Ch 5 +6 Flashcards
The origins/ basis of partnership
Came from law/equity as an extension of agency and contract law. Codified in 1890 england, much of the act is the same in BC today as it was then. Rules of CL and equity are applicable to partnership unless they are inconsistent with the partnership act (s91)
Uses of Partnership
- Professionals
- Joint ventures
- Tax reasosn (flow through taxation)
- Default / easy to start - no formal requirements, just 2+ ppl carrying on business in common
How is a partnership formed
No formal steps, but should have a written agreement.
Registration requirement (otherwise risk fine)
s2-4 of partnership act deal with existence
s2: Persons carrying on business in common with a view to profit.
1. Person - part 1 of act “corporation, partnership or party, personal or other legal rep of a person”
2. Carrying on business - part 1 defines business as trade, occupation, or profession. Backman case says can be any length of time but requires at leas 3 elements: (a) occupation of time, attention and labour, (b) the incurring of liabilities to other persons (c) the purpose of livelihood or profit.
3. In common - backman says partnership agreement will hint at this (see: freezers), but they must have actually used the agreement to govern their transactions (Shields). The fact mgmt is with one partner doesnt fail to meet this definition. Consider if parties jointly hold selves out as partners, contributions, sharing of profits/loss, joint bank accounts, joint property etc. ALSO LOOK TO S4.
4. View of profit - Question of intent, can even be ancillary purpose (backman). See Braat, shields.
s3: corporation is not a partnership
s4: Rules for determining partnership
Legal status of partnership and the consequences of this
Not a legal entity
Thorne - partner is not an employee bc not a legal entity
McCormick - Not subject to HRC because not employee, not legal entity.
Consequences:
Partners are liable to full extent of personal assets, cant be employees or creditors. Partnership is not taxed, rather income is allocated among partners and taxed individually / flow through tax.
How to end a partnership
By act of partners - set a fixed term, at end of a specific venture, or notice of intent to dissolve (s35)
Death
Bankruptcy
Dissolution of a partner
If 2+ partners, the dissolution of one partner only dissolves the partnership as between that partner and the remaining ones. This way the agreement will continue for the others, no one can force themselves into a better agreement.
Why? Partnership is based on trust and sharing of losses.
Usual funding of partnership
(1) investment by partners (cash, property, services)
(2) borrowed funds
(3) trade credit
- note the usual: securities leg might apply, creditors might constrain business,
What is the law governing relations between partners
s21-24, 27-28, 31-34 are default rules between partners. Based on equal capital/mgmt/profits – you will want to address any differences in your own agreement.
s21 - default can be changed w consent of partners and can be express or inferred from course of dealing
s22 - agents for each other with fiduciary obligations (s31-33)
- s31 full info affecting partnership (mcKnight)
- s32 account of benefits derived without consent of others related to partnership - no secret profits (rochwerg, mcknight)
- s33 turn over profits from engaging in competing business
s23 property held for partnership, in name of individual partner. Held in trust.
s24 property bought with firm money is firm property
s27 day to day rules
(a) Share equally in capital, profits and losses
(b) Firm indemnifies all partners for payments/liabilities
(e) Every partner may take part in the management of the business
(f) Partners not entitled to remuneration
(g) no new partner can be admitted to partnership without consent of all partners
(h) Decisions on ordinary business matters to be decided by majority; No change to nature of partnership business permitted without consent of all partners
(i) Partnership books are to be kept at the principal place of business of the partnership and every partner may have access to the books to inspect them or copy them
s28 partner cant be removed from partnership without consent - this must be expressly altered.
s34 when partner sells interest, the assignee gets profits but no say in mgmt or admin of business (thus they dont necessarily become a partner)
Risk of not having a partnership agreement / why have a partnership agreement and what to address
default in PA will apply, which assumes that partners are equal (re: capital, mgmt, profit share etc). Risk that partners will be stuck with terms they dont want. Address any differences from the presumption of equality.
Written agreement also provides a way to serve notice for dissolution, which can be difficult otherwise.
When will a partner be liable for acts of their co-partners
under s16 - if they represent themselves as partner they will be liable to anyone who has given credit on the faith of that representation. Could be made by anyone as long as person knowingly allowed it. Dont need to know particulars of who this was represented to.
If they are a partner they are agents for each other (s7) so they are always liable for each other to extent of personal assets. s11 - every partner is jointly liable for debts
s8 - any act/instrument relating to business of firm, done in firm name or in any matter showing intent to bind, by anyone authorized (actual or ostensible) binds the firm.
see mercantiles, s7 –> where partner does an act “carrying on in the usual way business of the kind carried on by the firm” is binding unless partner had no authority or 3P knew there was no authority (reasonable inquiry needed), or did not know they were dealing with a partner. (recall lloyd v grace - facility of law firm).
s12 every partner liable for loss or injury caused by wrongful act or omission where the partner acted with authority of copartners or acted in OCOB. Why? employer introduced wrong (bazley)
- -> improper purpose of actions doesnt take it out of OCOB (ernst & Young)
- -> wrongful act or omission is broad enough to include equitable wrong (strother)
s19 a person who joins a partnership is not liable for debts arising before they joined. Once in, they are bound by contracts formed when they were there, even after they leave, unless an agreement is made with a creditor (usually ahead of time, might affect interest rate).
Explain the principles of the existence of partnership as relating to third parties.
s8 - any act/instrument relating to business of firm, done in firm name or in any matter showing intent to bind, by anyone authorized (actual or ostensible) binds the firm.
see mercantiles, s7 –> where partner does an act “carrying on in the usual way business of the kind carried on by the firm” is binding UNLESS partner had no authority or 3P knew there was no authority (including if they were “put on notice”), or did not know they were dealing with a partner. (recall lloyd v grace - facility of law firm).
s9 - if firm credit is pledged for purpose not related to OCOB, the firm is not bound unless it was authorized by a partner. Policy: if not connected, no reason to believe ostensible authority.
s10 if 3P has notice of restriction on powers of a partner then actions against that will not bind
s12 every partner liable for loss or injury caused by wrongful act or omission where the partner acted with authority of copartners or acted in OCOB. Liability under s12 is joint a severable (s14). Policy? employer introduced wrong (bazley).
- -> improper purpose of actions doesnt take it out of OCOB (ernst & Young)
- -> wrongful act or omission is broad enough to include equitable wrong (strother)
s19 a person who joins a partnership is not liable for debts arising before they joined. Once in, they are bound by contracts formed when they were there, even after they leave, unless an agreement is made with a creditor (usually ahead of time, might affect interest rate).
under s16 - if they represent themselves as partner they will be liable to anyone who has given credit on the faith of that representation. Could be made by anyone as long as person knowingly allowed it. Dont need to know particulars of who this was represented to.
Policy behind law on existence of partnership as it relates to third parties
Reliance
On a known participant in the business: 3Ps rely on those involved to satisfy obligations made
On a person unknown to the third party: 3Ps rely on those not involved in the business and whose connection they are unaware of - if they see lots of assets in the business they will assume there is someone who can pay debts - but might not be true if lender has profit share
Unjust Enrichment – A person sharing in the profits gets the benefit of credit advanced
They ought to share in the losses as well
Might be flipped though in some cases- since creditworthiness/price of loan is set based on the known partners, if they can hold someone else liable for sharing in the profits (like another lender for example) then it is unfair because windfall for loaner.
But s.4(c)(i) to (iv) - persons can share profits and still not be found partners
Least Cost Avoidance – Who bears the loss, the creditor or some other?
Position to assess the risk and control for it – Those sharing in profits are in a better position to assess the risk of business failure
Lowers overall cost of credit
Other - Some cases dealing with the existence of partnership may well be explained by distributional concerns. These distributional concerns may be inconsistent with and override reliance, unjust enrichment or least cost avoidance.
How to determine if there is a partnership (in addition to the s2 definition?)
Section 4:
4(a) common ownership doesnt itself mean partners (see AE lepage)
4(b) sharing of gross returns doesnt itself mean partnership
4(c) - share of profits creates rebuttable presumption of partnership (cox v hickman)
4(c)(i) but pmt of debt by installments of profit wont itself create partnership
4(c)(ii) remuneration of employee by share of profit is not parrtnership
4(c)(iii) spouse/child of deceased partner isnt partner just because they share profit
4(c)(v) person receiving pmt for goodwill isnt a partner for receipt of profit only.
4(c)(iv) mechanism for financing businesses in difficult situations… (1) a loan (2) to a person engaged in or about to engage in business (3) on a contract btwn them and the lender (4) where the contract is written (5) the contrract is signed by all parties (6) under the contract the lender gets a rate of interest varying with profits… does not make lender a partner.
- -> Where there is a share of profits in a written loan agmt, need to show more than that for partnership (pooley, martin)
- -> controversial since investment of equity w/o partnership
- -> upside for creditors with no downside risk
- -> business funds could be totally from creditors
- -> BUT good for keeping business alive since otherwise hard to get $ from investors. (Martin v Peyton)
- -> abuse is addressed mostly by s5
s5 subordinates the interests of lenders with a share in profits to claims of other creditors. (s139 of bankruptcy act says same)
- -> re fort: s5 applies whether written contract or not
- -> s5 doesnt apply where share in profit is limited to repayment of loan principle (s4(c)(i))
- -> s5 doesnt apply to the extent there is just a security interest… need to have a right o the share of profits
