Carrying on Business for Profit is Necessary Ingredient of Partnership

In the context of a bitter falling-out between former colleagues in a highly profitable asset management business, the Court of Appeal has acknowledged that certain aspects of the law on the formation of partnerships could usefully be clarified. The Court emphasised that it is not the mere agreement to establish a partnership that renders the parties partners within the meaning of Section 1 of the Partnership Act 1890 but the actual carrying on of a business with a view to profit.

The claimant and three associates (the individual defendants) had decided to establish a new business but had appreciated from the outset that they would have to join forces with an established organisation in order to obtain finance for the venture and the required approval under the financial services regulations.

They duly became limited liability partners in an existing asset management firm through which they operated their venture under a profit-sharing agreement. The business, which was operated as a division of the firm, generated profits of £19 million in three financial years. Differences emerged between the claimant and the individual defendants and he was removed as a partner. He went to court to claim a share of the profits.

In dismissing the claimant’s appeal against the decision of the lower court, the Court of Appeal ruled that he and the individual defendants had not been partners at the inception of their business relationship and that his financial claims against them therefore could not succeed.

The Court noted that the claimant and the individual defendants had started out with a concept for a new business but, until their link-up with the firm, they had had no means of creating any profit. External funding, a working business model and regulatory approval were regarded as vital pieces of the jigsaw by the four men and, until those issues were resolved, there had been no binding relationship between them. Any other conclusion would be contrary to common sense as the parties had clearly contemplated that the nature of their relationship would ultimately depend on the nature of the vehicle chosen for their business.

Concluding that the claimant’s case against the firm was also ill-founded, the Court ruled that, on a correct interpretation of the profit-sharing agreement, his entitlement to a share of profits ceased following his receipt of the notice that he was being removed as a partner. The Court acknowledged that its ruling ‘entailed harsh results’ for the claimant but noted that it had no power to rewrite the agreement to accord with what it might think fair.