Protection of a Partner in a General Partnership

The general partnership is an arrangement among natural and/or legal persons to pursue a common business objective. When traders take part in the arrangement, the group is called a consortium and it is subject to the provisions of Article 357 et seq. of the Obligations and Contracts Act concerning general partnerships or the relevant company, depending on its legal form. Guided by the willingness to achieve the common business objective, the partners put their efforts into identifying the ways in which the objective can be attained and make an agreement in writing to avoid possible future disputes about the actual contents of the general partnership agreement. The identification of the risks related to the participation in the partnership in advance and the setting out of explicit provisions in writing on the rights and obligations, the distribution of the shares, the allocation of profits and costs, and the fixing of the period for which the partnership is established are all guarantees for the protection of any partner and his or her property rights in particular. Further safeguards are laid down in the Obligations and Contracts Act but those provisions and rather general and they cannot reflect the specific circumstances and actual relationships among the partners in each individual case. The property rights of a partner in a general partnership can be fully protected by making an agreement in writing to set out not only the essential characteristics of the general partnership, i.e. the common business objective, the common operations and the intention to enter into the partnership, but also the additional specific characteristics.

It is possible for the common operations to be carried out without common property, while the efforts of the partners can take various forms, including non-pecuniary contribution to the attainment of the common objective. The law does not require equal contribution by all partners, but it is necessary to agree on the share of the property and the profits in relation to the contribution. General partnership agreements are informal. The common business objective and the intention to enter into a partnership may be expressed in exchanged correspondence, and the rights and obligations could be set out subsequently through the participation in the attainment of the common business objective.

A failure of the partners to agree on their relationships in writing or to set out in detail their rights and obligations, the term of the partnership and the size of the shares could trigger disputes among the partners in the general partnership.

The concept of protecting a partner needs clarity on the consequences of the participation in a general partnership which is established to attain certain business objectives without being a legal entity itself. A general partnership is not a legal entity, and it cannot be a holder of rights and obligations or a duly recognised party to court proceedings. Hence a partner cannot claim protection of his or her rights derived from his or her participation in the partnership.

Any cash, replaceable items and items depleted in the course of their use constitute the common property of the partners, while all other items are considered to be contributed for common use, unless agreed otherwise. The general partnership is not a property owner and what is acquired through the partners’ operations in the pursuit of the common business objective is the common property of the partners. Unless agreed otherwise, all partners’ shares are equal and a partner is entitled to claim his or her share only upon leaving the partnership or when the partnership is dissolved.

It is interesting to examine the case in which the partnership has not been established on the basis of a written agreement, the partner has made a cash or non-cash contribution but the partnership has not engaged in any operations and continues to exist.

The grounds for dissolving a general partnership are set out exhaustively as follows: the objective of the partnership is attained or proves unattainable; the expiration of the term for which the partnership was established; the death or legal incapacity of a partner, unless agreed otherwise; a notice duly served by a partner at an appropriate time in the cases in which the partnership has been established for an indefinite period, unless it is agreed that the partnership will continue its operations with the other partners or there is a court ruling, and when there are valid reasons to dissolve a partnership established for a fixed period.

If there is no written agreement for a general partnership which has not engaged in any activities and none of the objective grounds set out in the law is in place, the partner who has made a cash or non-cash contribution has two options: either to serve a notice on the dissolution of the partnership or request its dissolution by the court.

In this particular case, the serving of a notice would not dissolve the general partnership if the notice is based on culpable non-performance by the other partners. Unlike bilateral agreements, general partnership agreements are multilateral, and the obligations undertaken by the partners cannot be counter claimed since they are mutual and oriented towards the common business objective.

Where no written agreement has been concluded, the partner could request the court to dissolve the partnership provided that there exist valid reasons to do so. The law does not contain any specific wording on what “valid reasons” could enable the partner to request the dissolution of the partnership from the court. By analogy to other legal concepts, the “valid reasons” for the dissolution of a general partnership by the court could be derived from the case law relating to the termination of a limited liability company where “important reasons” exist under the Commercial Code. The important reasons for the termination of a company are considered to be those reasons which create insurmountable obstacles to the implementation of the objects of activity or when the company has not engaged in any operations for a long period of time. The valid reasons for the dissolution of a general partnership by the court could also relate to the culpable non-performance of the other partners’ obligations to achieve the common objective.

After the general partnership is dissolved on any of these grounds, the partner will obtain property rights to a share, to a portion of the profit and to recovery of the costs incurred in the dealings of the partnership. The partner’s share is established on the basis of the calculation of the profit and loss in the joint operations. If the general partnership has not carried out any activity and the partner has made a cash or non-cash contribution, the question is what will be the share of this partner after the dissolution of the partnership and whether he or she is entitled to full recovery of the contribution or to reinstatement of the contributed property, as the case may be.

Where the general partnership has not carried out any operations from its establishment to its dissolution, it should be recognised that a partner who has made a cash or non-cash contribution to the attainment of the common business objective is entitled to recovery of the amount or property in full. But if the legal provision reading that all partners have equal shares in the absence of an explicit agreement is considered to be imperative, then the opposite conclusion could be drawn and the amount contributed by a partner would be distributed equally among all partners or the property would be partitioned, regardless of whether the other partners have fulfilled their obligations to make contributions. The recognition of equal shares of all partners in this case would violate the principle of fairness, the ban on inappropriate shift of goods and the ban on lion sharing companies which makes any agreement excluding a partner from participation in profits and losses null and void.

In this particular case, it could be argued whether any community of property has emerged in the first place or not so as to liquidate it after the dissolution of the partnership in accordance with the applicable rules.

As well as to a share, the partner will have a right to a portion of the profit, depending on his or her share, unless agreed otherwise, and to recovery of part of the costs incurred in the dealings of the partnership. If the partnership has not carried out any operations, the issues of profit distribution and cost recovery are irrelevant. Nevertheless, it should be noted that any share, portion of the profit or recovery of costs could be claimed only after the partnership is dissolved.

All pecuniary rights of the partner originate after the dissolution of the general partnership and if their scope is not agreed in advance, the applicable law provides for equal shares of all partners, distribution of profit and loss in accordance with the size of the share, and the right of the partner to claim recovery of the costs incurred, together with the interest accrued and the damage sustained in the dealings of the partnership.

This brief overview leads to the conclusion that the protection of a partner in a general partnership, and his or her pecuniary rights in particular, is set out in the law and that the law gives freedom to the partners to decide on the scope of their rights and obligations and on the duration of the general partnership. A written agreement on the establishment of a general partnership with detailed clauses on the type and time limits for making contributions by each partner, on the rights and obligations, size of the shares, duration of the partnership and rules on the participation in profit and loss is the guarantee that a partner could invoke the dissolution of the general partnership upon the expiration of its term and claim his or her share, portion of the profit and part of the costs incurred from the other partners.