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Horse & Law Special Edition - Owners vs. Owners vs. Trainers

01 August 2015

It is acknowledged that a handshake has been the backbone of how to do business in racing; the culture of the industry is more informality than formality. However, this is troubling for two reasons. Firstly, if a person is not an active participant of the industry, the many unwritten rules of racing are not understood and a handshake is not enough as people are wary of such informality. This is significant from a commercial perspective because if the industry desires growth an adjustment to formality may be required to encourage investment from sources outside the industry.  The second issue, which is also the subject of this article, is when a conflict arises; there is no mechanism in the handshake to deal with disputes.  This is particularly apparent when conflicts arise between owners and/or owners and trainers with regard to horse management.

 

The recently publicised Volkstok'n'barrell issue is a situation not uncommon for frustrated trainers and owners. That is, nobody knows what their legal rights are with regard to a horse until it is too late and the deal has walked, or, relationships have deteriorated. In most instances the reason for this is the absence of formal written agreements between the owners themselves, as well as the owners and the trainer. Ownership of horses can be complex, particularly when multiple people or entities join together to purchase a horse. In the equine industry the nature of the relationship between owners is often undefined and at times ambiguous. This in itself is not an issue when owners and trainers are all on the same page regarding the management of the horse. However, this ambiguous ownership is the source of many issues when there is a dispute or difference between them. This is particularly apparent when there are no written agreements in place and although the context of this article is the racing industry, similar issues also apply to the sport horse area.

 

So how is horse ownership complex? It is unbeknown to most owners of horses that when they purchase a share in a multi person or multi entity structure the legal nature of their relationship will either be a partnership or a co-ownership. The categorisation of ownership under one of these two concepts is significant, as partnerships have a separate set of rules that regulate the relationship from that of a co-ownership. At law, a syndicate will either be a partnership or co-ownership. Consequently, the first step when two or more people get together to purchase a horse should be to record in writing what the legal ownership is to be.

 

Is it a partnership, or a co-ownership? As noted above partnerships and co-ownerships have very different legal consequences and requirements. For example, if nine people own shares in a very well-bred and performed mare and cannot agree if she should be sold or retained, and they have no written agreement, what do they do? If your ownership structure is considered a partnership, the owners will likely be able to turn to the Partnerships Act 1908 for guidance on how to manage matters between them. However, if your ownership structure is a co-ownership your only option will likely have to be an application to court when a dispute arises and it cannot be resolved.

 

For an ownership structure to be considered a partnership it must fall within the definition of the Partnerships Act. The Partnerships Act states that a partnership is the relationship which subsists between persons carrying on a business in common with a view to profit. Additional rules for determining the existence of a partnership are further described in the Partnerships Act. The Partnerships Act also provides a mechanism for the partnership to be dissolved. If any owner wishes to dissolve the partnership they have the power under the Act to do so. The consequence of a partnership being dissolved is usually the sale of all partnership property followed by the payment of partnership liabilities and then the distribution of any proceeds to the partners.

 

Owners in a partnership need to be aware that under the Partnerships Act any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners. Therefore if only 8 out of the 9 owners wished to sell the mare and they proceeded with the sale they would be in breach of the Partnerships Act.

 

On the other hand if the ownership structure does not fall within the parameters of the Partnerships Act the structure will be a co-ownership. Co-ownerships are not regulated by an Act and therefore if disputes or differences arise as noted above an owner will likely need to make a costly court application to seek a resolution.

 

Whether a partnership or a co-ownership, the way to enable the better management of the horse, and avoid unforeseen risk and potential disputes is to make sure you either have a written partnership agreement which will supersede the Partnerships Act or a property sharing agreement in a co-ownership situation. At a minimum, the documents should note the ownership structure, who has the primary responsibility for managing the structure, who the owners are and percentage of ownership, a description of the horse and its main purpose, how decisions are made – for example if the horse is to be sold (majority or unanimous), how disputes are managed and how the structure is ended.

 

Different lawyers / advisers will offer different services and our firms practice is to create template documentation (whether it is for a syndicate, partnership or co-ownership) and then tailor it to the specific transaction and the client. All documents produced can be easily amended and be reused by the client. We work with our clients to identify their on-going legal risks and review the documentation regularly to ensure that it remains relevant and effective. In most instances a client will pay a one off fee for the initial template document. The reviews of the documents are completed in accordance with an agreed cost criteria, for example some aspects may be free, key aspects of the reviews may be costed on a time based or fixed fee, or such reviews can have their costs spread both around the owners and or over time. There are many options when it comes to keeping these agreements up to date based on a method of costing that works for the owners, trainers, agents and/or syndicators concerned.

 

Frustrated trainers

Many trainers retain shares in horses that they train and they often find themselves repeatedly in the same situation when there is conflict between the owners. Trainers have more on the line in these instances as they have an ownership share and also the potential to create a further income off training fees, stakes and the possible commission of a sale. Notwithstanding the obvious benefits of  written owner agreements and owner/trainer agreements, more often than not trainers do not ascertain what the group of horse owners want out of the ownership – are they a bona fide partnership who want to make a profit by selling the horse, a group of co-owners who invest for pleasure or a mix of the both? In these circumstances unless trainers have established the ownership structure and have something in writing recording this, they are at the mercy of their owners in conflict situations. A trainer establishing ownership at the beginning of training the horse is essential as it determines all parties expectations from the start and can avoid conflict in the future.

 

Who has to complete the paperwork?

The question for many in this situation is who should be responsible for arranging this documentation? In the instance of a licenced syndicator, the syndicator should ensure all documentation is completed by the owners and the syndicate and trainer. If a group of people get together to purchase a horse and the trainer is not involved, then the owners will need to arrange the documentation between themselves. In instances where trainers are involved from the outset, it is suggested that the trainer takes control to ensure documentation is completed.

 

Getting the right advice from the start

There is no reason for agents, owners, syndicators and trainers to not have well drafted formal written agreements drawn up by appropriately qualified people. We often hear it is too expensive to engage a lawyer, for example, to draft such agreements. I do not disagree that there  are upfront costs, however, this needs to be balanced against the value of having a robust agreement that removes the ambiguity from horse ownership and protects every person’s interest. There are ways to address costs, for example you can pass on the legal fees by including a percentage of the cost into each share price at the time of sale. If a buyer hesitates at the requirement to pay a small one off fee to ensure their interest is protected, then you need to seriously consider what type of owner they are going to be.

 

Alice Nunn is a Solicitor in the Equine team at Norris Ward McKinnon. You can contact Alice at alice.nunn@nwm.co.nz.