Partnership dissolution: when do partners' obligations end?

A recent Court of Appeal decision sets out the general principles that apply to partners who don't have a formal agreement governing the dissolution of their partnership.

In particular, the decision¹ considers the extent of the duty on former partners:

• to complete partnership opportunities that exist at the time of dissolution; and
• under their fiduciary obligations to each other.

One of the principal issues on appeal was whether the High Court had been correct in its finding that the party who terminated the partnership was obliged to complete (for the benefit of the partnership) a project.

The Court of Appeal noted that, in the absence of any relevant provisions in a partnership agreement or under a contractual obligation assumed by the partnership to a third party, any such obligation on a former partner to complete a project could only arise:

• under section 41 of the Partnership Act; or
• from any fiduciary duty on his part.

Partnership Act

Section 41 of the Partnership Act provides authority for each partner to bind the firm "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 Court of Appeal concluded that there was no obligation on the part of the terminating partner under section 41 to complete the project for the benefit of the partnership because:

• Even though the opportunity may have come to fruition if the partnership had not been dissolved, this opportunity was not an "asset" of the partnership. It was only an opportunity.
• In this case, no work had commenced on the project and no contract to do so had been entered into. A partner in a dissolved partnership is not obliged to undertake fresh and substantial liabilities in order to preserve partnership opportunities.

The duty of good faith

The court noted that "it is fundamental that partners owe a duty of good faith to each other and that this duty extends beyond dissolution of the partnership until the completion of the winding up". The duty precludes a partner taking advantage of information, business connections or opportunities belonging to the partnership in order to secure private advantage or profit to the exclusion of the other partner or partners without their consent.

The duty of good faith also requires former partners to continue to act equitably towards each other in the winding up of the affairs of the partnership in a way that is fair to all concerned. However, the court did not believe that this duty extended to an obligation in this case on the terminating partner to complete the contract for the benefit of the partnership. This, it said, would be inconsistent with the obligations of former partners under section 41 of the Partnership Act. While acknowledging that equity and the general law may supplement the rights and duties imposed under that Act, the court considered it would be inappropriate to extend the operation of section 41 beyond its terms and intended purpose.

¹ Clark v Libra Developments Ltd [2011] NZCA 493

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