BALDWINS • FoodLegal

Australian Lawyers and Consultants

Partnerships made in Heaven

July 1998 (reviewed May 1999)

In the generation of our grandparents, many business partnerships may have been formed on a handshake. How was this possible? Even in those days, lawyers did exist too.

One possibility is that the partners were bound by family kinship ties that would have been stronger in effect than any detailed partnership document. Even in the case of a partnership with a non-family ‘outsider’, there could have been community sanctions in some trades so that, for instance, an errant Flinders Lane trader might suffer community castigation for improper conduct vis-à-vis his partner. Alternatively, the nature of the profit-sharing partnership was confined to fixed roles so that the scope for misunderstanding could be minimized. For example, if one partner was supplying the money and the other was providing his labour, both partners knew where each stood from the outset. The partnership would only need to last until either the moneyed partner withdrew his money or the labour provider ceased providing his labour. If there were partnership assets, the partners had already agreed on who had the power to sell these. If the labour-providing partner had insisted on security of tenure, he might have been given a definite lease or employment package from the outset which would limit the scope for arguments at the end of the partnership venture.

By most accounts, it seems that we now live in a more litigious society than the era of our grandparents. The driving force for joint ventures or partnerships nowadays is also quite different since the economic circumstances are different. Whereas our grandparents produced goods to sell into markets that were in short supply, today there is an abundance of competitive supply of goods. Considerable business growth nowadays has come from the services sector. Typically, the partners in a business partnership today may each have sufficient financial capability to operate independently but perhaps prefer to merge their business as a "strategic joint venture" to enjoy the benefits of reduced competition when market demand for the product has not been growing. Or perhaps, high cost of an investment in a new technology or other needs have driven people to share the business risks with someone whose ‘connection’ can offer other business benefits.

A documented partnership or joint venture agreement is absolutely essential in the complexities of business alliances today.

A fundamental concern of any partnership nowadays is to reach agreement on the terms of any future separation of the partners such as when a principal director of one of the partners dies. Does each of the remaining partners intend to go into business with the family members of the deceased director? Apart from deciding on the events that ought to trigger a partnership buy-out or sale, there are numerous other issues that can be documented in the partnership agreement. These might include:

• deciding what assets belong to the partnership
• how much notice needs to be given to the other partner(s) by a partner wishing to leave
• whether the remaining partners should have an outright option to purchase, or a limited right of first refusal to purchase before the outgoing partner can sell to someone else
• whether the partnership assets are to be valued (and by whom) or whether they are all to be sold publicly or distributed in kind to the partners
• the terms of payments (including repayment of credit and debit loan accounts) and the purpose to which insurance proceeds (e.g. life insurance) will be applied
• the security for outstanding payments
• the indemnities to be given between the parties in relation to previous and future liabilities of the business
• preservation of the right to defend potential future claims either from creditors or tax authorities
• the imposition and extent of restrictive covenants
• ownership and maintenance of insurance policies that are effected either for buy-out funding purposes or against potential business liability exposures.

There are numerous other issues and permutations. Whilst some partnerships may well extend beyond the death of a director of one of the partners, there is little scope to rely on negotiations from heaven. These matters are best resolved whilst all of the principals are alive.

For further information, contact Joe Lederman at BALDWINS, Australian Lawyers & Consultants.

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