When is a Course of Conduct not a Course of Conduct? - Partnership Act 1980

News / When is a Course of Conduct not a Course of Conduct? - Partnership Act 1980

Last Updated on 10/06/2019

When is a Course of Conduct not a Course of Conduct? - Partnership Act 1980

 

 

 

Partnerships are a good way to start up new businesses and carry on trade for small to medium revenue return. Typically, partnerships continue even after sales and businesses take off and the partners reap the rewards.   

In the UK, partnerships are governed by the terms of a written Partnership Agreement (if one is prepared), and the Partnership Act 1890. As the business in a partnership evolves, so too may the terms of the Partnership change from the original Agreement. How does the law approach such change?

Section 19 of the Act states:

“The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing”

This section of the Act came up for further discussion in the recent Dakshu Patel v Kesha Patel [2019] EWHC 298 (Ch) on 18 February 2019. In unusual circumstances, the case came before the High Court as a challenge against an Arbitrator’s award given in the dispute; on the basis that the Arbitrator had erred in law in granting that award (Sections 68 and 69 of the Arbitration Act 1996).

The parties were both dentists and the Defendant was married to the Claimant’s nephew. Many dental practices choose to run business via a partnership as do G.Ps and the parties entered into a written Partnership Agreement in relation to a practice in Purley. The Agreement stated that they would share profits and losses equally. A year later, they bought a second practice in Mitcham and entered into a second Partnership Agreement, again providing that profits and losses would be shared equally.

It was always intended that the Claimant would not work at either of the practices and instead the Defendant carried out the day to day work and managed both practices.

In the two accounting years at the Purley practice, 100% of the profits were allocated to the Defendant. The Claimant confirmed this to the partnership accountant and both parties signed the accounts, although there was no communication between them on the point. The Defendant's marriage broke down and during the following accounting period, the parties could not agree on the partnership accounts.

The matter was referred to Arbitration and the Arbitrator first concluded that the accounting practices amounted to a course of conduct pursuant to section 19 of the Act that varied the Partnership Agreement. He went on, rather unusually, to conclude that in his cross examination of the parties in Arbitration they both agreed the Defendant carried out more work and that work be recognised. Therefore he concluded that in providing their testimony, that the share of profits at the Mitcham practice had been varied and therefore the Arbitrator held the variation was offered and accepted and therefore agreed upon within the Arbitration itself.

The Claimant could not be blamed for bringing the matter before the High Court to challenge the Arbitrator’s approach and the Judge agreed that the Arbitrator had been wrong in reaching such conclusion.

The Court confirmed that in examining the “course of conduct” it was not necessary to look at the number of occasions an event took place, although the smaller the number the harder the task is to prove a course of conduct. It was, however, necessary to look at the matter objectively as to whether there is clear and unambiguous conduct intending to vary the existing Agreement. 

It would be expected that a course of conduct would have to establish acceptance by both parties in a contractual sense to a variation to the existing agreement. It would also be expected for there to be some consideration for that variation (although in terms of a partnership, it can be assumed that an agreement not to terminate the partnership if the varied terms are agreed, would be sufficient consideration). The conduct would have to be clear and unambiguous and objectively capable of some degree of certainty.

As such, the Court held that allowing the two years of accounting procedure by the Claimant, could just as much be a waiver of his right to claim an equal share of the profits rather than an actual variation of the Agreement for the foreseeable future. He held there had been no variation to the Agreement in respect of the Purley practice. This result fitted in with the terms of the Agreement itself which stated that failure or delay in enforcing a term did not affect the right to enforce that term subsequently, and that variations to the Agreement ought to be in writing.

Not surprisingly, the Judge held that he had never come across a variation of a partnership taking place whilst giving witness evidence in a case and he held that there had been no variation of the Agreement in terms of the Mitcham practice. 

Whilst this is a harsh result for the Defendant who carried out all of the work at both practices, perhaps the lack of clear discussion between the parties beforehand in addition to the infancy of the businesses was also taken into consideration by the Judge.

Manisha Modasia at Clear Commercial specialises in commercial litigation and can assist with partnership disputes in all business sectors. She can be contacted on 0161 873 2797 to discuss further.  

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