Partnership dissolution – building (incomplete) bridges

22 August 2011
unfinished bridge

“… The classic example that is often given is where a firm has contracted to build a bridge, and dissolution occurs when only half of the bridge has been built …”

The recent case of Boghani v Nathoo [2011] EWHC 2101 (Ch) (judgment 2 August 2011) is a useful modern authority relating to the obligation and entitlement of partners to carry on the firm’s business following partnership dissolution.

At the date of dissolution the assets of the firm included two substantial but incomplete hotel developments. The partners were unable to agree how those developments should be disposed of in the winding up of the affairs of the firm, with one partner contending that following a three month marketing campaign the uncompleted hotels should be sold to the highest bidder, and the other partner maintaining that the hotels should be completed before being sold.

Expert evidence confirmed that the projects could each be sold within three months of commencement of a marketing campaign, whether or not the projects had been completed, but that the benefit to the firm of completing the projects was considerably more (some £65m more, net of the cost of completing the projects) compared with simply selling off the uncompleted hotels.

Section 39 of the Partnership Act 1890 states:

“On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or his representatives may on the termination of the partnership apply to the Court to wind up the business and affairs of the firm.”

In other words, every partner in a partnership dissolution has the right to require that the assets of the firm should be sold and the proceeds used to pay the debts of the firm, with any surplus to be distributed amongst the partners.

However, section 38 states:

“After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise.”

The classic example that is often given is where a firm has contracted to build a bridge, and dissolution occurs when only half of the bridge has been built. The contract to build the bridge is a “transaction begun but unfinished.” There are contractual “obligations” to complete the project.

In the Boghani case, the Court considered whether it was “necessary” to complete the projects in order to wind up the affairs of the firm, and what “complete transactions” meant in this context.

Both of the principal contracts governing the developments permitted the firm to assign the benefit of the agreements and novate its obligations if it could find another developer to take its place. In addition, both partners were willing and able to purchase the uncompleted projects. It followed from that that it was not “necessary” to complete the projects, as the winding up could occur through disposal of the hotels. The “transactions” (the outstanding contractual obligations) could be “completed” through assignment and/or novation.

Furthermore, the projects required further financing to complete them. While there was no indication either way as to whether such financing would be available, the Court pointed out that financing would involve “further and new post-dissolution contracts.” That said, historically the Courts have recognised that where a firm has an obligation to finish a bridge, it can (post-dissolution) enter into new contracts to purchase the girders necessary to finish it. So there is a lack of clarity here as to how one distinguishes between the need to enter into new financing contracts and the need to enter into new contracts to purchase girders.

However, in the Boghani case, on the basis (principally I believe) of the ability to assign/novate the contracts, the Court found that it was not appropriate to order that the partners should co-operate in completing the projects prior to sale; instead the uncompleted hotels should be marketed and sold immediately.

The corollary of the above is that where a firm has both a contractual obligation and the ability to complete a project, and there are no “escape clauses” (for example, permitting assignment/novation, or indeed permitting termination of the contract altogether), and/or there are no third parties (or partners) willing to take over the incomplete project, partners are likely to be entitled to insist that their co-partners should co-operate in completing the project as part of the winding up process.

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