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22nd October 2014

Legally Speaking – Farming partnership disputes, the reality

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Disputes concerning farming partnerships are in a league of their own in terms of the heartache, slog and cost associated with their resolution.

There are two main reasons for this state of affairs: first, they often involve family members who are at complete loggerheads with each other and secondly, they often involve agricultural land which has increased in value significantly over recent years. The emotional and financial stakes are therefore often high and the lawyers are presented with a tough nut to crack in terms of dispute resolution.

Many professional commentators (and they are quite right in this approach) focus on avoiding partnership disputes, advising partners to update outdated partnership agreements and to ensure that they dovetail with the partnership’s accounts and the individual partners’ Wills. Sometimes though, the consensus which is required to update a partnership agreement and/or the way in which partnership accounts are prepared is simply unattainable and, in certain cases, the very attempt to do so can trigger a dispute. For example, suggesting to partners that the market value of land should be used on retirement instead of book value might appeal to a partner who is close to retirement but might not appeal to the remaining partners who have to find the money to pay an outgoing partner, especially where the value of agricultural land has risen sharply in value.

The reality that there are instances where partnership issues are incapable of resolution and, to make matters worse, the partnership business can be close to paralysis because the partners cannot agree on operational matters.

How then can a state of deadlock be resolved? Depending on the circumstances, the only practical solution might be a demerger, that is the creation of two separate businesses. If the land farmed by the partnership is of sufficient acreage and suitable geographic spread to support two separate farming businesses, then a demerger is often the only viable way forwards for partners who are never going to see eye to eye.

Demerger though is a voluntary process requiring consensus. If there is no consensus, then what can be done to force through a demerger? The simple answer is to use litigation as a means to an end. Correspondence will pass between the parties’ solicitors under the guise of the Pre-action Practice Direction with one party claiming there are grounds for winding up the partnership on the just and equitable ground and the other denying the existence of such grounds.

Assuming that there is still an impasse after the protocol process has been exhausted, then the partner seeking a demerger will commence court proceedings in the High Court, Chancery Division, seeking an order for the winding up of the partnership. The process is similar to an old style divorce. The defence will set out a detailed family history (sometimes one sided) and the claimant’s reply will scrutinise and correct the perceived inaccuracies in the defence. Apart from this process being mildly cathartic, it does not achieve very much.

However, as the litigation train moves closer to trial, and the parties begin to appreciate the risks and costs involved in losing at trial, there is a tendency for them to become more risk averse and the prospect of a demerger takes on more appeal than when it was first proposed.

Since the resolution of a farming partnership dispute involves many segments, mediation will often be necessary. This will require careful preparation: parties should not resort to preparing posturing position statements; instead, they should focus on helping the mediator by detailing all offers and counter offers, agreeing a list of issues and submitting possible solutions to the mediator on a confidential basis.

The mediation will be a long and hard negotiation. If a settlement is reached, at best, it will be without prejudice and subject to contract because the parties will need some tax and valuation advice before feeling comfortable enough to commit to a binding settlement.

The period following settlement at mediation to implementing a settlement will involve considerable expense. The parties will need input from a variety of professionals on issues such as accounting, tax, trusts property, valuation and overage. There will be a need for a comprehensive settlement agreement which achieves a balance between a full and final settlement of claims and preserving the parties’ right to enforce post-settlement obligations.

The litigation process outlined above is daunting. However, partners often have to incur significant costs and become jittery about their prospects of success at trial before committing to settlement. However, on a positive note, a settlement involving a demerger can lead to the creation of two viable farming businesses for future generations each with a value far outweighing the costs incurred in resolving the partnership dispute.

A version of this article was published in the NFU British Farmer and Grower, October 2014 edition. For more information, contact Simon Biggin on 01223 461155 or click here to email Simon. For more information on our dispute services click here.