A RECENT case that came across
our desks draws attention to the fact
that not only do partners have to
have a current and effective
partnership deed but that in
preparing the deed and in using its
powers the partners have to be very
aware of the duty of good faith;
expressed by lawyers as Uberrima
fides (the utmost good faith).
In 2009
Lockharts was instructed by
clients who
wished for
their
partnership
deed to be
updated to
reflect the changing landscape. Upon
instruction, it became apparent that
there were ongoing performance-
related issues with respect to one
partner which would influence the
updates to be made to the deed.
The remaining partners wished to
insert a gardening leave clause into the
partnership deed, with the specific
intention of protecting themselves
should the need to expel arise.
When a partner is put on gardening
leave, he or she is required to remain away from work to serve out a period
of notice at home and is thereafter
expelled, if a conciliation cannot be
achieved. This is usually done through
the process of mediation – preferably
led by an accredited mediator.
The partners inserted the gardening
leave clause, in their view with the best
intentions for the practice, and some
time later expelled the underperforming partner, after placing
him on gardening leave. Needless to
say the expelled partner claimed that he
had not understood the effect of the
provision and that it was put in
“behind his back”.
The expelled partner claimed that
the expulsion was wrongful, as well as a
breach of good faith. The partner
claimed damages pursuant to that
claim.
In any claim for damages there
must be a cause of action, e.g. there
must be an alleged wrongful expulsion
which has prompted the claim. The
cause of action in this case was the
alleged wrongful expulsion, coupled
with the breach of the duty of good
faith.
Damages sought in these cases are
designed to put the damaged party back into the position that he or she
was in previously, had the damage not
occurred. Resultantly, the partner in
this case claimed damages that would
restore him to his previous position
had he not been expelled.
In such cases, quantum (i.e. the
amount of damages) is determined by
the multiplier which can be sizeable,
particularly with young practitioners.
The larger the multiplier, the greater
the potential damages.
It is important to note that the
expelled partner has an obligation to
mitigate his losses, which effectively
means that he must do what is possible
to maintain his standing.
However, full mitigation for an
expelled partner is difficult insofar as
the person may not be able to mitigate
beyond relatively modestly paid locum
work. Whilst this does not fully
mitigate for the lost partner position,
this does comply with the duty to
mitigate.
The claim for damages very often
goes to arbitration: an alternative
method of resolution. Therein the
wrongfulness of the expulsion will be
determined by an arbitrator, as will any
damages that flow from the expulsion
if found wrongful.
Good faith compromised
In summary, inserting gardening leave
clauses in a partnership deed becomes
a distinct issue when good faith is
compromised and wrongful expulsion
alleged. If a partner wishes to claim for
damages following expulsion, he or she must have an identifiable cause of
action, and must be aware of the
obligations to mitigate his or her losses.
The partners who are defending the
claim for damages must have acted in
good faith at all times, as well as
ensuring they can prove there were
valid, justifiable reasons for the
expulsion.
It is clearly a considerable help if
there is strong evidence that the
obligation to show the utmost good
faith is available.
This can take the form of detailed
notes and minutes and very possibly
papers to show that the partner’s
concerns were discussed with either a
senior colleague from another practice
(preferably one at a distance) or with a
local representative or an experienced
partnership lawyer working in the
veterinary field.
It is also of note that in this case
considerable difficulties also arose
because the partner who was put on
gardening leave, and then expelled, had
part ownership of the surgery premises
which he refused to relinquish until his
alleged expulsion claim had been
settled. This put a “dead-hand” on the
continuing parties’ ability both to deal
with the surgery premises and to
recruit a vastly needed replacement
partner.
This case demonstrates that
ensuring the partnership deed is
current and effective is equalled by the
importance of updating the partnership
deed in a manner compliant with good
faith and obtaining appropriate advice.
