Brief facts of the case

The plaintiff, Ms. Huo, claimed that she and Mr. Liu signed an agreement in November 2019 to jointly operate a pancake shop, with Ms. Huo contributing 150,000 yuan and Mr. Liu contributing 200,000 yuan, each accounting for 50% of the shares and enjoying 50% of the profits. The accounts are reconciled on the 10th of each month, and the profits are distributed on the 15th of each month. The cooperation period is from December 1, 2019 until the store cannot be leased. Mr. Liu is responsible for the day-to-day operation and management, Ms. Huo does not participate in the management but can put forward business proposals, and the major matters of cooperation are agreed upon by both parties. Ms. Huo fulfilled her capital contribution obligations, but Mr. Liu did not reconcile and distribute profits on a monthly basis. Ms. Huo argued that Mr. Liu was in breach of contract and could not achieve the purpose of the contract, and the statement provided by Mr. Liu showed that the interest rate of 70,000 yuan was generated in December 2019, which should be distributed at 50% each. Therefore, he requested the court to terminate the agreement, and Mr. Liu returned the investment of 150,000 yuan and paid the profit of 35,000 yuan.    

The defendant, Mr. Liu, argued that from December 1, 2019 to April 2020, Ms. Huo was in possession of the offline business data, and that the online data during that period and the subsequent online and offline data were in Mr. Liu's possession, and Mr. Liu could provide them for reconciliation. However, since the opening of the store, it has been in a loss-making state and has not met the conditions for distributing profits, so it does not agree to terminate the contract and does not recognize the existence of breach of contract.

Heard by the courts

After trial, the court held that the agreement signed between Mr. Liu and Ms Fok should be valid. Ms. Huo asserted that Mr. Liu had breached the contract on five points, and the court commented on each of them as follows:    

First, the agreement stipulates that the account will be reconciled on the 10th of each month. For the December 2019 statement, Mr. Liu sent it to Ms. Huo on 13 January 2020, and for the January 2020 statement, Ms. Huo did not request reconciliation due to the closure of the store. Therefore, Mr. Liu's delay in providing the statements was a defect in performance and did not constitute a fundamental breach of contract.    

Second, with regard to Mr. Liu's cash contribution of RMB 200,000 as stated in the agreement, since the parties did not specifically agree on the time and method of capital contribution, Mr. Liu's claim that his capital contribution before December 1, 2019 was the capital contribution under the agreement, but no evidence was submitted to prove it, so it was not accepted. Mr. Liu also stated that he would invest at any time according to his business needs, so his current insufficient capital contribution did not constitute a breach of contract and would not affect Ms. Fok's contractual rights and interests.    

Thirdly, Ms. Huo asserted that Mr. Liu had not gone through the industrial and commercial registration, but since he had not submitted a request for a change of registration, and Mr. Wang, the current shareholder, had agreed to cooperate with the change, Mr. Liu did not breach the contract.    

Fourth, Ms. Huo's announcement in June 2020 that she would stop cooperating with her would not naturally have the legal consequences of terminating the contract. However, because Ms. Huo did not cooperate, Mr. Liu changed the offline collection account to Ms. Xia's account, and Ms. Xia made it clear that the relevant income belonged to the store and she would not occupy Ms. Huo's share. Therefore, Ms. Huo's exercise of the statutory right of termination is not supported.    Fifth, Ms. Huo refused to continue to cooperate, and Mr. Liu decided on business hours, and there was no breach of contract. The parties agreed that during the cooperation period until the lease could not be continued, if the store was no longer in operation, Ms. Huo and Mr. Liu could liquidate according to the agreement, instead of being the reason for the statutory termination of the contract.    

In summary, Ms. Huo exercised the statutory right of rescission and filed various claims on the grounds of Mr. Liu's fundamental breach of contract, which lacked factual and legal basis, and after the court finally rejected all of Ms. Huo's claims, Ms. Huo appealed, and the court of second instance upheld the original judgment, which has now taken effect.

What the judge said

Partnerships between individuals are different from partnerships, and this business model has a low market access threshold, and there is no need to register the capital contribution for industry and commerce, nor do you need to make a clear written agreement on the follow-up operation, so in reality, many stores often adopt the model of individual partnership.   

What should a partner do if he wants to withdraw from the partnership or terminate the partnership agreement? Taking this case as an example, Ms. Huo's request to terminate the agreement was due to Mr. Liu's fundamental breach of contract, but Ms. Huo's belief that Mr. Liu's fundamental breach of contract was not found by the court. In the normal operation of the store, the capital has become a necessary cost for the operation, and Ms. Huo asked for a refund, but in fact she asked for the division of the partnership property, which can only be completed by settlement or liquidation by both parties when the partnership store cannot continue to operate. Now that the store is still in operation, the parties have not liquidated the partnership property, and Ms. Huo directly sued for refund of the money and distribution of profits, but the court could not support it.    

A partnership contract is an agreement between two or more partners to share benefits and risks for common business purposes. The basis for claiming the right to terminate a partnership contract includes the right to terminate at will and the right to terminate by law. In judicial practice, the failure to achieve the purpose of the contract due to the fundamental breach of contract by the partners in the non-performance of debts, or the rigidity of the relationship between the partners, the loss of the foundation of trust, and the inability to continue to perform the partnership affairs may be deemed to have met the conditions for exercising the statutory right of rescission. The pancake shop was still in operation, and Mr. Liu also stated that he would continue to invest according to actual needs and was willing to cooperate with the reconciliation, so Ms. Fok's exercise of the statutory right of rescission in this case was not supported.    

In any case, although the procedures for the establishment of an individual partnership are simple and convenient, this also leads to the fact that in the event of a dispute between the partners, on the one hand, there may be a lack of prior agreement that can be referred to, and on the other hand, the individual's weak ability to present evidence may cause difficulties in presenting evidence. All partners are reminded to conclude the partnership contract in writing as much as possible, standardize and stipulate the terms of the partnership financial system, partnership term and withdrawal mechanism, retain the voucher for the partnership operating expenses, disclose the accounts according to the agreement, and strengthen the communication between the partners, so as to better protect the "human compatibility" of the partnership and safeguard the legitimate rights and interests of each partner.    

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