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Are you allowed to withdraw from a partnership?

The legal concept of a "partnership" between two or more entrepreneurs has been with us since Roman times. Even in the modern era, partnerships have many advantages as a legal structure for doing business. They are easy and inexpensive to form and can be managed by the partners themselves with a minimum of red tape. The partnership agreement, if it is in writing (and it does not need to be) is a private document and need not be filed in any registry for public scrutiny. The partnership's financial statements are similarly private.

The agreement between the partners may stipulate that the partnership is to endure for a fixed period of time, or has been formed to carry out a specific project, after which it will terminate. Alternatively a partnership may be for an indefinite period, in other words for as long as the partners desire to continue in partnership with one another. A partnership of the latter kind is called a “partnership at will” and one of its features is that any partner is entitled, at any time, for any reason or no reason at all, to terminate the partnership by advising the other partners that he no longer wishes to be in partnership with them.

Even in a partnership that is to endure for a fixed period of time, or to carry out a specific venture, a partner can bring the partnership to an end by telling his co-partners that he is withdrawing from the partnership. This is called a “notice of renunciation”. However, in a partnership for a fixed period or to carry out a specific venture, a partner who withdraws from the partnership prematurely will be liable to the others in damages if he did not have justa causa – a legally valid reason – for the early termination. An example of a valid reason would be a justifiable loss of confidence in one's fellow partners, for example if one discovered that a partner was stealing partnership money.

If you are in partnership and you wish to withdraw from the partnership, it would be wise to take legal advice before doing so. Inter alia, your attorney will need to determine whether or not you are entitled to simply withdraw from the partnership without giving reasons, or whether you need to have a valid reason to withdraw.

The landmark judgment in Wiehahn v Marais 1965 (1) SA 398 (T) concerned a partnership in which the partnership agreement provided that any partner who wished to withdraw from the partnership had to give six months’ notice. One of the partners wrote his co-partners a letter claiming that he had justifiably lost confidence in them and that he was withdrawing from the partnership immediately, without giving the six months' notice mentioned in the partnership agreement. The other partners contended that the partnership had not been validly terminated by this letter and tried to get a court order to stop the withdrawing partner from setting up in business on his own.

The court held that the letter in question had the effect of terminating the partnership and that the partner who wrote the letter thus had the right to set up in business on his own. (The underlying principle is that no one can be compelled to remain in a partnership against his will.) However, said the court, if he was unable to prove that he had good grounds for summarily terminating the partnership, without giving the agreed six months period of notice (an issue which would be determined by the court in the pending litigation), he would be liable to pay damages to the other partners to compensate them for the financial loss caused by his premature termination of the partnership.

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