In its decision in the recent case of Eaton v Caulfield, the English Chancery Division (Companies Court) highlighted the importance of the members of partnerships formalising their relationship by way of a partnership agreement.
Mr Eaton and Mr Caulfield, along with another third party, worked together as recruitment consultants and had portrayed themselves as a partnership for a number of years. Their relationship was formalised in 2007 with the incorporation of a LLP, but without the three parties ever entering in to a LLP agreement.
In 2008, the relationship between Mr Eaton and Mr Caulfield broke down with the result that Mr Caulfield expelled Mr Eaton from the business. Mr Caulfield took the view that he was the "boss" in the partnership and that, by reference to a document headed "Business Rules and Guidelines" (signed by the parties more than a year before the incorporation), he had the power to expel Mr Eaton. Mr Eaton contested this, claiming that he had been unlawfully expelled and that his expulsion was unfairly prejudicial.
In the absence of any written agreement between the parties, and subject to any agreed oral provisions, the provisions of the Liability Partnerships Regulations 2001 applied, under which Mr Caulfield had to show that a power of expulsion had been expressly agreed.
Having looked at the parties' relationship (including correspondence and evidence of discussions between them), the court found that there was nothing to support Mr Caulfield's assertion that the parties had agreed to him having a power of expulsion, nor would the court imply such a power, as it was not satisfied that the parties, as reasonable men, would have agreed to such a term if it had been suggested.
It was found that there was no justification for Mr Eaton's expulsion from the partnership, that there was a failure to make a reasonable offer to purchase Mr Eaton's interest in the partnership and that Mr Eaton had suffered unfair prejudice as a result. It was held that there was a complete breakdown in the relationship between the parties and Mr Eaton was entitled to have the partnership wound up.
This decision serves as a reminder of the importance of entering into a formal agreement for any partnership that is formed so as to best protect your interests with expressly agreed provisions. All partnerships should ensure that a suitable agreement is in place so as to clearly define the relationship between all members.