Ambiguity in Law Firm Partnership Agreements

You would expect that lawyers, many of whom draft and revise contracts on a daily basis, would be especially careful to draft their own law firm partnership agreements so as to make their intentions clear and remove areas of potential ambiguity. Yet this does not always happen. In several recent cases, partners have brought suit against their firms or former firms, and argue that provisions of their partnership agreements should be interpreted one way, while the firms have chosen to implement the provisions in other ways. In these cases, courts must decide if the clauses at issue have at least two reasonable interpretations and are therefore sufficiently ambiguous that the matters should be decided by a fact-finder, or if the provisions are clear enough that they are unambiguous and the claims do not survive summary judgment.

A traditional way courts resolve ambiguity in contract disputes is by applying the doctrine of contra proferentem, which means that if the intent of the parties is impossible to discern, any ambiguities must be construed against the drafter as a matter of law. However, in cases 'where the relevant extrinsic evidence offered raises a question of credibility or presents a choice among reasonable inferences the construction of the ambiguous terms of the contract is a question of fact which precludes the application of the contra proferentem rule.' Morgan Stanley Group, Inc. v. New England Ins. Co., 36 F. Supp. 2d 605, 609 (S.D.N.Y. 1999) (internal quotation marks and citation omitted), aff'd in part & vacated in part on other grounds, 225 F.3d 270 (2d Cir. 2000).

The Insufficiently Specific Clause

Courts have reached different results in deciphering potentially ambiguous language in law firm partnership agreements. Several different types of ambiguities have been analyzed. One type of ambiguity occurs when a clause is insufficiently specific regarding a procedural matter. This occurred in Bailey v. Fish & Neave, 8 N.Y.3d 523, 837 N.Y.S.2d 600 (2007), in which partners from the law firm Fish & Neave amended the firm's partnership agreement to change the compensation system to delay paying income to partners leaving the firm until they reached age 65. Departing partners had previously been paid compensation almost immediately. Due to the negative impact this change would have on them, two departing partners sued and argued that because Fish & Neave's partnership agreement did not have a provision that described how many votes were needed to amend, general partnership law should apply. In the absence of an agreement to the contrary, New York law mandates that all changes to a partnership agreement be approved by a unanimous vote of the partners. Id. at 527, 529 (citing N.Y. P'ship Law '40(8)). The court in Fish & Neave held that while the agreement lacked a specific clause concerning amendments to compensation rules, the intent of the partners who drafted the agreement could be readily discerned by looking to other parts of the document, and thus the agreement should not be considered ambiguous. Id. at 529.

The court noted that 'the [a]greement, read as a whole, makes clear that … all questions related to the partnership … may be decided by a majority vote, unless the [a]greement provided otherwise' and that in two separate instances, the agreement specifically strayed from this standard to require more than a simple majority. 'Plainly, where the firm intended for more than a majority vote to govern regarding a particular question related to the partnership, it so specified in the [a]greement.' Fish & Neave, 8 N.Y. 3d at 529.

Since the provision did not fall into those specific exceptions, the court concluded that that the partnership intended the issue to be decided by majority vote. The court also noted that the partnership agreement provided that dissolution of the partnership itself would require only a majority vote; therefore, it would be odd to interpret the agreement to require a higher standard for a less significant decision, such as amendment to the firm's compensation arrangement. '[I]t would be anomalous for the firm to be able to bring about the most fundamental change ' dissolution ' by majority vote and not be able to amend its compensation/payment system without the unanimous consent of the partners.' Id. The court in Fish & Neave thus found the agreement provision unambiguous by looking to the entire document.

Thus, law firms need to be especially careful to look ahead to potential conflicts that may arise when partners leave or retire. A failure to do so may result in unnecessary litigation over an issue that could easily have been agreed upon had it been adequately considered.

Silence on the Issue

In Bodner v. Hoffmann & Baron, LLP, No. 003790/04, 2005 WL 2428331 (N.Y. Sup. Ct. Nassau Co. Sept. 27, 2005), Gerald Bodner, who left his firm Hoffmann and Baron following a dispute with the other partners, sued to receive additional severance. Although he received a satisfactory share of the firm's tangible assets, he claimed that he was also owed an additional $1,519,000 plus interest for his share of the firm's intangible 'goodwill.' The partnership agreement was silent on this issue, which the firm cited as evidence that it had purposely avoided inclusion of such an entitlement. Bodner argued that since the partnership agreement was silent as to the severance for departing partners, the absence of a provision for 'goodwill' compensation was meaningless. The severance provision stated that: 'It is contemplated that partnership status is terminated by one of the following: death, disability, retirement, withdrawal, and expulsion. As of the date of this Agreement, the firm has not determined the terms of termination with respect to each of the events set forth above.' Id. at *2.

The court ruled that absent any language to the contrary, the agreement most likely reflected the intent of the partners to delay deciding the issue of severance compensation, including the question of what to do regarding payment for the firm's 'goodwill.' The court stated:

A fair reading of this provision establishes that, at the time of Plaintiff's departure from the firm, the partners of Hoffmann & Baron had not come to an agreement among themselves vis-'-vis the financial ramifications of an individual partner's departure from the law firm nor had they specifically agreed to exclude goodwill from the calculation of the termination payment to a departing partner. Bodner, 2005 WL 2428331, at *2.

Because the agreement did not explicitly include or exclude the 'goodwill' payment that Bodner demanded, the court denied summary judgment for both sides.

Sufficiently Clear Language

A detailed analysis of the intent of the drafters of an agreement may not be necessary if the court finds the language in question to be sufficiently clear. Of course, if 'the language unambiguously conveys the parties' intent, extrinsic evidence may not properly be received.' Seiden Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 428 (2d Cir. 1992).

For example, in Phelps v. Frampton, 339 Mont. 330, 170 P.3d 474 (2007), one attorney employed by the law firm Hedman, Hileman & Lacosta sued another attorney to recover a larger share of a referral fee that the firm had received. Sean Frampton acquired business for the firm in a wrongful death case. Frampton entered into a fee-splitting agreement with a Georgia law firm that had more experience with such litigation, and both Frampton's firm and the Georgia firm worked on the case. After a settlement, Hedman, Hileman & Lacosta received approximately $1.8 million as a referral fee from the Georgia firm. The referral fee was divided among the partners of Frampton's firm; he received about 55% of this amount, while Phelps received a bonus of only $25,000. Phelps returned the money, claiming his share should have been $120,000. Id. at 335.

In a suit against Frampton for a larger share of the fee, Phelps argued in part that Frampton did not 'earn' such a large percentage of the compensation and that the language in the partnership agreement was ambiguous since it did not define the term 'earn' in any meaningful way and 'provide[d] no guidance' as to how to apply the term to fee splitting. The court rejected Phelps's reasoning, and stated that an ambiguity exists in a partnership agreement only when ”the language is susceptible to at least two reasonable but conflicting meanings.” Phelps, 339 Mont. at 348 (quoting Mary J. Baker Revocable Trust v. Cenex Harvest, 338 Mont. 41, 164 P.3d 851 (2007)). Simply because Phelps had a different view of the meaning of the term 'earn' did not mean that the clause was ambiguous. A contract is not ambiguous 'simply because the parties urge different interpretations.' Seiden Assocs., 959 F.2d at 428.

Contradictory Language

A court is more likely to find a partnership agreement provision ambiguous if there is contradictory language present within the same clause. LoFrisco v. Winston & Strawn LLP, 42 A.D.3d 304, 839 N.Y.S.2d 481 (1st Dep't 2007), involved Anthony LoFrisco, who was considered a 'rainmaker' who brought wealthy clients to the firm, and who in exchange was given a lucrative contract in 1994. The contract, however, provided that his compensation would be 'reduced by 25% in fiscal year 2001, by 50% in 2002, by 75% in 2003, and by 100% in 2004 and thereafter.' Id. at 305. In 2001 LoFrisco was able to renegotiate the contract, and the firm agreed to cancel the 25% reduction to his pay that would have taken place that year. As to the following years, the contract read:

The [Executive] Committee [of the Firm] will consider your request for similarly structured bonus payments in fiscal years subsequent to Jan. 31, 2001, on a year by year basis. Specifically, that consideration will consist of the same analysis of your contributions to the Firm as conducted in this fiscal year, as well as prior fiscal years. Id. at 305-06.

When the firm did not compensate LoFrisco to the extent he believed he was entitled, he brought suit. The trial court found that the unambiguous language of the 2001 renegotiated contract allowed the firm total discretion as to LoFrisco's compensation. The appellate court reversed and found significant ambiguity as to the compensation clause and decided the case should survive summary judgment.

The firm argued that the word 'consider' in the first sentence made this clause unambiguous and established that it would be solely up to the firm's discretion whether to continue the same compensation system in the following years. The appellate court held that there could be an equally valid contradictory interpretation, since the term 'will' in the second sentence is 'mandatory, not permissive.' LoFrisco, 42 A.D.3d at 307. Under that interpretation, the firm 'guaranteed' that it would use the same formulas to determine LoFrisco's future compensation as it did in all years since the 1994 original contract. Because there was contradictory language within the same provision, the appellate court could not determine with certainty the intent of the drafters. Id. at 307-08. Where an agreement's provision seems to contradict itself, courts will generally find ambiguity.

No Written Partnership Agreement

Even more difficult are the controversies among partners when no partnership agreement exists. The court in D'Amour v. Ohrenstein & Brown, LLP, No. 601418/06, 2007 WL 4126386 (N.Y. Sup. Ct. N.Y. Co. Aug. 13, 2007), considered this question. The main office in the World Trade Center of the firm Ohrenstein & Brown was destroyed in the 9/11 attacks. The firm received sums of $6.2 million and $3.9 million in insurance proceeds. The plaintiffs, all lawyers with the firm, alleged that five partners attempted to keep this money by designating themselves as 'equity partners' and the other attorneys as 'non-equity partners.' Since only equity partners were to receive a share of the insurance money, the sum would be split between fewer people, giving each of the 'equity partners' a much larger share.

The plaintiffs claimed that the distinction between equity and non-equity partners had not existed before this insurance dispute. D'Amour, 2007 WL 4126386, at *2. Since the firm did not have a written partnership agreement, the court reviewed other evidence to try to determine whether either side had a strong enough case that granting summary judgment would be appropriate. The court considered
evidence of the intention of the parties and whether this intention had been sufficiently clear to both sides. Without a written partnership agreement the evidence of intent from both sides led to a denial of summary judgment. The court stated that:

[T]he intention of the parties involved is one of the factors which will be examined, in the absence of a written partnership agreement, to determine whether a partnership exists, and whether an individual is a partner in the partnership. Thus, the fact that the parties have or have not characterized an individual as a partner in an agreement may be considered, together with other evidence of the parties' intent, in determining whether or not the individual is, in fact, a partner. However, the parties' characterization of the individual as a partner or non-partner is not alone conclusive as to whether the individual is or is not actually a partner. Id. at *10.

Thus, in the absence of a written partnership agreement, even the most basic questions, such as who is a partner, may be subject to litigation.

Conclusion

The fact that such claims are being litigated should serve as a clear reminder to attorneys to spend care and time crafting their own partnership agreements to make them as precise and unambiguous as possible. In short, lawyers should treat the drafting of these contracts as seriously as if they were drafting for a client.

You would expect that lawyers, many of whom draft and revise contracts on a daily basis, would be especially careful to draft their own law firm partnership agreements so as to make their intentions clear and remove areas of potential ambiguity. Yet this does not always happen. In several recent cases, partners have brought suit against their firms or former firms, and argue that provisions of their partnership agreements should be interpreted one way, while the firms have chosen to implement the provisions in other ways. In these cases, courts must decide if the clauses at issue have at least two reasonable interpretations and are therefore sufficiently ambiguous that the matters should be decided by a fact-finder, or if the provisions are clear enough that they are unambiguous and the claims do not survive summary judgment.

A traditional way courts resolve ambiguity in contract disputes is by applying the doctrine of contra proferentem, which means that if the intent of the parties is impossible to discern, any ambiguities must be construed against the drafter as a matter of law. However, in cases 'where the relevant extrinsic evidence offered raises a question of credibility or presents a choice among reasonable inferences the construction of the ambiguous terms of the contract is a question of fact which precludes the application of the contra proferentem rule.' Morgan Stanley Group, Inc. v. New England Ins. Co. , 36 F. Supp. 2d 605, 609 (S.D.N.Y. 1999) (internal quotation marks and citation omitted), aff'd in part & vacated in part on other grounds , 225 F.3d 270 (2d Cir. 2000).

The Insufficiently Specific Clause

Courts have reached different results in deciphering potentially ambiguous language in law firm partnership agreements. Several different types of ambiguities have been analyzed. One type of ambiguity occurs when a clause is insufficiently specific regarding a procedural matter. This occurred in Bailey v. Fish & Neave , 8 N.Y.3d 523, 837 N.Y.S.2d 600 (2007), in which partners from the law firm Fish & Neave amended the firm's partnership agreement to change the compensation system to delay paying income to partners leaving the firm until they reached age 65. Departing partners had previously been paid compensation almost immediately. Due to the negative impact this change would have on them, two departing partners sued and argued that because Fish & Neave's partnership agreement did not have a provision that described how many votes were needed to amend, general partnership law should apply. In the absence of an agreement to the contrary, New York law mandates that all changes to a partnership agreement be approved by a unanimous vote of the partners. Id. at 527, 529 (citing N.Y. P'ship Law '40(8)). The court in Fish & Neave held that while the agreement lacked a specific clause concerning amendments to compensation rules, the intent of the partners who drafted the agreement could be readily discerned by looking to other parts of the document, and thus the agreement should not be considered ambiguous. Id. at 529.

The court noted that 'the [a]greement, read as a whole, makes clear that … all questions related to the partnership … may be decided by a majority vote, unless the [a]greement provided otherwise' and that in two separate instances, the agreement specifically strayed from this standard to require more than a simple majority. 'Plainly, where the firm intended for more than a majority vote to govern regarding a particular question related to the partnership, it so specified in the [a]greement.' Fish & Neave, 8 N.Y. 3d at 529.

Since the provision did not fall into those specific exceptions, the court concluded that that the partnership intended the issue to be decided by majority vote. The court also noted that the partnership agreement provided that dissolution of the partnership itself would require only a majority vote; therefore, it would be odd to interpret the agreement to require a higher standard for a less significant decision, such as amendment to the firm's compensation arrangement. '[I]t would be anomalous for the firm to be able to bring about the most fundamental change ' dissolution ' by majority vote and not be able to amend its compensation/payment system without the unanimous consent of the partners.' Id. The court in Fish & Neave thus found the agreement provision unambiguous by looking to the entire document.

Thus, law firms need to be especially careful to look ahead to potential conflicts that may arise when partners leave or retire. A failure to do so may result in unnecessary litigation over an issue that could easily have been agreed upon had it been adequately considered.

Silence on the Issue

In Bodner v. Hoffmann & Baron, LLP, No. 003790/04, 2005 WL 2428331 (N.Y. Sup. Ct. Nassau Co. Sept. 27, 2005), Gerald Bodner, who left his firm Hoffmann and Baron following a dispute with the other partners, sued to receive additional severance. Although he received a satisfactory share of the firm's tangible assets, he claimed that he was also owed an additional $1,519,000 plus interest for his share of the firm's intangible 'goodwill.' The partnership agreement was silent on this issue, which the firm cited as evidence that it had purposely avoided inclusion of such an entitlement. Bodner argued that since the partnership agreement was silent as to the severance for departing partners, the absence of a provision for 'goodwill' compensation was meaningless. The severance provision stated that: 'It is contemplated that partnership status is terminated by one of the following: death, disability, retirement, withdrawal, and expulsion. As of the date of this Agreement, the firm has not determined the terms of termination with respect to each of the events set forth above.' Id. at *2.

The court ruled that absent any language to the contrary, the agreement most likely reflected the intent of the partners to delay deciding the issue of severance compensation, including the question of what to do regarding payment for the firm's 'goodwill.' The court stated:

A fair reading of this provision establishes that, at the time of Plaintiff's departure from the firm, the partners of Hoffmann & Baron had not come to an agreement among themselves vis-'-vis the financial ramifications of an individual partner's departure from the law firm nor had they specifically agreed to exclude goodwill from the calculation of the termination payment to a departing partner. Bodner, 2005 WL 2428331, at *2.

Because the agreement did not explicitly include or exclude the 'goodwill' payment that Bodner demanded, the court denied summary judgment for both sides.

Sufficiently Clear Language

A detailed analysis of the intent of the drafters of an agreement may not be necessary if the court finds the language in question to be sufficiently clear. Of course, if 'the language unambiguously conveys the parties' intent, extrinsic evidence may not properly be received.' Seiden Assocs., Inc. v. ANC Holdings, Inc. , 959 F.2d 425, 428 (2d Cir. 1992).

For example, in Phelps v. Frampton , 339 Mont. 330, 170 P.3d 474 (2007), one attorney employed by the law firm Hedman, Hileman & Lacosta sued another attorney to recover a larger share of a referral fee that the firm had received. Sean Frampton acquired business for the firm in a wrongful death case. Frampton entered into a fee-splitting agreement with a Georgia law firm that had more experience with such litigation, and both Frampton's firm and the Georgia firm worked on the case. After a settlement, Hedman, Hileman & Lacosta received approximately $1.8 million as a referral fee from the Georgia firm. The referral fee was divided among the partners of Frampton's firm; he received about 55% of this amount, while Phelps received a bonus of only $25,000. Phelps returned the money, claiming his share should have been $120,000. Id. at 335.

In a suit against Frampton for a larger share of the fee, Phelps argued in part that Frampton did not 'earn' such a large percentage of the compensation and that the language in the partnership agreement was ambiguous since it did not define the term 'earn' in any meaningful way and 'provide[d] no guidance' as to how to apply the term to fee splitting. The court rejected Phelps's reasoning, and stated that an ambiguity exists in a partnership agreement only when ”the language is susceptible to at least two reasonable but conflicting meanings.” Phelps , 339 Mont. at 348 (quoting Mary J. Baker Revocable Trust v. Cenex Harvest , 338 Mont. 41, 164 P.3d 851 (2007)). Simply because Phelps had a different view of the meaning of the term 'earn' did not mean that the clause was ambiguous. A contract is not ambiguous 'simply because the parties urge different interpretations.' Seiden Assocs., 959 F.2d at 428.

Contradictory Language

A court is more likely to find a partnership agreement provision ambiguous if there is contradictory language present within the same clause. LoFrisco v . Winston & Strawn LLP , 42 A.D.3d 304, 839 N.Y.S.2d 481 (1st Dep't 2007), involved Anthony LoFrisco, who was considered a 'rainmaker' who brought wealthy clients to the firm, and who in exchange was given a lucrative contract in 1994. The contract, however, provided that his compensation would be 'reduced by 25% in fiscal year 2001, by 50% in 2002, by 75% in 2003, and by 100% in 2004 and thereafter.' Id. at 305. In 2001 LoFrisco was able to renegotiate the contract, and the firm agreed to cancel the 25% reduction to his pay that would have taken place that year. As to the following years, the contract read:

The [Executive] Committee [of the Firm] will consider your request for similarly structured bonus payments in fiscal years subsequent to Jan. 31, 2001, on a year by year basis. Specifically, that consideration will consist of the same analysis of your contributions to the Firm as conducted in this fiscal year, as well as prior fiscal years. Id. at 305-06.

When the firm did not compensate LoFrisco to the extent he believed he was entitled, he brought suit. The trial court found that the unambiguous language of the 2001 renegotiated contract allowed the firm total discretion as to LoFrisco's compensation. The appellate court reversed and found significant ambiguity as to the compensation clause and decided the case should survive summary judgment.

The firm argued that the word 'consider' in the first sentence made this clause unambiguous and established that it would be solely up to the firm's discretion whether to continue the same compensation system in the following years. The appellate court held that there could be an equally valid contradictory interpretation, since the term 'will' in the second sentence is 'mandatory, not permissive.' LoFrisco, 42 A.D.3d at 307. Under that interpretation, the firm 'guaranteed' that it would use the same formulas to determine LoFrisco's future compensation as it did in all years since the 1994 original contract. Because there was contradictory language within the same provision, the appellate court could not determine with certainty the intent of the drafters. Id. at 307-08. Where an agreement's provision seems to contradict itself, courts will generally find ambiguity.

No Written Partnership Agreement

Even more difficult are the controversies among partners when no partnership agreement exists. The court in D'Amour v. Ohrenstein & Brown, LLP, No. 601418/06, 2007 WL 4126386 (N.Y. Sup. Ct. N.Y. Co. Aug. 13, 2007), considered this question. The main office in the World Trade Center of the firm Ohrenstein & Brown was destroyed in the 9/11 attacks. The firm received sums of $6.2 million and $3.9 million in insurance proceeds. The plaintiffs, all lawyers with the firm, alleged that five partners attempted to keep this money by designating themselves as 'equity partners' and the other attorneys as 'non-equity partners.' Since only equity partners were to receive a share of the insurance money, the sum would be split between fewer people, giving each of the 'equity partners' a much larger share.

The plaintiffs claimed that the distinction between equity and non-equity partners had not existed before this insurance dispute. D'Amour, 2007 WL 4126386, at *2. Since the firm did not have a written partnership agreement, the court reviewed other evidence to try to determine whether either side had a strong enough case that granting summary judgment would be appropriate. The court considered
evidence of the intention of the parties and whether this intention had been sufficiently clear to both sides. Without a written partnership agreement the evidence of intent from both sides led to a denial of summary judgment. The court stated that:

[T]he intention of the parties involved is one of the factors which will be examined, in the absence of a written partnership agreement, to determine whether a partnership exists, and whether an individual is a partner in the partnership. Thus, the fact that the parties have or have not characterized an individual as a partner in an agreement may be considered, together with other evidence of the parties' intent, in determining whether or not the individual is, in fact, a partner. However, the parties' characterization of the individual as a partner or non-partner is not alone conclusive as to whether the individual is or is not actually a partner. Id. at *10.

Thus, in the absence of a written partnership agreement, even the most basic questions, such as who is a partner, may be subject to litigation.

Conclusion

The fact that such claims are being litigated should serve as a clear reminder to attorneys to spend care and time crafting their own partnership agreements to make them as precise and unambiguous as possible. In short, lawyers should treat the drafting of these contracts as seriously as if they were drafting for a client.