How should you divide the profits in a VOF? Pro rata or 50/50?

Most partnership or general partnership (VOF) disputes involve money. This often occurs when the partnership ends and there is a need to discuss the final bill. Another source for discussion is whether profits and losses should be divided equally, or whether that division should be in proportion to each person's contribution. Attorney Robert van Ewijk specializes in disputes in the partnership and the VOF and explains the situation.

VOF agreement on distribution of profits and losses

If there is a written or tacit agreement is between the partners showing how profits and losses are to be divided, then that agreement is the starting point. If there are then disputes about the amount of each person's share of profits or share of losses, it is usually because there is discussion about how the profits or losses were calculated. A different method of calculation, in fact, can lead to a different result. In this blog, I deal with the situation where nothing has been agreed upon regarding the sharing of profits and losses. This happens more often than you might think. Entrepreneurs often start their new business full of enthusiasm. They then do not always think carefully about putting things on paper. Only when things go wrong are they confronted with this. This can lead to escalating disputes.

Main rule in the partnership and the VOF: division in proportion to contribution

The rules about the partnership is in Book 7A of the Civil Code. The rules about the VOF are in the Commercial Code. The VOF is a special form of the partnership, namely the partnership that acts externally under a common trade name. Article 7A:1670 of the Civil Code (in the title on the partnership), states how profits and losses must be divided if nothing has been agreed upon in a contract. The main rule is found in Art. 7A:1670 (1) BW. The law assumes that each partner's share is proportionate to his contribution. That contribution need not necessarily consist only of labor, but can also include contributions of money, goods or other items or services.

When are profits from the VOF distributed equally?

For the situation where one of the partners contributed only labor, the law (Art. 7A:1670 subsection 2 BW) that his share of profits is equal to the share of the partner who contributed the least. In the situation where there are only two partners, this means in practice that if one of the partners has contributed only labor, then an equal share of profits applies. However, this rule is viewed critically in the literature. According to several authors, this provision should be interpreted restrictively. Namely, such that the rule only applies if the partner in question has really contributed nothing but his labor. If more has been contributed than just labor, the aforementioned paragraph does not apply. See, for example Asser/Van Olffen 7-VII 2022/68, Tervoort, in: GS Person Associations, no. 2.8.1.1 and Mohr/Meijers 2022/2.8.

Supreme Court: divide profits VOF equally unless conflict with reasonableness and fairness

This exception (equal sharing of profits) to the main rule (division in proportion to contribution) was clarified in the Supreme Court ruling of March 7, 2003 (ECLI:NL:HR:2003:AF2167) affirmed, but noted that under circumstances such an allocation may be unacceptable by the standards of reasonableness and fairness (r.o. 3.6.). When there is such unacceptability is discussed in the opinion of the A-G to that judgment (ECLI:NL:PHR:2003:AF2167). Among other things, consideration can be given to the situation where the other partner does not adequately fulfill its obligation to contribute labor and - when that obligation is fulfilled - does not thereby deliver the quality that can be expected.

Citing the literature, the A-G also mentions the situation where one of the partners (regardless of the cause) is only available to the company part-time. Also in that case, applying the aforementioned judgment, an equity adjustment must be made to the profit share. The A-G:

“If from the beginning or during the existence of the partnership agreement it is unclear whether (some) partners are only available to the company on a part-time basis, it seems reasonable that the diverse labor performance should be appraised and the profit-sharing adjusted accordingly (Cf. Asser-Maeijer 5-V, no. 68), so that justice is done to the principle of Art. 1670 or, if one wishes, Art. 6:248 of the Civil Code.”

Partner of partnership fails in obligation to contribute labor

Failure to provide as much labor as the other partner, under circumstances, may also be a failure to perform of its obligations. Prof. M. van Olffen notes in his note under the judgment (JOR 2003/79):

“If it appears that a partner fails to meet his contribution obligation due to insufficient labor availability, then a reduction in profit entitlement, or at least a net lower remittance in connection with a set-off of the claim for default also fits there.”

Lawyer in VOF dispute over distribution of profits

If there is no VOF agreement, disputes may arise over the distribution of profits. But so can the situation where there is a (written) agreement. Lexys attorneys specialize in such disputes. Take contact with us for more information on what we can do for you.