The Legal Definition of a Partnership

It is really important to understand the whole meaning of the legal definition of partnership because we must advise correctly those who are thinking setting up a partnership or those who might fulfil the definition without intending to. An example of this situation is provided by Keith Spicer ltd v Mansell. [1] According to the case “there is no partnership where it is merely shown that persons were preparing to carry on business as a company as soon as they could.” [2] To understand the legal definition of a partnership we must know the requirements of it. Firstly, a partnership is a relationship based on a contract between two or more people. “The relation between members of a company is expressly excluded from the definition by section 1 (2) (a) of the 1980 Act, and therefore a company cannot be a partnership, although it can be a partner. [3] Section 24(5) of the 1980 Act provides that each partner must have participated in management and be fully informed of all decisions in a timely fashion, since all partners would be liable for debts and other obligations in favour of partnership.

The first issue which we must look at in every case is whether a partnership existed. Section 2 of 1980 Acts provides a further assistance in determining whether a partnership exists or not. This section states that certain facts will be prima facie evidence of a partnership. So, according to this we can determine whether a partnership existed in our case of Green &Co firm.

Section 2(1) provides that “joint ownership of property does not of itself create a partnership.” If for example two partners own a house, this alone does not mean that a partnership is existed, but if they rent it out as a business this clearly creates a partnership. This, in the case of Green &Co is satisfied since the business of the partnerships located at 12 High Street , county buildings, old town. The case of Davis v Davis [4] illustrates the meaning of section 2(1) of the Act.

“Section 2(2) provides that sharing gross returns is not sufficient to prove the existence of a partnership, but that sharing net profits less outgoings will be prima facie evidence.” For example in the case of Cox v Coulson [5] it was held that the sharing of gross box office receipts by two parties was not enough to prove the existence of a partnership. In Green & Co the partners take the net profits arising from settlement of the annual accounts.

Section 2(3) of the Act 1890 provides that sharing profits is prima facie evidence for the existence of a partnership, but there are a number of exceptions, such as that partners can pay off a creditor by instalments out of profits and the creditor will not be a partner. The case of Cox v Hickman [6] is an example of that situation. Furthermore, partners can pay interest on a loan made to the partnership by a share of net profits and if the partners buy another business, they can pay for the goodwill in it by a share of profits. [7]

Moreover, partnership has some key features. A partnership may exist without any formal agreement by the partners and does not need to be registered. That way is more flexible of being in business with others than a company. In Green & Co the four partners made an agreement on 1 January 2008 and set up their firm. They agreed to remain partners in the business of Antiques Dealers for five years and to continue in partnership from five year period to five years period subject only to the incidence of death or retirement. Another key feature of a partnership is that each partner has personal liability. They have unlimited liability which means that “if the assets of the partnership are insufficient to meet its liabilities, the partners personal assets are available to creditors of the partnership.” In that way, partners may risk losing the investment that they made in partnership and also the assets that they did not choose to invest. In Green & Co each partner pays £30,000 as initial capital. Furthermore, section 9 of the Act says that partners are jointly liable for any debts of the partnership and section 3 of the civil liability (contributions) Act 1978 imposes several liabilities for such debts. So “ each partner is liable for the other partners (joint liability) and that a creditor may sue any combination of partners or a single partner, such action being of itself no bar further action against other partners (several liability)”. [8] The case of Robinson v Geisel [9] is relevant here.

The four partners in Green & Co formed a trading partnership. “In Wheatley v Smithers, [10] the court defined a trading partnership as one requiring the buying and selling of goods.” “The Limited Partnership Act 1907 provides that partners may form limited partnerships(which must be registered) in which one or more partners have limited liability, so long as at least one partner has unlimited liability.” According to section 6 a limited partner who takes part in management he becomes liable for all the debts of the partnership. The partnership information in the case of Green & Co is that the partners meetings and balance sheets and profit and loss accounts shall be circulated to all partners. So, everyone are liable for the acts of another partner.

The four partners in Green & Co set up their business for a fixed term. Fixed term means that “the partners may agree that the partnership should continue for a particular period of time or purpose, with or without provisions to apply in the event that the partners wish to continue the partnership afterwards.” “A common provision is that the partnership will continue until the partners unanimously agree otherwise.” “Such a partnership will dissolve automatically at the end of the specified period or purpose unless the partnership is in fact continued.” [11] All these facts make us to reach to the conclusion that, indeed there is a partnership in relation to Green & Co.

Continuing, in the case of Green & Co, Jane Gray, who is a new partner bought a collection of valuable antique books from another antiques dealer and she paid £10,000 on credit terms for them, without the knowledge of the other partners. After that, the other partners refuse to pay for the goods and regarded that Jane is responsible to pay the books. The firm is legally bound by the contract that Jane makes with Jones older antiques. Section 5 of the 1890 Act make it clear that each partner is an agent of the partnership, so if he acts within his authority, those acts legally bind the partnership and therefore the other partners. When a partner make a contract, for example, that is within his authority, the partnership and therefore all other partners will be legally bound to that contract and they will have to pay for goods or anything else supplied under it, or in adverse supply goods or services itself. They will be bound by what the contract says. So the other four partners of Green & Co are legally bound to pay for the antique books. Moreover, even if the partner has not been authorised by the other partners to enter into an obligation on behalf of the partnership, his acts may still bind their partnership according to section 5 of the Act.

Another important thing that section 5 notes is that in order the other partners to be bind by the Act of one partner need to be satisfied three conditions. Firstly, the partner “carrying on in the usual way business of the kind carried on by the firm of which he is a member.” In Mercantile Credit v Garrod, [12] for example, where a partnership agreement for a business which lets garages and repaired cars, however, their business does not involve the buying and selling of cars. Despite this, one of the partners sold a car. It was held that the partnership was liable. “In concluding that the partner had done an Act which was of the kind done in a garage business, the court looked at what was apparent to the outside world in general.” [13] The facts of this case are very close to Green & Co. Jane Gray had bought antique books. She had done an act which was of the kind done in an antique business. In addition to this, an adverse case is that of Niemann v Niemann [14] where a partner accepted, in payment of a debt by a third party to the partnership, shares in company. In that case it was held that the partnership was not bound since that method of repayment of a debt was not the usual.

The second condition which needs to be satisfied is that the third party must know or believed that the partner had authority. In that case, as I have mentioned above even if the partner has not been authorised by the other partners to enter into a contract on behalf of the partnership, his acts may still bind the others. Finally, the third condition is that the third party must know or believed that the partner was a partner. “This is likely to be the case because his name will either be part of the name of the partnership or will appear on the letter heading in compliance with the Business Names Act 1985.” [15] So according to this, it does not matter that the third party had never dealt with Jane before. He believed that Jane was a partner and that she was authorised as a new partner.

Obviously, Green & Co is bound by the contract with “Jones olde antiques”. Section 9 of the Act says that “Every partner is liable jointly with the other partners for all debits and obligations of the firm incurred while he is a partner”, and the case of Bagel v Miller [16] illustrate this principle. Furthermore section 10 provides that “the firm is liable for the wrongful acts of a partner, acting in the ordinary course of business of the firm”. Hamlyn v Houston & Co [17] is relevant here.

Jane Gray, should not had made that contract with “Jones Olde Antiques” without the knowledge of the other partners since some restrictions clearly sais that no partner shall without the previous consent of the other partners to buy goods on behalf of the firm to an amount exceeding £5,000, or advance the moneys of or deliver on credit any goods which belong to the partnership. According to the agreement of their partnership, if any partner by act or breach of his duties as a partner or of the agreements and stipulations herein contained, or act in any respect contrary to the good faith which it must be existed between the partners, or enter into any arrangement with or for the benefit of creditors, the other partners may informed him with a written notice about dissolution of the partnership and that he must cease his partnership with them immediately, any other questions, also, would be referred to arbitration. The partner who is going to be expelled had the opportunity within 72 hours after the written notice to explain either writing or orally his position to the other partners. If no explanation given then the other partners can vote in favour in person or by proxy. [18]

A partnership may be dissolved by a partner or by the court. In this situation the dissolution can be made by the other partners. Given the extensive grounds for dissolution without court involvement, judicial dissolution is only rarely necessary. For example partnerships for a fixed term or purpose can be dissolved on the expiry of the term. In addition to this, judicial dissolution can be achieved if the partners or one of them want to dissolve the partnership for a fixed term with an agreed notice period before the term has expired. Section 35, also, noted that one of the reasons at which the court may dissolve a partnership is “where a partner wilfully or persistently breaches the agreement (whether written or otherwise)”. This includes any act which caused damage on the firm. A petition may be presented by any other partner [19] .

Continuing, Alan, one of the partners of Green & Co, had an accident which made him unable to work for at least six months. His injury cannot affect his partnership with the firm since their agreement provides that if a partner is absent because of a temporary illness not to be reckoned in the reasons at which the other partners may ask for dissolution. The other partners cannot expel him from the partnership since his injuries are not permanent and he will be able to work again. Furthermore section 25 of the 1890 Act provides that there is no power to expel even if the majority of partners wish it, unless there is express agreement. In Snow v Milford [20] it was held that the expulsion in order to be valid, the clause must cover the complaint. Moreover, in Blisset v Daniel [21] it was held that if a partner is excluded without any cause or explanation, then the expulsion is ineffective because it is done in bad faith, it is not for the partnership’s benefit.

Finally, Roger, feel “excluded” from the partnership since John, Alan and Amanda, the other three partners, put him under pressure to back down on some important decisions. This is not right. A partnership is based in mutual trust and this was established by case law. The partners owe each other a duty of good faith. In Const v Harris [22] Lord Eldon said that “In all partnerships, whether it is expressed in the deed or not, the partners are bound to be true and faithful to each other”. Each partner must act in the interests of the partnership and not for himself. He must treat his co partners with the utmost fairness and good faith. Section 24(5) provides that every partner can take part in the business and because this is the most important concept of partnership none can accept an agreement which excludes this. Section 24(8), also, noted that all decisions must be taken by a majority of the partners, but that unanimity is required to change the nature of the business. It is very important that all partners have completely understood the nature of their duties as partners, both those which are implied by law and those agreed by the partners. Finally, the agreement needs to set out the sanctions for failure to fulfil them. [23] Moreover, in the case of any dispute between the partners which cannot resolve it by themselves, they will agree to try to resolve it through mediation. The Mediator has the power to inspect the partnership’s books and accounts and also to convene meetings with partners. Any agreement decided by the partners through the Mediator is legally binding [24] .

One difficulty with this area of law is that many clients fail to take a correct advice at the outset. It is very important to address an appropriate partnership agreement in order to avoid any disputes or faults which may cause damage to the business, and also being aware of the legal consequences.