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Business and Employment Law > 4: Running a Partnership > Flashcards

4: Running a Partnership Flashcards

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1
Q

What meant by ‘joint and severally liability’?

A

Joint liability means that anyone seeking to bring a claim against a partnership can choose to sue any one or all of the people who were partners when the liability was incurred.

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2
Q

How much of the claim can each partner be sued for?

A

The full amount of the claim.

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3
Q

Which section is joint liability found in PA 1890?

A

s9 PA 1890.

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4
Q

If one partner pays a claim, what are they able to claim from the other partners?

A

They can either be indemnified (reimbursed) by the other partners (unless the partnership agreement provides otherwise)

OR

They can claim a contribution from the other partners under s1(1) Civil Liability (Contribution) Act 1978.

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5
Q

What are the 3 exceptions to the rule that partners who have left the firm remain liable for obligations incurred whilst they were partners?

A
  1. if the departing partner did not give proper notice that they had left;
  2. under a novation agreement; or
  3. “holding out”.
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6
Q

What is the law of agency?

A

When a partner is bound by the acts of another person depending on whether that other person had the partners’ authority to act on their behalf.

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7
Q

Can a person acting on behalf of the firm who is authorised to do so (whether partner or not) bind the firm?

A

Yes, they can - and it will also bind all the partners. s6 PA 1890

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8
Q

What is the legal relationship between a partner who makes an agreement with a supplier?

A

Privity of contract

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9
Q

What is the legal relationship between a partner who makes an agreement and the other partners?

A

Authority

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10
Q

What is the person acting, in terms of authority, known as?

A

The agent

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11
Q

What is the person on who’s behalf the agent is acting, in terms of authority, known as?

A

The principal

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12
Q

What is actual authority?

A

Authority which has expressly been given by the principal to the agent.

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13
Q

What are two ways in which an actual authority can be granted?

A

Via the partnership agreement itself or by a decision of the other partners.

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14
Q

Can express actual authority be implied from a course of dealing?

A

Yes, it can.

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15
Q

What is apparent authority also known as?

A

Also known as ostensible authority

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16
Q

What is apparent authority?

A

Apparent authority depends on the point of view of the other party to the contract: based on what the principals (the other partners) have allowed the other party to think, are they entitled to believe that the agent (the individual partner) has authority?

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17
Q

What is the rule in s5 PA 1890 around apparent authority?

A

In order for a partner to have apparent authority, they must be doing an act which is in the course of business of the kind carried on by the firm.

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18
Q

What are the two main elements of s5 PA 1890?

A
  1. Business of the kind carried on by the firm (e.g. is a supplier entitled to believe that this is a normal course of action for the business?)
  2. Carried on in the usual way (e.g. would a supplier expect that the partner is able to place such a big order?)
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19
Q

Are the two tests in s5 PA 1890 subjective or objective?

A

They are both objective.

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20
Q

When will the partnership not be bound by apparent authority?

A

If:

  • the transaction did not relate to the business of the kind carried on by the firm
  • the partner would not usually have been expected to have the authority to do this
  • the other party knew that the partner had no authority
  • the other party did not know or did not believe that they were a partner in the firm
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21
Q

Is anyone bound if the tests in s5 PA 1890 are failed?

A

Yes, the partner is bound by privity of contract, but no one else is.

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22
Q

What does s8 PA 1890 reinforce?

A

That other partners will not be bound if the outsider knows that the individual partner’s authority is restricted.

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23
Q

What happens if the individual partner does not have any sort of actual authority but does have apparent authority?

A

The individual partner is bound by the contract due to privity of contract, but so are the other partners. However, those other partners can bring a claim agains the individual partner for exceeding their authority.

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24
Q

What happens if the individual partner does not have any sort of authority, either actual or apparent?

A

The individual partner would still be bound by the contract due to privity of contract, but the other partners would not be bound. The outside party could bring a claim against the individual partner for ‘breach of warranty of authority’ (provided they falsely held themselves out as having authority).

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25
Q

Are partners who have been admitted as a partner recently become liable to the creditors of the firm for things done before he become a partner?

A

No, s17(1) confirms that they will not be liable.

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26
Q

Is a retiring partner still liable for the debts of the partnership before their reitrement?

A

Yes, s17(2) states that a retiring partner is still liable of the debts that were incurred during his tenure in the partnership.

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27
Q

How can a retiring partner protect themselves from being sued by a creditor of the firm for liabilities incurred whilst they were a partner?

A
  1. Indemnity: reimbursement by other party
  2. Novation: protection by agreement with the other party
28
Q

What is the advantage of a novation agreement compared with an indemnity?

A

The outgoing partner is entirely released from their obligations with a novation agreement, so they don’t run the risk of being sued on their original liability and having to claim from the partners.

29
Q

Where does it say that an outgoing partner can be discharged from their liabilities by using a novation agreement?

A

s17(3) PA 1890.

30
Q

What is the possible problem with a novation agreement?

A

There is no reason why a creditor should ever agree to a novation, as it releases the original partner from all liability.

31
Q

How would a retiring partner tell outside third party that they have left the partnership?

A

s36(2): London Gazette

32
Q

If someone who has dealt with the firm in the past is not given notice, what are they able to do when an outgoing partner has left?

A

According to s36(1), they are able to treat the outgoing partner as still being a member of the firm (and thus liable on any new contracts) until they are given notice of the retirement.

33
Q

What’s the difference between telling people who have dealt with the partnership about a partner retiring and telling people who haven’t dealt with the partnership before?

A

Have dealt with partnership before: must give NOTICE

Haven’t dealt with partnership before: London Gazette

34
Q

What does being ‘held out as a partner’ mean?

A

Someone who tells others or allows others to think that they are a partner.

35
Q

What does s14(1) state about a partner who has held themselves out to be a partner?

A

It states that someone who tells others or allows others to think that they are a partner is liable as though they were a partner, as the outsider has been in reliance on the fact that the person was a partner.

36
Q

If Sasha is being considered as a potential partner, but says she is a partner, which reassures a creditor about the partnership’s financial position, is Sasha liable for any future debts of that creditor?

A

Yes, Sasha is liable as though she was a partner, because she held herself out to be a partner. The creditor must prove that they heard her say she was a partner before the sale and before their relying on the statement.

37
Q

Which two situations is s14 important in?

A

Salaried partners
Partners who have left the partnership

38
Q

What is a salaried partner?

A

A partner who is paid a salary instead of a share of the firm’s profits.

39
Q

Why is being a salaried partner risky?

A

Because they are held out to be a partner to outsiders, who can hold them liable just as though they were a partner.

40
Q

How can a salaried partner protect themselves from liability?

A

As they will be held out as a partner, the other partners in the firm should indemnify them against liability to outsiders under s14. (Providing indemnifying partners have the resources to pay any claims)

41
Q

How might a retired partner avoid being held out as a partner under s14?

A
  • Destroy old notepaper, update website, remove references as a partner
  • Ask current partners to alert clients
  • Ask current partners to put a note in London Gazette
42
Q

How could retired partners still be liable to outsiders under s14?

A

If they knowingly held themselves out as a partner after leaving, i.e. someone who sees their name still on the website but does nothing to remove it.

43
Q

What are fiduciaries?

A

Fiduciaries are partners who are agents of the other partners. They are legally bound to act in their best interests. They have a ‘fiduciary relationship’.

44
Q

Is it just statute that oversees fiduciary relationships?

A

No, equity requires fiduciaries to act openly and honesty toward the other parties to the relationship, otherwise remedies are available for breach.

45
Q

Which part of the PA 1890 deals with fiduciary duties?

A

ss28-30 PA 1890.

46
Q

What are the fiduciary duties outlined by ss28-30 PA 1890?

A

s28: a duty to render accounts to the other partners of all things affecting the partnership;

s29: a duty to account to the other partners for private profits made from any transaction concerning the partnership or the use of partnership property; and

s30: a duty not to compete with the partnership.

47
Q

What happens if ss28-30 fiduciary duties are breached?

A

The partner can be ordered to account to the partnership for any profit that they have made as a result of the breach. The benefit will go to the partnership, including the breached partner, so they will still share in it.

Or they will be ordered to pay damages to the other partners.

48
Q

What is meant by the duty to render accounts (s28)?

A

This is the duty of openness, hoensty and good faith. The partner must be open in their dealings with one another.

49
Q

What is meant by the duty to account for private profits (s29)?

A

A partner who uses partnership property (incl. the partnership name or business connections) to make a private profit must share the profits with the other partners.

50
Q

What is meant by the duty not to compete with the partnership (s30)?

A

If the partner gets a profit from competing with the firm, they must share all profits made from it.

51
Q

When will s30 (not competing) not apply?

A

When the other partners consent to a partner competing.

52
Q

Which duty is a common law duty and not mentioned in PA 1890?

A

The duty of care and skill within the partnership. E.g.

  • in the management of the partnership, the duty is to take reasonable care.
  • negligence injuring a third party (gross or culpable)
53
Q

Does a partner have a right to be paid back for expenditure incurred for the purposes of the firm’s business?

A

Yes, they have a right to be indemnified for firm expenditure.

54
Q

Does the partner have a right to take part in the management of the business?

A

Yes, unless it has been overridden in the partnership agreement.

55
Q

Does the partner have a right of veto on matters that require unanimous decisions?

A

Yes, they also have the right of an equal say in majority votes on other matters, unless the partnership agreement provides otherwise.

56
Q

Does the partner have a right to inspect the partnership’s records (books)? Where would they be kept?

A

Yes, they must be kept at its place of business.

57
Q

What kind of rights are the following rights?

right to be indemnified for firm expenses
right to take part in management of business
right to veto/have equal say
right to inspect books

A

These are contractual rights, implied by PA 1890.

58
Q

Can the contractual rights implied by PA 1890 be overridden?

A

Yes, in the partnership agreement.

59
Q

What are the two types of duties owed to partners and what remedies are available?

A

Contractual (most) - damages, specific performance, injunction

Fiduciary (s28-30) - account of profits, damages, injunction

60
Q

Besides the legal and equitable remedies for breach, what other options could be used?

A
  • expelling partner in breach
  • dissolving the partnership
  • ADR
61
Q

What should be taken into account when expelling a partner in breach?

A
  • does partnership agreement allow it? (not possible under PA 1890)
  • what majority needs to vote for expulsion?
  • do they have any rights? (e.g. right to warnings or to speak in the meeting where expulsion is discussed)
  • do the partners need to buy the outgoing partner’s share?
  • can the partner be persuaded to retire and negotiate the share?
62
Q

If expulsion is not an option and the partner cannot be persuaded to retire, what can be done?

A

Dissolve the partnership.

63
Q

When can you dissolve a partnership?

A

If it is a partnership at will or if there’s a provision for dissolution in the partnership agreement.

64
Q

How could the court get involved in dissolving a partnership?

A

It may be possible to apply to the court for an order dissolving the partnership agreement under s35, though this is discretionary.

65
Q

What does PA 1890 state about a new partner’s terms if nothing is expressly agreed?

A

They will join the partnership on the same terms as applied before they joined (which is confusing if the existing partners have agreed a specific share split). It should be an opportunity to review the whole of the partnership agreement or start a new one.

Business and Employment Law (16 decks)

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