Transatlantic Perspectives on Partnership Law: Risk and Instability

Abstract

Partnership law in the United States and England has long differed on a basic question that has pervasive significance: if a partner wishes to terminate membership in a general partnership, is the partner bound by a prior agreement to remain a member of the partnership? English partnership has long made such agreements enforceable. In contrast, under U.S. partnership law, a partner who exits from a general partnership prior to an agreed-upon term or otherwise in contravention of the partnership agreement is subject to liability for breach of contract but has power to exit prematurely by dissolving the partnership or by dissociating from it. Partnership legislation has embodied this divergence since the English Partnership Act (1890) and the Uniform Partnership Act (1914). Subsequent changes in general partnership legislation - the Revised Uniform Partnership Act in the United States and recent reform proposals for England - continue to reflect the divergence.

My thesis is that general partnership law in each country strikes a different balance between stability for the partnership association and risk over time as perceived by each individual partner. As a consequence general partnerships in the United States are less stable as business associations but the risks borne by individual partners are reduced. In contrast, joining a general partnership in England reflects more of a pre-commitment strategy to staying the course of membership, despite subsequent changes in the risks of continued association as perceived by partners over time. An additional consequence is that partnership law in each country contains doctrines that mitigate the potentially harsh consequences of permitting or forbidding a partner to exit from the partnership in contravention of the original partnership agreement.

This contrast is relevant to evaluating the content of general partnership law in the United States, in which a rich menu of organizational choices is now available to organizers of business firms, because alternate organizational choices promise greater stability than does a general partnership. Moreover, the characteristics of firms that are organized or otherwise characterized as general partnerships is relevant to assessing the relative merits of the U.S. and U.K. approaches.