseasonable time’”. Pothier goes on to explain that a partner giving notice, so that he may take for himself some benefit which would accrue to the partnership if it were to continue, would have to account to the partnership. Further, that partner would not meet the requirement of good faith, and notice would be viewed as having been given at an unseasonable time, if for example, it would be in the common interest of the partnership to defer dissolution.

In a modern commercial context, the Guernsey Court may take issue with the concept of an “unseasonable time” as being vague and creating further potential uncertainty. However, the concept is, broadly speaking, in keeping with the English authorities and the concept of an “improper purpose”.

Considering the above authorities in the round, it may be successfully argued that in circumstances where a partner intends to proceed with the dissolution of a Guernsey partnership at will, the notice must be served in accordance with the overriding duty of good faith owed by a partner.

In conclusion, in the event that a partner serves a notice of dissolution with an ulterior motive which demonstrates an improper purpose or mala fides, then under those circumstances it may be successfully argued that the Guernsey Court would prevent the dissolution of the partnership or at least force the defaulting partner to account to the other partners for any “undue advantage” accruing as a result of their act of bad faith.