The recent Court of Appeal case Cheema v Jones and others illustrates the risk for partnerships who are operating without a formal written partnership agreement.
In this case the Court of Appeal considered a dispute in relation to a medical practice. Two existing partners had invited three new partners to join the partnership and the new doctors had begun to work in the practice whilst the new partnership agreement was being negotiated.
Before the new partnership agreement was signed, a dispute arose whereby Cheema (an original partner) had suggested to one of the new partners that the other original partner should retire. As the dispute escalated Cheema was prevented from seeing patients or accessing any medical records and therefore issued proceedings based on the terms of the original partnership agreement.
The issue in dispute was which partnership agreement governed the relationship between the five doctors.
Cheema argued that the original agreement was still in place and that his consent was needed to dissolve the original partnership. The other four doctors claimed that a partnership at will had been created between the five doctors following notice they had served on Cheema to dissolve the original partnership.
The Court of Appeal held that a new partnership had been created as the new doctors had started to work at the practice. As the original agreement was never referenced in the negotiations for a new partnership agreement as a fallback position the court concluded that the original partners had intended to abandon the original agreement. Consequently, the partnership could be dissolved without the original partners’ consent.
This is an interesting case that illustrates that regardless of whether a new partnership agreement has been signed, new partners joining a partnership may create a new partnership causing the original partnership agreement to cease to be effective.
This case reminds us of the importance of seeking adherence on or before ‘day one’ of new partners joining a partnership and this case may also highlight possible consequences for LLPs.