Stale Partnership Agreements Lead to Practice Pitfalls

Revisit Law Firm Partnership AgreementsDrafting a partnership agreement is a key component of starting a legal practice – keeping it updated, however, is one housekeeping item that often falls by the wayside at busy firms. Whether gaining or losing a partner, attorneys need to put the parties’ expectations in writing.  Failing to do so can place the law firm at risk of losing control over its current revenues or worse, can lead to the collapse of the firm.

Discrepancies in one partnership agreement resulted in a legal battle in the following case:  the law firm Chadbourne & Parke sued a former partner over a fee awarded in a matter involving trusts for descendants of department store magnate Marshall Field.  The former partner, a veteran trusts and estates lawyer who left Chadbourne in 2000 to join another firm, had continued to provide legal services to the client after leaving the firm and claimed entitlement to a portion of the fee awarded by the court after he departed the firm.  While his original partnership agreement would have required him to split the fees if he were still at the firm, the agreement was silent on arrangements with former partners.

Another recent case highlights the importance of updating a firm’s partnership agreement, particularly where its terms contain precise requirements regarding who the firm must maintain as partners in order to continue functioning as a business.   The widow of a firm’s founding partner was able to force the firm’s dissolution following the partner’s death because the partnership agreement had not been updated to reflect the interests of additional partners who joined the firm after the agreement was drafted.

Law firms and the attorneys responsible for updating partnership agreements should keep the items below in mind in order to help reduce risk:

  • Partnership agreements should be reviewed at least annually in addition to every time there is a substantial change in the firm’s normal order of business (e.g., new partners added, merger, etc.).  Think of a partnership agreement as a fluid document requiring periodic review and updating similar to a will.  Key “life events” in your firm will trigger the need to review the terms of your partnership agreement much like a marriage, divorce or having children prompts the review and possible update of a will.
  • With the trend in downsizing, firms may be restructuring their staffs.  These changes in operating structure or responsibilities can open firms up to risk if they are not careful to consider how these changes impact their partnership agreements and revise the terms accordingly.  The partnership agreement in many ways is not unlike an operating manual for the firm.
  • In particular, firms that have created a dedicated committee to handle management decisions may want to consider management liability insurance which can provide financial protection for those individuals in the event of a lawsuit or other dispute which could become costly to defend

This post by Jim Rhyner, worldwide lawyers professional liability insurance product manager, Chubb Group of Insurance Companies, is one of a continuing series of guest posts on CounseltoCounsel. Special thanks to Jim for his continued contributions.