The importance of partnership agreements


The importance of having a robust updated partnership agreement for a farming partnership was highlighted in the recent case of Ham v Ham.
In this case the parents had built up the farm over the years starting with a modest 5 hectares of land in 1966. Their son, John, joined the partnership in 1997 when the farm comprised of 178 hectares of land. All went well for the next 11 years but in 2009 John had a disagreement with his parents over the future direction of the farm. This could not be resolved and John left the partnership in 2009. A dispute arose over what share of the partnership assets John was entitled to. Due to a poorly worded partnership agreement the key dispute was over the valuation of John’s share. He believed that he was entitled to a share at full market value whereas his parents argued that it should be based on the book value of the assets. Due to the increase in land prices over the period the difference in the two valuations was considerable. The judges eventually ruled in favour of John with some reluctance, citing lack of clarity in the partnership agreement. This resulted in the farm having to be sold in order to pay John his partnership share.
The case underlines the importance of having a clearly worded partnership agreement in place from the commencement of every partnership. The main areas the agreement should cover include the ownership of partnership assets, profit and capital shares, partner’s drawings, banking arrangements, business records and accounts and what happens on termination.
With the large increases in land values over recent years more cases similar to this are likely to appear before the courts in future.