Posted by: Glenn Ferguson | Date: 22 July 2011
I recently was involved in a case where I acted for a partner of a business (90% ownership) who had experienced considerable angst when the other partner (owning a 10% interest) departed the business and took with him approximately 60% of the client base.
This matter highlighted to me, and all parties involved, the quite severe consequences that apply if a partner breaches his/her duties towards the other partner in a business.
A brief summary of the facts are as follows:
A summary of the advice given to Partner A is:
a) Damages for breach of the partnership agreement in the context of the fiduciary relationship between Partner A and Partner B;
b) Damages for misleading and deceptive conduct under the Trade Practices Act (now the Australian Consumer Law);
a) a claim based upon a statutory cause of action as a Director of Partner B, pursuant to section 197 of the Corporations Act;
b) Damages of breach of the fiduciary duty between the principals conduct in orchestrating the breach of the partnership agreement;
c) Damages for misleading and deceptive conduct under the Trade Practices Act (now the Australian Consumer Law).
a) Damages because of the third party’s “knowing assistance” to Partner B in orchestrating the breach of partnership agreement; and
b) Damages for misleading and deceptive conduct under the Trade Practices Act (now the Australian Consumer Law).
The legal remedies that Partner A was entitled to included:
a) An injunction against Partner B, the principal of Partner B and the third party to stop them from acting for the clients that had unlawfully been taken from the business;
b) An account of profits for all monies received by Partner B, the principal of Partner B and the third party;
c) Compensation for the loss of commissions that would otherwise have been likely to have been received by Partner A, but for Partners B breach, or alternatively a capitalisation of the value of that loss of commissions.
The matter was settled on a confidential basis, at an early stage, without the necessity to institute Court proceedings.
This matter highlighted the need to:
a) Conduct a thorough due diligence on parties before you enter into a partnership;
b) Have a properly constructed partnership agreement (in this matter we were able to rely upon the terms of the partnership agreement);
c) Be fully aware of your obligations as a partner (and your other partners obligations towards you) in the conduct of your business;
d) Complete very detailed records of your client base and your activities in dealing with clients, as this information was critical in demonstrating Partners A case against Partner B.
Please do not hesitate to contact me if you would like any advice in relation to your obligations as a partner, or setting up your partnership agreement. Partnerships are a great way forward for many businesses however, it must be setup correctly.