Without a partnership agreement keeping it alive after the death or departure of a partner, the firm dies also.

So any well-written partnership agreement keeps the firm alive and gives the continuing partners an option to buy out the share of the departing partner.

Typically such provisions provide for:

• ascertainment of the value of the share to be paid by the continuing partners
• payment of that value in instalments.

The reason for instalments is to protect the functioning of the business. That all makes sense.

But sometimes the drafting of the provisions – and parties’ attempts at compromise – go wrong.

That was the case for the farming partnership in Liddle v. Liddle  [2019] EWCA Civ 346 where the English High Court decided that the continuing partners should pay a lump sum instead of continuing instalments.

FACTS

The farm had 7 partners. The partnership agreement provided that upon the exercise of the option the firm’s accountants would prepare a balance sheet at the date of departure but with the assets (other than goodwill) being shown at their market value at departure with the value to be “agreed between” the parties and failing agreement within 2 months after the exercise of the option to be decided by a valuer acting as an expert.

The price would be paid in 40 equal quarterly payments the first to be made after 2 months after the expiry of the period for exercising the option.

If any instalment remained unpaid for more than 21 days after the due date the whole balance of the price would become payable.

One partner died in December 2011, another retired in April 2012 and a third retired in Octber 2013.  The relevant continuing partners duly exercised their options to purchase.

A dispute arose over the market value of the assets. Parties agreed that instead of accounts as at the dates of departures being made up the annual accounts nearest the departure dates would be used by the partnership accountants who would produce accounts showing assets both unrevalued and revalued.

There was delay in producing the accounts and the outgoers raised court proceedings seeking an order for implement of the payment provisions even though the amount due hadn’t yet been ascertained.

The judiciary at first instance held that the partnership accountants were not acting as experts and so their valuation was not binding under the agreement.  They also held that the dwellinghouses owned by the partnership should be valued on a vacant possession basis and that the outstanding issues including the valuation should be assessed and decided by the court.

Before the court could make the decision the continuers’ solicitors accepted the valuations suggested by the partnership accountants.

The continuers contended that the agreed sums should be paid in the 40 equal quarterly instalements and paid the sums that would have been due up to the date of agreement.

The outgoers contended that as the initial and subsequent instalments had remained unpaid for more than 21 days after the due date, the whole balance of the price had become payable.

The judge at first instance agreed with the outgoers, finding the provisions of the agreement to be clear despite the parties’ disagreement as to value. The continuers appealed to the English Court of Appeal arguing that on a proper interpretation of the agreement the liability to pay any instalment arose only upon the price being agreed and that there was no breach in payment of an instalment that would trigger the payment of the whole price.

The Court of Appeal decided that

1. the liability to pay any part of the price under the agreement only arose upon the ascertainment of the price
2. the price was ascertained at the point when the accountants (not acting as experts), issued the accounts with the price and not at the point when the continuers accepted the price in the accounts
3. no part of the price was paid within 21 days of the accountants issuing the accounts and therefore the whole price was payable by the continuers to the outgoers at once.

DISCUSSION

Suspensive conditions for payment (conditions precedent to payment)

It is not clear that the court’s reasoning would be followed in Scotland, although the result would be the same.

Upon the exercise of the options a contract of sale arose for the sale of the outgoers’ (the sellers’) rights under the partnership agreement to the continuers (the purchasers).

The price under the contract was to be ascertained as per a balance sheet prepared by a third party (the firm’s accountants) with the value of the assets to be agreed by the parties failing which determined by an expert.

The agreement made it clear that the first instalment of price was due to be paid within 2 months after the expiry of the option period and that if the instalment remained unpaid for over 21 days then the whole price would become instantly due.

It seems clear that the continuers’ obligation to pay the price was subjected to a suspensive condition that the price be ascertained in the method provided. Not only that, but the price would have to be ascertained in the method provided within 2 months of the expiry of the option period. Otherwise the first instalment could hardly become due.

Here, for whatever reason, the parties agreed to depart from that suspensive condition dispensing with both the method for ascertaining the price and also the implied time limit for ascertainment.

While they agreed, implicitly, for the court to decide the values (in the absence of their agreement) and therefore the price, they did not agree to alter the time limit upon which an instalment would become payable.

In that situation, absent a variation of the instalment provision, the default position under s.43 of Partnership Act 1890 would apply, namely that the continuers would have to pay the whole amount due to the outgoers as a debt due at the date of their departure.

Lessons

From the perspective of continuing partners it’s important to secure the payment of the outgoing partners’ share in instalments and to ensure that the suspensive conditions for their duty to pay in instalments as provided in the partnership agreement are fulfilled – and indeed fulfillable.

The payment of the first instalment should be tied to the binding ascertainment of the price and not an unrealistic timescale.

A failure to do so will result in a lump sum being made payable under the Act – with cash flow difficulties for the firm.