It may seem self-evident that the partners in a partnership own all the assets and thus own the goodwill. However, problems can arise when there are partners of different types and a dispute arises, as happened in a recent case.
Mr Castledine joined an accountancy partnership as an equity partner in 1995 and was made party to the partnership agreement on his joining the firm. There also existed a second agreement, which dealt with the ownership of the goodwill of the practice, but he did not receive this. He retired in 2003.
The second agreement required incoming partners to purchase goodwill and provided that goodwill payments would be made to retiring partners. The practice of purchasing goodwill used to be widespread, but over recent years it has become less and less common. In 1999, the firm put into effect a new arrangement whereby incoming partners no longer had to ‘buy in’ to the goodwill and outgoing partners would no longer receive goodwill payments. The decision was also taken to pay the value of goodwill standing in the accounts at 31 December 1997 to those partners entitled to receive it.
Mr Castledine did not receive a payment in respect of the goodwill of the partnership. He went to court, claiming that he was entitled to a share on the grounds that:
- he was specifically told that he would acquire a proportionate share in the goodwill of the practice; and
- he had acquired a share in the practice goodwill under the partnership agreement.
His claim was unsuccessful. Firstly, there was no written evidence that an undertaking was given that he would acquire a share in the practice goodwill. Secondly, it was clear from the partnership agreement that a second agreement existed which dealt with the ownership of the practice goodwill. Since he had not asked to see that document nor conducted any negotiations with regard to it, Mr Castledine could not reasonably seek to have the partnership agreement construed in his favour.
The moral of the story is to get your agreements in writing and deal with any issues at the initial stage of negotiations, rather than leaving them to resurface later on.
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Partner Note
Castledine v RSM Bentley Jennison and RSM Bentley Jennison Ltd. [2011] EWHC 2363 (Ch).