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The Partnership charter

The Partnership Charter by David Gage Millions of people co-own closely held companies, family businesses, and business partnerships, but establishing them and keeping them together is never easy. Here, finally, is the guide they have been waiting for.... Read More

Improving the Partnership Relationship

The Lawyers Weekly

by Jay Brecher
The Lawyers Weekly
October 31, 2008

Partnership charter helps clarify the roles, responsibilities and expectations of each partner

The partnership structure is virtually synonymous with the practice of law these days.

While some still opt to go the sole practitioner route due to the administrative demands and complexities of practicing law, most lawyers in private practice opt to do so as members of law firms or partnerships.

While law students are taught all of the key substantive legal principles in every area of practice, little to no time is spent on how to work effectively within the partnership structure, nor has there been much written on the subject.

David Gage, a clinical psychologist and founder of a Virginia-based mediation and consulting firm, observed this lack of knowledge about business and professional partnerships. So he drew from his own extensive experience in mediating partnership disputes to write the book, The Partnership Charter: How To Start Out Right With Your New Business Partnership (or Fix the One You’re In).

“I learned an enormous amount about how people got into conflict, and realized that it wasn’t an infinite number of ways,” said Gage. “I kept seeing over and over certain recurring patterns, and, really, they fell into either the business side of things or the interpersonal side, and clearly both are important for any partnership to run smoothly.”

A partnership charter is a written document that generally sets out the roles, responsibilities, and expectations of each partner. “Really, the goal of the partnership charter is to remove the ambiguity that’s present in most business and professional partnerships,” explained Gage.

A partnership charter should not be confused with a partnership agreement. While an agreement is a legally enforceable contract between the parties setting out their respective rights and obligations, a charter isn’t meant to be legally binding. Instead, it addresses key interpersonal issues that aren’t dealt with in a partnership agreement.

“People think that if they have the legal documents in place, they’re protected, but what I say is that it gives them a false sense of security,” said Gage. “They really need to do more. They need to look at the interpersonal issues, as well as the business issues, and they need to get way more clarity, even on the business issues, than they almost ever do.”

Partnership charters are more fluid than partnership agreements.

“The legal document can be revised, but it’s meant to withstand the test of time, whereas a partnership charter is really meant to be revised on a regular basis,” said Gage.

Any significant change to the partnership structure, such as the admission of new partners, would require reviewing and revising the charter, he said.

Gage does recommend using the partnership charter as a tool to aid in the drafting of a partnership agreement: “There’s such a clarity of intentions there that it’s relatively easy for lawyers to draft the narrower legal documents from the broader partnership charter.”

Although the provisions of a partnership charter may not be legally binding, partners generally feel duty-bound to uphold them, in Gage’s experience.

“It is their agreement about how they’ll operate and treat one another, so once they create those agreements, they typically feel pretty committed to them.”

Partnership charters are not suitable for every kind of partnership. In particular, it’s usually impractical for very large partnerships to create a charter that adequately addresses the personal circumstances of each partner. “It works better for partnerships up to a certain size,” said Gage. “When it shifts from the real involvement of each individual partner to committees and an executive or managing director, it doesn’t work as well.”

In Gage’s view, while establishing a partnership charter at the outset of a partnership can be very effective in reducing the likelihood of future conflict, it can also serve a valuable role when adopted by existing partnerships.

“In almost any existing partnership, there are slivers of ambiguity that eventually, under changing circumstances, create conflict,” he explained. “There’s a lot of confusion in many partnerships about roles, responsibility and range of authority.”

The principles underlying the partnership charter can also be applied to other types of legal relationships. Gage recently co-wrote an article in the American Journal of Family Law that suggests that couples preparing to negotiate a prenuptial agreement should consider formulating a marital charter.

“By looking at the partnership charter, [spouses] are in essence creating a very different paradigm, one where they’re working in a collaborative way to reach agreements on how they will divide assets,” he explained. “It’s one of openness, collaboration and building trust, as opposed to working in an adversarial way.”

Lawyers may find it hard to write the partnership charter in plain language while avoiding the sort of boiler plate clauses and other assorted legalese that pervade most documents they draw up. Gage conceded that it may be difficult for lawyers to approach a partnership charter as not being some sort of a legal document.

However, he also noted that some of the topics dealt with in a charter, particularly those regarding the interpersonal dynamics between the partners, don’t lend themselves to any kind of legal agreement.

“The interpersonal side isn’t about nebulous navel-gazing,” he said. “It’s really all about making clear commitments to one another voluntarily about how people will work together effectively.”

Another aspect of partnership charters that Gage sees as being particularly applicable to lawyers is in establishing a mutual understanding regarding the contributions made by each partner.

“Law firm partners often struggle with their different contributions to the firm, and how those are valued,” he explained. “That is at the heart of a lot of partner disputes.

“Being a partner is really more than just what your equity contribution is, or your capital contribution, or your billable hours. And it’s even more than your rainmaking abilities,” said Gage.

There are a lot of different types of contributions that partners make. The charter process forces people to look at their different contributions and to discuss the relative value of each type of contribution.”