Case Study

High value multi-party partnership dispute

Gannons recently defended a professional services firm against an action brought by more than fifty claimants, each of whom were in partnership with our client. Our client operates a business with high-street branches all over the country.

Some of these branches are wholly owned by our client, but many others are operated as partnerships between our client and the professional (or professionals) offering services from the branch.

Our Client’s history

Beginning as a small number of London-based practices in the 1990s, our client has expanded to become a truly national operation. They were keen to develop a group structure that would incentivise the professionals that worked in their branches. After experimenting with a franchise model, our client opted instead for a network of partnerships, believing that the ability for a professional to share equally in the profits of their practice would incentivise them more effectively.

From that initial idea the group grew organically from a handful of practices to well over three hundred. Our client operates a “hub and spoke” model, with a central support centre providing accountancy, HR and business support to the branches. They also incur various operating costs on behalf of the branches which are paid centrally and then recharged to the branches, including those branches which operate as partnerships. Our client believes that this supports the group as a whole, which can benefit from the economies of scale that come with buying as part of a large, nation-wide group.

The central issue – partners should not be paid

It is an important principle that general partners (as opposed to members of an LLP, for instance) are not paid for the work they do for the partnership. A partner’s “reward” for working in a partnership is their share of the profit made by the business. If a partner was paid for their services this would reduce the profits available for distribution; in essence, that partner would be compensated twice at the expense of their fellow partners. It is possible for a partnership agreement to stipulate that one partner may recover expenses which it incurs on the partnership’s behalf, but this will depend on the wording of the particular agreement.

The Operating Costs – defined by the partnership agreement

The agreements governing each of the branch partnerships were drafted in-house by our clients, and contained a provision setting out what costs could be charged to the partnership by each of the parties to the agreement. The costs charged by our clients to the partnerships were collectively known as “the Operating Costs.” For many years the Operating Costs were relatively modest, and so our client incurred many costs centrally without recharging these to the partnerships.

For a variety of reasons the centrally incurred costs grew substantially in 2017, but were not immediately recharged to the partnerships. In July 2018, our client notified its partners that it intended to recharge these higher costs. A number of the professionals questioned the amount and validity of the charges and a group took legal advice. As a result a challenge was raised not only to the specific sums charged, but also the ability of our client to charge Operating Costs at all.

While the vast majority of the professional partners took the matter no further, fifty-two partners began High Court proceedings in June 2019 contending that the additional costs, and other costs charged, were our client’s own operational business expenses and not costs which they were entitled to recharge to the partnerships. Our position was that all of the costs charged were ones which our client was entitled to charge under the partnership agreements.

How the case progressed

The case ran for many months, with the first complaints raised in July 2018 and the trial scheduled for the spring and summer of 2021. We settled the majority of the claims at a relatively early stage of proceedings, and came very close to settling the whole matter at mediation.

These cases were settled by agreeing a “cap” based on a percentage of turnover of the partnership, above which Operating Costs could not be charged to the partnership. However, a few of the claimants refused to settle on this basis, and so it seemed likely the case would progress to trial.

Disclosure

With the trial approaching both sides had to give disclosure – that is, to produce documents within their control that were relevant to the case. Most of the documents were within our client’s control, and so we had to review many tens of thousands of documents to satisfy our client’s disclosure obligations.

Our team were able to guide our client through this exercise, and conducted a significant portion of the review ourselves. The fact that our client was able to satisfy its disclosure obligations on time prevented them from being forced into accepting a settlement on unfavourable terms.

Settlement

Shortly before trial we reached a settlement with the remaining claimants. By this stage both sides had produced witness statements, and the claimants could not be sure that they would succeed at trial.

The eventual settlement agreed to cap Operating Costs at a percentage of turnover of the partnership, as well as amending the definition of Operating Costs to further clarify what could be recharged by our client. The increased certainty these amendments afforded was welcomed by our client, so much so that they amended their template partnership agreement to mirror the settlement agreement and ensure consistency across the network.

Reaching settlement was a great commercial advantage to our clients, who were considering a sale of their business. By avoiding a trial whose outcome was uncertain (and which may have generated a further appeal) we saved our client considerable time and costs, and enabled them to carry on with their planned sale.

 

 

Alex Kennedy

I know that when the noise dies down there is a solution to be found. I set about that task as quickly as possible.

Let us take it from here

Call us on 020 7438 1060 or complete the form and one of our team will be in touch.