Peter Coats explains why medical practitioners need a partnership agreement and what the agreement should contain.
A well-drafted partnership agreement is essential to establish a clear framework for the running of the practice and the relationship between the partners. Preparing the agreement can be complex and time-consuming but getting it wrong (or, worse still, no agreement at all) can lead to serious problems in the future, so you need to plan carefully and get the right legal advice at an early stage.
The answer is definitely ‘yes’. Without a written agreement, the partnership will be a ‘partnership at will’ and can be dissolved at any time by any partner serving an immediate notice of termination upon the other partners.
This could result in the forced sale of the partnership’s assets (including any premises) and the redundancy of staff, which could have major financial consequences for the partners personally. Moreover, dissolution of the partnership could lead to the loss of your NHS contract. On dissolution, each partner will also be able to go their own way and set up a rival practice, because there will be no restrictive covenants to prevent them from competing with the other partners.
Finally, dissolution of the partnership could result in a messy, protracted and expensive legal dispute between the partners, which will have a very damaging effect on the practice. A properly drafted partnership agreement will not stop partners falling out with each other but it will clarify the partners’ obligations and help to resolve disagreements between them.
You should also bear in mind that a partnership at will can arise between the existing partners and an incoming partner if the new partner joins before signing a formal partnership agreement. You must therefore ensure that the new partner and all the existing partners sign a new partnership agreement or a variation to the existing agreement, before the incoming partner starts working in the practice.
In addition, if you do not have a partnership agreement, the relationship between the partners will be governed entirely by the Partnership Act 1890. Many of the provisions of the Act are cumbersome and unsuitable for modern medical practices.
For these reasons, having no agreement can create instability in the practice, and may cause a result which is not in the best interests of the partners or the practice as a whole.
All partnerships should review their agreements and update them to reflect the current regulatory framework, including GMS/PMS. An agreement which was prepared before the introduction of GMS/PMS will almost certainly contain provisions which are obsolete, redundant or even conflict with the terms of any NHS contract, which could lead to confusion or even the termination of the contract, which could be disastrous for the practice.
In any event, your partnership agreement should be reviewed on a regular basis to ensure that its provisions genuinely reflect the current working arrangements between the partners.
If you already have a written agreement, you may be able to update it without preparing a completely new document. Instead, you could use a shorter supplemental agreement which changes those provisions of the old agreement that need to be updated, but leaves the rest intact. This approach can be quicker, and less expensive in legal fees but if your agreement needs a lot of changes — especially if it predates GMS/PMS — we recommend that you start again from scratch.
The following are examples of the matters which should be covered by the partnership agreement. Arrangements between partners can vary enormously, so this list is not exhaustive.
A number of problems can arise if you operate without a partnership agreement, or if your partnership agreement is not properly drafted. The following are some examples:
The GMS and PMS regulations allow practices to introduce non-GP partners including practice managers, nurses, consultants, pharmacists or other health professionals, provided that the partnership includes at least one general medical practitioner. Please bear in mind, however, that a non-medical person who is not directly involved in the practice — for example, a third party accountant or professional adviser — cannot be a partner in the practice.
If you are proposing to admit a non-GP partner, you may need to change your partnership agreement, because some of its provisions may be inappropriate for non-medical partners. For example, the non-GP partner may not have a clinical role or may be subject to different professional rules (e.g. nursing regulations) from those which apply to the other partners. You should also consider what role the non-GP partner will play in management, decision-making and administration, as there may be certain tasks which are more or less suited to their particular abilities.
GMS and PMS contracts can be awarded to companies limited by shares where at least one share in the company is legally and beneficially owned by a medical practitioner and the other shares are owned by other qualifying persons (including medical practitioners, practice managers, healthcare professionals, GMS/PMS providers, NHS employees or NHS trusts). Despite this increased flexibility, however, the vast majority of GMS and PMS practices still operate through traditional partnerships.
APMS contracts are, by their nature, more flexible in terms of the ownership of the contracting company.
The limited company model could have advantages for your practice, as compared with partnership. A partner in a general partnership is personally liable for his or her own negligence and debts and those of the other partners, meaning that his or her personal assets may be at risk, particularly if a claim is not covered by insurance. For example, if one partner incurs substantial debts in the name of the partnership, then the other partners will be jointly liable for those debts and all partners can be sued together, even if the other partners had no knowledge of the first partner’s activities. In contrast, the shareholders in a limited company will usually have no personal liability in a similar situation.
However, if you wish to transfer your existing practice to a limited company, this will require the consent of NHS England or your CCG, which could present difficulties.
As a result of the Primary Medical Services (Sale of Goodwill and Restrictions on Sub-Contracting) Regulations 2004, many practices have set up companies to provide enhanced services. Where the company is separate from the entity which holds the registered patient list of the practice, the company can be sold for a price that reflects the goodwill of the underlying business.
The members of a limited liability partnership (LLP) also benefit from limited liability in many cases. However, when the NHS contracts were negotiated in 2004, LLPs were not considered, and therefore the regulations do not allow for LLPs to enter into GMS or PMS contracts. It is possible that this may change in the future.
If you are interested in forming a company or LLP, please let us know.
Preparing a partnership agreement can be complex and time-consuming, but a properly drafted agreement can help to establish clear and practical guidelines for the running of your practice. It is therefore essential that you get the right advice at an early stage, as this can help to identify potential problems and minimise the risk of costly disputes in the future.
Peter advises on corporate and corporate finance transactions of all different types and size. He acts for clients from a wide variety of market sectors.
