Most people understand the bits of a contract that talk about payments or what goods or services are being promised. But have you ever wondered why contracts are so long, and you have absolutely no idea what half the clauses are even getting at? We’ve written this series as a quick guide to help decrypt the legalese – obscure clause by obscure clause – why it’s there, what it does, and whether it’s important for you.
No Partnership Clause
Often contracts have a clause stating that the agreement is not a partnership. It may also go on state that it’s not a joint venture or contract of employment.
It may look something like this:
Nothing in this agreement constitutes a partnership. It is the express intention of the parties to deny any such relationship.
What Is It For?
The word ‘partner’ tends to be overused in business – for example, ‘sales partner’, ‘solutions partner’ and so on. That’s confusing, because in law, a ‘partnership’ is a specific type of legal relationship. Being a partner – in the legal sense – is risky, because means you could be liable for what your partner does. Even if you don’t use the word ‘partner’ anywhere in the contract, courts can still look at the relationship and decide that it’s a partnership. This is because ‘partnership’ has a broad legal definition: the relationship between persons carrying on a business in common with a view of profit. So this clause is aimed at ensuring that the contract you’re signing isn’t a partnership.
When Do You Need This Clause?
Whenever you don't want to create a partnership. Especially when the agreement:
- Isn't a one-off agreement (the work or payment is ongoing);
- Deals with jointly owned property (including intellectual property);
- Allows for shared or split profits or gross returns;
- Allows for shared or split debts, losses or expenses.
What Can Go Wrong?
Courts can decide that a partnership exists without you intending to create one (or even knowing you have). If a partnership exists, then your rights and obligations under the agreement will change:
- You are liable for debts incurred by the partner.
- Profits are split 50-50.
- The partner can sign you up to debts or agreements without your knowledge or approval.
- You can be sued for something that the partner did, even if it isn't your responsibility (joint and several liability).
- The partner has equal rights in running your business.
These can be changed in an agreement, but if you aren't expecting a partnership, your agreement probably doesn't deal with these issues.
Note: Even with this clause, courts sometimes decide you are operating as a partnership. Just changing the name isn't enough. Saying you don't want a partnership (this clause) is persuasive, but isn't the only factor. If you are concerned your circumstances look like a partnership, talk to us about other structuring options for your whole business relationship.