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 partnerships 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.
The Facts – Partnerships
A brief summary of the facts are as follows:
- Partner A (90%) and Partner B (10%) owned a professional services business.
- The partnership agreement included a restraint of trade, where Partner B was not allowed to compete with Partner A should he leave the business.
- Partner B decided to leave the business and the principal of Partner B resigned as an employee.
- At the time of resignation, the partnership was not formally dissolved.
- Partner B wrote to a number of existing clients (on partnership B new employer’s letterhead) making a number of misleading statements to entice clients of the partnership to change over to the new employer.
- A number of clients signed the document referred to above without knowing that Partner B had actually left the business and was now working for the third party.
- Partner A was understandably upset as the business suffered a considerable loss of income and the value of the business deteriorated significantly as a result of the departure of these clients.
The Law – Partnerships
A summary of the advice given to Partner A is:
- Claim against Partner B
a) Damages for breach of the partnership agreement in the context of the fiduciary relationship between Partner A and Partner B;
- Claim against the principal of Partner B
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).
- Claim against the third party
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.
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