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There are advantages and disadvantages of a written and unwritten partnership agreement, as well as common areas of dispute. In this article, we explore both types of partnership agreements and how it may be possible to resolve disputes.

Partnership agreement

A business partnership will generally arise in one of two ways; either there is a formal written partnership agreement in place or the partnership is governed by the Partnership Act 1890. A partnership governed by the Partnership Act is often referred to as a ‘partnership at will’.

The fact a partnership may arise without a formal agreement provides flexibility, autonomy, and a degree of informality to business partners. However, this flexibility and informality can often lead to uncertainty and ultimately to a dispute arising between the partners.

Written partnership agreement

A formal written agreement provides significant advantages. The partners have a framework of terms which they can turn to resolve a dispute or clarify a point of contention.

A poorly written and ambiguous agreement is however likely to only cause further confusion and animosity. A partnership agreement should therefore be tailored to the partnership business and the partners’ aims and ambitions for the business. Partners should not be afraid to explore the ‘what if’ scenarios at the outset of their business relationship. Whilst at the outset of a new business it may be rather awkward and unpleasant to discuss how a future potential disagreement or dispute may be dealt with or what will happen if a partner exits the business, it will undoubtedly make the partnership stronger in the long run if these issues are tackled and addressed early on.

A clear and robust set of terms would invariably avoid escalation of a dispute and preserve business, and personal, relationships.

A written partnership agreement would usually include provision for:

  • How profits are to be shared and distributed.
  • How disputes are to be dealt with and resolved. A dispute resolution clause will usually ensure the partners explore alternative ways of resolving a dispute (such as mediation or arbitration) rather than proceeding straight to court.
  • What happens in the event a partner exits or retires.
  • Calculation and payment of the exiting partner’s interest in the partnership and distribution of assets.
  • What happens if a partner serves a notice to dissolve and how the partnership business may safeguard against dissolution in certain circumstances.
  • The duties and obligations of the partners.
  • Any restrictions on the exiting partner in order to protect the interests of the ongoing partnership business and its partners.

Unwritten partnership agreement: Partnership at Will

A partnership at will generally arises where two or more individuals enter into business with one another with the intention to generate profit and financial gain. Individuals may therefore unexpectedly find themselves in partnership even where this was not discussed or planned. Alternatively, a tenancy at will may arise where the individuals take the view that it is not necessary to put in place a formal written agreement as, for instance, they have known each other for a long time and have “always got on”. This can pose problems as discussed further below.

Where there is no written agreement in place, the partnership will be governed by the Partnership Act 1890. This is a very old Act which has largely remained unchanged since it was passed.

A partnership governed by the Partnership Act will, essentially, mean that:

  1. The profits (and liabilities) of the business are shared equally between the partners – irrespective of the time and capital a partner may put into the business.
  2. If a partner dies or decides to exit the business, the partnership must be dissolved and the assets sold and divided.
  3. A partner cannot be expelled. If the partner(s) wish to remove another partner then the partnership must be dissolved.

Therefore, in the event a dispute or disagreement cannot be resolved, it is likely that the partnership would be dissolved – even if this is not what the continuing partners want. This would have significant and far reaching legal and financial consequences for the partners and the business. Furthermore, the Partnership Act does not include a mechanism for dispute resolution. Therefore if a dispute cannot be resolved amicably between the partners, the default position is for the matter to be determined by the court.

For these reasons it is advisable for a partnership agreement to be drawn up at the outset. A written agreement provides the partners with a level of certainty and safety measures to ensure the business is protected should an issue arise.

Common areas of dispute and ways to seek a resolution

Partnership disputes can arise for a variety of reasons. Often, they involve disagreement over the distribution of profit, arguments over assets (whether owned by individual partners or the business), expulsion of an underperforming partner, and what happens on dissolution.

The key to resolving most disputes is to act quickly to avoid matters escalating or festering. A well worded partnership agreement should direct and guide the partners as to how the issue and dispute may be resolved quickly and efficiently (for example the mechanism for distribution of profits and the mechanism for dealing with disputes). Ultimately this may preserve the relationship between the partners and avoid the need to seek court intervention or dissolve the partnership.

If faced with a dispute, the partners should attempt to resolve their differences internally and between themselves. If this is not possible then the partners could agree to appoint a third party (or possibly the partnership’s accountant) to attempt to open lines of communication and navigate the partners to achieving a compromise. If this is unsuccessful then the partners could agree to refer the matter to mediation (where an independent and trained mediator will attempt to facilitate a compromise and resolution of the dispute) or by way of ‘Expert Determination’ (where a third party, such as an accountant or surveyor, makes a determination of the issue and dispute which the partners agree to be bound) as an alternative to court proceedings.

If it is not possible to reach a negotiated amicable settlement then, ultimately, it will be necessary to issue court proceedings in order to determine the issue or dispute. Proceedings are time consuming (often taking 18-24 months to conclude at a final trial hearing) and the legal costs can be significant. For this reason court proceedings should be viewed as a last resort.

Prevention and de-escalation of a dispute is by far the better strategy. For this reason it is always advisable to put a partnership agreement in place – this could not only save time and costs but it could also preserve the business or personal relationship between the partners.


Our Commercial Dispute Resolution team are able to provide specialist partnership advice, whether it be setting up a partnership, the running and governance of the partnership, or the resolution of a dispute.