Business Law and Practice - Formation of Partnerships and Authority

Question 1

When does a partnership exist?

Answer 1

Definition contained in Partnerships Act 1890

1. Persons

At least two humans or legal entities (i.e. can form partnerships between companies)

2. Carry on a business in common

Business is buying or selling goods or providing services for a fee

In common goes to the idea that the people conducting the business are operating it together

3. With a view to profit

Do not necessarily need to make a profit - intention is enough

There does not need to be an intention to form a partnership or a written partnership agreement although many will have one

Question 1

Agreement to share profits

Answer 1

Presumption of partnership where there is an agreement to share profits

Does not apply to wages

Does not apply when agreement to share profits was only to repay a debt

Does not apply if constitutes an annuity to a survivor of a partner

There is no presumption where there is an agreement to share losses

Question 2

Authority

Answer 2

Every partner is agent of partnership for purpose of partnership’s business - therefore, they can enter into legal relationships on behalf of the partnership

Act of partner carrying on in the usual way business of the kind carried on by partnership binds partnership - to bind the partnership the partner must have acted with authority

Apparent/ostensible authority and actual authority

Question 3

Actual authority

Answer 3

Authority partner believes they have based on their communications and dealings with the firm

Express: partnership agreement or vote

Implied: course of dealings or related to express authority

Question 4

Apparent Authority

Answer 4

Partner’s act that seems related to business of the kind carried on by firm this binds the firm even if partner did not have actual authority

An objective test:

• Is partner’s act related to firm’s business in the eyes of a reasonable person?
• Is transaction one a partner in this type of firm would have authority to do in the eyes of a reasonable person?

Exceptions: partner had no actual authority to act AND third party knew this OR third party did not know partner was a partner

A subjective test

Case law has established that there are certain acts third parties can assume partners have authority to do:

1. Buy and sell firm goods
2. Receive debt payments
3. Hire employees; and
4. Employ a solicitor

Question 5

Partner lacked actual or apparent authority

Answer 5

Partner who contracted with third party is liable but partnership is not

Liable for breach of a warranty of authority

Question 6

Partner had apparent authority only

Answer 6

Partnership is bound but can pursue partner for contractual remedies for breach of the partnership agreement

Question 7

Tort liability

Answer 7

Firm liable for partner’s tort committed in ordinary course of partnership business or with authority from fellow partners