CNY 57,972 Awarded in Partnership Dispute over Beauty Salon
This case involved a dispute between an employee and his employers over a partnership agreement for a beauty salon in Eastern China City. The employee, Mr. Li, invested money and worked at the salon but later resigned after a disagreement over whether to add a beauty department. He sued to dissolve the partnership and recover his investment. The trial court ordered the employers to return 80 percent of the investment, but on appeal the amount was reduced based on the specific terms of the partnership agreement.
Mr. Li worked as an employee at a beauty salon run by Ms. Zhang, which was also the registered address of a separate hairdressing studio operated by Ms. Zhang. In February 2009, Mr. Li and the two owners, Mr. Huang and Ms. Zhang, who were married, signed a partnership agreement and a supplemental agreement. Mr. Li agreed to invest a total of CNY 100,000 for a 10 percent share, with the partnership to run for five years. He paid CNY 50,000 upfront, and the remaining CNY 50,000 was to be deducted from his monthly wages at a rate of 50 percent until fully paid. By April 2011, a total of CNY 46,620 had been deducted from his wages, and another CNY 1,500 was deducted in May 2011, bringing his total investment to CNY 96,620. In 2011, a disagreement arose because Mr. Li opposed the owners’ plan to add a beauty department. Unable to reach an agreement, Mr. Li resigned in June 2011. Profit statements provided by Ms. Zhang showed the salon had suffered losses from its inception through April 2011.
Mr. Li filed a lawsuit in August 2011, seeking to dissolve the partnership and recover CNY 96,500. In the original trial, Mr. Huang argued that only Ms. Zhang operated the business, while Ms. Zhang argued that Mr. Li’s withdrawal did not meet the conditions set in the agreement. The trial court found that the agreement was a valid partnership based on mutual trust. Because the parties could no longer cooperate, the court allowed Mr. Li to withdraw. The court noted that the business was not registered and that both owners jointly managed it. Considering the partnership’s losses, Mr. Li’s former employee status, and the reason for his departure, the court ordered the owners to return 80 percent of the investment, or CNY 77,296.
On appeal, Mr. Huang and Ms. Zhang argued that the trial court should have applied the early withdrawal clause in the partnership agreement. That clause stated that a partner with special circumstances requesting early withdrawal must apply in writing three months in advance, obtain approval from a majority of the board of directors, and then receive a proportion of the investment based on how long the agreement had been in effect. The owners pointed out that Mr. Li had been a partner for about two years and four months, which fell into the bracket requiring a 3/5 return. The appellate court agreed. It found that although the board of directors had never been formed, the owners themselves raised the time-based formula. Therefore, the appropriate return was 3/5 of the total investment of CNY 96,620, which equaled CNY 57,972. The court also confirmed the dissolution of the partnership agreement.
The appellate court modified the trial court’s decision, reducing the amount to be returned from CNY 77,296 to CNY 57,972. Both parties were ordered to share the litigation costs. This case highlights how partnership agreements with detailed withdrawal clauses will be enforced by the courts, even when the internal governance structure, such as a board of directors, was never actually established. Business partners should ensure that exit terms are clearly written and that they follow the agreed procedures if they wish to leave the partnership.
Disclaimer: This article is for informational purposes only and does not constitute legal advice.