A Scottish court has recently refused to find that a legal partnership existed between two former friends and Mr Elliott in relation to a business arrangement to develop and exploit a couple of online dating apps. The court held that, without a contract, there was no partnership and Mr Elliott was not obliged to share the profits from the venture with the friends.

This case serves as a reminder that parties should properly document any business arrangements, whether as a partnership or otherwise, in order to avoid uncertainty and contrary findings by a court.

A little bit of the facts

In 2009 Messrs Worbey and Farrell agreed to support the initial stage of the project to develop the apps Wapo and Wapa. They were referred to as “investors/marketing gurus etc”. Mr Elliott then started to develop the apps. They exchanged emails and Messrs Worbey and Farrell made small financial contributions to Mr Elliott every now and then, but nothing substantial or regular.

Subsequently, Mr Elliott drew up a business plan and shared it with Messrs Worbey and Farrell. The business plan included a number of notable features with regard to the ownership and financing of the project and the parties’ contributions. This business plan was never agreed between them.

In 2011 Mr Elliott wrote to Messrs Worbey and Farrell enclosing a cheque for their total contributions to date plus interest. This was intended to end the relationship because Messrs Worbey and Farrell were unable to fulfil their agreement to support him.

Messrs Worbey and Farrell alleged that a legal partnership was created among them and they should be allowed to share the profits generated by the apps.

What the judge said

The court looked at the statutory definition of a partnership: “the relation which subsists between persons carrying on a business in common with a view of profit”. It held that the relationship between the parties did not amount to the carrying on of a business in common and, as a result, there was no partnership

The judge gave his opinion as to nature of the parties’ business relationship:

  • The description of Messrs Worbey and Farrell as “investors/marketing gurus etc” suggested that the nature of their interest was to receive a return from the apps by making contributions of a financial nature and non-financial nature.
  • When eventually Messrs Worbey and Farrell were offered a choice between an equity share in the proposed company and an entitlement to royalties, they chose the latter. That was entirely consistent with the status of investors as opposed to members of a partnership.
  • The parties’ negotiations as to their rights and duties never reached the stage of a concluded contract. There was insufficient consensus among the parties to create a contractual relationship. There was never consensus as to the nature or extent of their obligations and entitlement to a return of profits or a share of losses.

What you can take away from this

This case is unusual in Messrs Worbey and Farrell claiming that their business relationship amounted to a partnership. In practice, parties to commercial arrangements would usually prefer to exclude the formation of a partnership, mainly to avoid unlimited liability as partners. A typical joint venture agreement or shareholders’ agreement for a limited company will include an express provision stating that there is no partnership between the parties.

Whatever commercial arrangements you have with your friends, family or business partners, it is important that you document them, in writing, properly and adequately, to avoid differing perceptions of the relationship or unnecessary disputes in the future.

Here’s the Scottish Court of Session judgment of the case of Worbey & Anor v Campbell & Anor [2016] CSOH 148.