Why you need to keep your partnership agreement up-to-date – a case study
1st July, 2013
We are often asked by GPs whether it is really necessary to have a partnership agreement. We understand that spending time and money to prepare or update a partnership agreement may seem like a low priority when practice income is being squeezed and there are increasing demands on partners' time.
But our experience indicates that the consequences of not having an agreement – or having an agreement that is out-of-date or inadequate – are serious and may prove to be both costly and damaging to the practice.
This is the first in a series of case studies based on real GP client cases. It illustrates why it is important to update your partnership agreement when a new partner joins and how difficult it can be to expel a partner if you do not have an agreement in place. The technical legal details have been simplified for clarity but the key facts are based on a real case handled by one of our specialist healthcare solicitors.
The Case:
Drs A, B and C had been in partnership for a number of years. They were good friends and had always got along very well. There was a partnership agreement.
Over a number of months, Drs A and B started to notice errors in Dr C’s work, particularly his administrative work and record-keeping. Sometimes records of attendances on patients weren’t made at all or they were scant and inadequate. When the partners spoke to Dr C about their concerns, he admitted that he was suffering domestic problems, was feeling very tired and was struggling to keep on top of his workload. Dr C, at the other partners’ request, underwent a medical examination but no particular health problems were revealed.
Dr C took a period of paid leave and, on his return, was allowed (at his request) to work part-time. He was also allocated longer appointment times and given extra administrative support. The senior partner (Dr A) provided mentoring and guidance. A new partner (Dr D) was recruited on a part-time basis to pick up Dr C’s surplus workload. Dr D was given a copy of the partnership agreement but was concerned about some of the provisions. The partners agreed that they woild renew the terms.
Meanwhile, despite efforts to support Dr C, Dr C’s administration and record-keeping continued to deteriorate. On a number of occasions, Dr C forgot to refer patients for treatment he had agreed to refer them for. The practice received a number of complaints from patients. When these matters were brought to Dr C’s attention, he apologised and said he would try to improve, but there was no noticeable improvement. It reached the point where the other partners were concerned about the reputation of the practice and, even more seriously, patient safety.
After a number of potentially serious incidents, the partners met with Dr C and told him that they felt they had no option but to consider asking him to leave the partnership. They told him that they were intending to expel him under a clause in their partnership agreement which permitted a partner to be expelled “forthwith” for “serious and persistent” breaches of the partnership agreement. The partners told Dr C that they felt he had seriously and persistently breached an obligation in the agreement to “diligently carry out administrative tasks in relation to his clinical duties”.
Dr C was upset but was also not surprised. He admitted that he had suspected this might be the outcome. The partners agreed to meet again in a week to enable Dr C to consider the proposal to expel him and respond to it. When they met again, Dr C did not have anything further to suggest and it was decided that he would cease to be a partner with immediate effect and be given three months’ profit share in lieu of notice.
A week after Dr C left, the other partners received a letter from a solicitor acting on Dr C’s behalf. It stated that, as Dr D had not signed up to the agreement with the other partners on joining the partnership, there was no valid partnership agreement between the parties. This meant that the partnership was a partnership “at will” and the partners’ purported expulsion of Dr C had brought about a dissolution of the partnership. The solicitor’s letter called for the partnership to be wound up and stated that Dr C would be informing the PCT (as it then was) that the partnership had been dissolved acrimoniously and that he did not support the continuation of the practice’s PMS agreement with the other partners. It was also claimed that Dr C had been subjected to discrimination and would be seeking compensation.
Drs A and B were very upset and worried and, at this point, came to us for advice. Unfortunately, the legal effect of the expulsion as set out by Dr C’s solicitor was correct: where a partnership does not have a partnership agreement which varies the relevant statutory provisions, it is not possible to expel a partner, regardless of how poor their performance or conduct may be: the only option is to dissolve and reform the partnership. There was a real risk that the dissolution could result in the practice losing its NHS contract if Dr C challenged the continuation of the contract in the name of the continuing partners, as commissioners cannot “take sides” in an acrimonious dissolution.
Outcome:
The partners instructed one of our specialist healthcare solicitors who was able to negotiate a settlement with Dr C’s solicitor under which Dr C agreed to drop the discrimination claim (on the basis that it was vexatious) and consent to a variation of the PMS agreement which permitted the other partners to continue the practice without him.
However, the case highlights the very real risk of a practice losing their contract if they attempt to expel a partner when there is not a partnership agreement in place. It is essential to ensure that new partners sign up to any existing partnership agreement in order to avoid the agreement not being binding on the enlarged partnership.
The partners paid Dr C a modest settlement sum.
Learning Points:
If Drs A and B had arranged for Dr C to sign a simple deed of adherence with Dr D when she joined the practice, expulsion provisions within the original partnership agreement would have been effective. The legal costs to prepare a deed of adherence would have been a fraction of the legal costs that they incurred in negotiating a settlement.
Even with a valid partnership agreement, it is advisable to seek legal advice before expelling a partner as it is important to exercise the expulsion provisions fairly and reasonably and strictly in accordance with the relevant terms in order to minimise the risk of a legal claim. There will be costs involved in obtaining legal advice at any stage, but early advice will minimise the risks of the matter escalating into a full-blown dispute and will almost always be cost-effective in the long run.
If you have questions about anything in this case study, or have any other legal questions, please contact me.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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