Partnerships are common within the farming industry because they can be formed with relative ease and at little expense. They are also governed by less bureaucracy not being subject to the same level of regulation applying to other business structures, such as in the case of a private limited company.
Partnerships can be set up without a written agreement and for this reason, many exist without appropriate documentation governing the relationship of the parties. The farming sector has a tendency of making arrangements and ‘doing a deal’ without committing pen to paper predominantly for two reasons – firstly, because it is cheaper and quicker and secondly, because it is part and parcel of the agricultural mindset that ‘it will be alright on the night’. In most cases, partnerships thrive on the hard work and graft of those involved but this does not always play out. Disputes can take place leading to a complete breakdown in mutual trust and respect.
If the reader takes anything from this piece, it is the need to realise just how important it is to put in place a written partnership agreement. In the absence of a written agreement (or if a written document is inadequate) the default provisions of the Partnership Act 1890 (and no ‘1890’ is not a misprint) will apply. The main provisions of the Act are as follows:
- Partners are entitled to share equally in the capital and profits of the business.
- Partners must contribute equally towards losses (capital and income).
- The death or bankruptcy of a partner will automatically dissolve the partnership.
- On dissolution, the continuing partners have no right to buy the share of the outgoing partner – the default position being that the partnership is wound up under s.44 of the Act and assets sold after final settlement of accounts. Each partner is entitled to be paid out their share of capital, after debts and liabilities have been paid.
If a partnership has evidence of a course of dealing and practice, this can be relied upon to take the parties away from certain provisions of the Act. This can be particularly important because some provisions of the Act are viewed as unfair and rather draconian.
Partners have a financial duty towards one another i.e. a legal obligation to act in the best interests of each another and further, a duty to act in ‘good faith’. They should be open and frank in relation to disclosure and information. Lastly, they have a duty to account to the business for any profit and/or benefit derived from the use of the partnership property, without the knowledge of the other partners.
The beauty of the partnership relationship is the practical efficiency by which the business can be run when relations are on a sound footing. Farming partnerships regulate the ownership of significant assets, which often will have been passed down from one generation to the next over many years. However, when things fall apart matters can become toxic causing deep financial and personal wounds to the enterprise and personalities involved. Accordingly, you act at your peril if you consider that a gentleman’s agreement or family relationship without more, will weather the storm. Last resort litigation (with all the associated costs) for an order to wind up the business and sell the assets, can be avoided by putting in place an appropriate written agreement.
Agri Advisor Legal LLP receives regular instructions from farmers to prepare written agreements and acts for several partnerships embroiled in disputes, in what is increasingly a growth area.