A recent Superior Court decision in a dispute over a partnership agreement is a reminder for law firms to fully iron out the details with their new partners and leave nothing to chance, experts say.
Djurdjevac, who had been an articling student at the firm, was to make the payment for five years after becoming a partner there. But two years later, he left the partnership. In a decision on Nov. 14, Superior Court Justice David Corbett found he didn’t have to keep making the payments after leaving the firm.
The decision came down to what the parties said at the time Djurdjevac signed the documents to join the partnership. Although they discussed the amount and period for the goodwill payments, the partners didn’t consider what would happen if Djurdjevac left the partnership prior to paying in full, the judge said.
“The inference I draw from the evidence is that the parties did not put their minds to Mr. Djurdjevac leaving the partnership in less than five years,” wrote Corbett.
“The evidence of both sides casting shades of meaning on their discussions six years ago that would bear on this question is patently self-serving and not entitled to any weight. If either side had put its mind to the issue, the issue would have been discussed expressly.”
The law firm insisted the payment was akin to a bank loan but had little proof to back up that claim, according to the decision.
“And I can conclude that any ambiguity arising from the failure to document the terms of the goodwill payments ought to be resolved against the firm,” wrote Corbett.
According to Colin Cameron, president of Profits for Partners Management Consulting Inc., new partners often make goodwill payments in order to avail themselves of the firm’s established client base after entering the partnership. The payment is separate from operational capital contributions, says Cameron.
The judge’s decision in the case didn’t surprise Lerners LLP partner Brian Radnoff, who says the duty to include all terms in a partnership agreement falls onto law firms.
“Given that the partnership agreement — and this is true in most law firms — is essentially imposed on new partners, the judge was essentially saying if the partners wanted something in a particular way, they should have put that in their partnership agreement.”
He adds: “What was significant is that these partnership agreements are forced onto the perspective partner and if the law firm or the pre-existing partners want to deal with something in a particular way, they have every ability to do so. When you’re invited to become a partner, there’s not really much of a negotiation over what the agreement is going to say. You take it or you leave it.”
If Deacon Spears knew it was expecting payments from Djurdjevac over a five-year period, it should have considered what would happen if he left before that time, Radnoff suggests. “We’re past the point of time where partners stay in one law firm for their entire careers. It’s quite common for people to move around from place to place, including partners.”
Corbett asked the firm’s counsel, Nicole Henderson, whether Djurdjevac’s estate would have had to pay the amount if he had died in a car accident just a few days after entering the partnership.
“Her response was instructive: we should not assume that the firm would have taken such a hard line in such tragic circumstances,” wrote Corbett.
“That is both a good answer and no answer at all,” the judge continued. “It is a good answer because it is the only reasonable response in the circumstances.
It is no response at all because it side-steps the legal question. If the legal response is yes, the balance would be owed to the firm, then this would have to have been made clear to Mr. Djurdjevac at the time he entered the partnership.”
The goodwill payments are “highly material for a young lawyer, as Mr. Djurdjevac was at the time,” Corbett noted.
“Indeed, taking the firm’s position as expressed, the goodwill was a fixed long-term obligation, akin to a bank loan, and the sort of obligation that could well lead someone in Mr. Djurdjevac’s position to purchase insurance for it if he had financial responsibilities to others.”
According to Cameron, the apparent deal in the Djurdjevac case is “unusual” as partners often make goodwill payments for the time they were present at the firm.
“The standard way it’s done in the industry is that you’d pay for the goodwill over a period of time and if you did happen to cut out of the partnership after two or three years, you would only be liable for the amount while you were there,” says Cameron.
He adds: “I would consider [the arrangement in this case] to be unusual in terms of what the standard arrangement would be in most law firms.”
Radnoff says it’s possible law firms have different ways of designing their partnership buy-in payments but notes the bottom line is that the agreement should state all expectations and consider various unforeseen but likely scenarios.
“The take-away is if there’s an important issue, particularly payments over time, you should deal within the partnership agreement what’s going to happen if the partner leaves before all the payments are made.”