Why written partnership agreements are important - lessons from the UK Court of Appeal
Cobden v Cobden – Why Written Partnership Agreements are Important
Two brothers and a dairy farm owned 50:50; with no written agreement in place, what could possibly go wrong?
As it turns out, quite a lot. So much so that the Court of Appeal had to depart from very well settled principles of law to do justice, in circumstances that could very easily have been avoided or planned for.
What happened?
Daniel and Matthew Cobden operated a dairy farming business as equal partners in a partnership since 2006, after a third brother left the business, that they had all inherited from their parents. Around the time of them buying out their third brother, it was held that Daniel had said that Matthew could buy him out of the partnership as he would like to leave the business at some point. There was never a formal partnership agreement nor anything that documented the conversation about Matthew being required to buy Daniel out. In reliance on that discussion, Matthew started to make significant efforts to improve the business.
Matthew was the driving force behind the growth of the dairy business and when he fell out with his brother he sought to buy him out at a fair price as he has thought they agreed, in fact he offered him a sum that was above an independent valuation. In the end, Daniel refused to sell, and so Matthew sought not only a court declaration to dissolve the partnership but also an order (a Syers order) to compel Daniel to sell his interest to him at a fair value, based on alleged mutual understandings from discussions in 2005/2006 and a later discussion in 2021.
The judge at first instance concluded that there discussions between the brother about the buyout did take place and the circumstances relating to the dissolution of the farming partnership were “exceptional” enough for the Syers order to be made and Daniel would be required to sell his interest in the business to Matthew for £3 million. Daniel appealed the decision.
The Court of Appeal dismissed the appeal. It agreed with the trial court. In its judgment it emphasised that the conditions for a Syers order were not exhaustive and that a Syers order can by justified on the basis it would serve the interests of justice on the facts of the particular case in hand. In this case, Matthew has relied to his detriment (investing all his time and money in the dairy business) on the expectation that he would one day buy out Daniel at a fair price and continue the business alone and that there was a shared understanding between the brother.
Implication of the case
While this case gives a small glimmer of hope for those in partnerships without a formal written partnership agreement if there is clear evidence one partner relying to his detriment, and there is a shared understanding between the partners in relation to the detrimental reliance, a Syers order may be justified. However, it is still very risky for partners or any business associates to rely on an informal arrangement, particularly where the parties involved are with family or friends, as all parties involved are exposed to uncertainly, costly and emotional disputes and outcomes that do not reflect one or more parties’ intentions which can also cause unintended consequences. More importantly, it will likely lead to an irreconcilable breakdown in, and eventual end to, the relationship.
It is therefore important to have a written partnership agreement which deals with key issues such as dispute resolutions and exit strategy front the outset, so all partners know where they stand. While there are some costs to put a formal written agreement in place, it is still a substantial saving in comparison to the possible costs you might incur for a dispute in the future; not to mention the uncertainty, the time and the disruption it can cause to the business!
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If you have any questions or need guidance on how to formalise your business arrangements with partners and business associates, our corporate legal team is here to help.