Partnerships Flashcards
what is the definition of a partnership?
a relationship between two or more persons carrying on a business in common with a view to making profit
how is a partnership formed?
there are no formalities to form a partnership - it can be done in writing, orally, or by a course of trading with a view to making profit
there does not have to be an intention to make a partnership
what are factors in determining if a partnership exists?
Factors indicating partnership exists:
- profit sharing (not conclusive)
- agreement to share losses and profits (more likely)
- all individuals taking part in decision making
- partners holding themselves out as partners
Factors indicating a partnership does not necessarily exist:
- loan by one party to another
- if a person is not being held out as partner
what are the overall advantages (5) and disadvantages (3) of a partnership?
advantages:
- no formality = partnership can be formed without formal agreement or intention
- speed = two people with a view to making profit can start trading immediately
- there are no set-up costs so less expense
- there is a high degree of confidentiality regarding the business affairs as there are no filing or disclosure requirements
- more control and flexible organisational structure as partners can decide on how to run the business
disadvantages:
- risk = a partnership has no separate legal personality so the individual partners must enter into contracts with third parties in their own names and have unlimited liability against their personal assets if they default
- if a partnership is created inadvertently without a written agreement, default statutory provisions apply to determine the terms of the partnership which may be unfavourable especially in relation to profit and loss sharing
- financing is done by partners personally injecting capital or borrowing securing personal assets - may be difficult to borrow money as securities they can give are limited (e.g., no floating charge)
what is the relationship between the partners themselves? what does this entail? (4)
Partners owe a fiduciary duty to each other.
This means they:
- owe an overriding duty of good faith
- must make honest and full disclosures
- cannot make unauthorised personal profits
- must avoid conflicts of interest
what are the partners’ liability in contract between each other?
partners are JOINTLY liable for contractual obligations incurred while they are partner
this means that all partners collectively are liable to 100% of the obligations and creditors must claim against all partners
“Together we are jointly liable for 100% of the liability”
what are the partners’ liability in tort between each other?
partners are JOINTLY AND SEVERALLY liable in tort
this means creditors can choose who to go after for the full amount and that partner can later recover from the other partners
“Together we are jointly liable for 100% of the liability, AND each person individually is liable for 100%”
Will a new partner be liable for debts incurred before they joined the partnership?
not automatically - unless they agreed otherwise
when will retired partners be liable for partnership debts?
partners who have left the firm will still be liable after they retire in respect of debts incurred by the partnership whilst they were a partner
how can a retired partner be relieved from liability for obligations and debts incurred while they were partner?
that partner can novate the contracts they were party to with the consent of the other party
when will a former partner be liable for partnership obligations and debts incurred after they left? how can the former partner prevent this from happening?
If, from the perspective of a third party, that person is an apparent partner of the firm = the third party can treat all apparent partners as jointly liable for the debt
this is unless the third party is notified that the partner left by:
- actual notice = for those who had actual dealings with the partner before departure
- constructive notice by publication in the London Gazette = for those did not have actual dealings with the partner before departure
but note: if the third party did not know this person to be a partner before they left, the partner will not be liable
when will a non-partner be liable for partnership debts?
if a person held themselves out as a partner or knowingly allowed themselves to be held out as such
what 3 requirements must be present for a person to have been ‘held out’ as partner - for a non-partner to be personally liable for partnership debts?
A non-parter will be personally liable for partnership debts if they held themselves out as partner - this requires:
- partner made a representation to a third party that they are a partner (or allowed one to be made)
- the third party relied on this representation (e.g., by supplying goods/services to the firm)
- the third party believed in the representation
this is only to estalish non-partner liablity - to establish the liability of the firm, apply the common law principles of agency
if an individual (partner or not) purported to bind the firm but did not have authority to do so, and the other partners are happy with their act, what can be done?
partners can RATIFY the act and adopt the contract either expressly or impliedly by performing it
when will a partner’s unauthorised acts (entering contracts on behalf of the firm) bind the firm so that the firm will be liable?
s5 PA
- the act is for carrying business of the KIND carried out by the firm (is this the kind of contract that this kind of business would carry out?)
- the act is for carrying on such a business in the USUAL WAY (is this the kind of contract that the partner acting alone would usually make on the firm’s behalf or one that the third party would expect a partner to enter into individually?
–> consider this from the third party’s point of view
OR can also bind the firm under the common law of agency (apparent authority - representation and firm holds parter out as having authority)
when will a partner’s acts (entering contracts on behalf of the firm) NOT bind the firm so that the firm will not be liable (s5 PA)? (2)
(1) the third party actually knew the partner was not authorised to enter into the contract on behalf of the firm
or
(2) the third party did not know or believe the person was a partner
–> consider this from the third party’s point of view
when will the acts of a non-partner bind the firm so that the firm is liable at common law?
- common law of agency = if they had APPARENT AUTHORITY at common law
- the firm will be the principal and the non-partner will be the agent
- note: this could also apply to partners purporting to bind the firm
when will a person purporting to bind the firm have apparent authority, thus bind the firm under common law of agency??
- the firm represents or permits a representation to be made to a third party that a person has authority to bind the firm (AND the third party relies on this representation) = firm is bound
- this could be where a person is being held out as a partner
example:
- a person with the title of marketing manager has the apparent authority to bind the firm on marketing decisions
- an ex-partner using the firm’s old letterhead to enter contracts