Partnerships - liability for debts

Question 1

General position

Answer 1

Contracts entered into by an individual partner will:
- Always bind the partner who entered into the contract (privity of contract); but
- Only sometimes bind the partnership as a whole if contracting partner had: 1) actual authority OR 2) apparent authority

Question 2

who can the contracting party sue if the firm is liable

Answer 2

• The firm as a whole, OR
• Any individual who was a partner at the time the debt was incurred.
  > Under s9 PA partners are jointly and severally liable
  > If the partner entered into the contract with apparent authority only, they will have to indemnify the other partners for any liability / loss they incur

Question 3

Actual authority

Answer 3

s 6 PA: an instrument executed in the name of the firm by any person authorised to do so, whether a partner or not, will bind the firm and all the partners

• actual authority = where partner is authorised by the partnership to enter into the agreement
• where the partner has actual authority, the agreement will ALWAYS bind the partnership
• express or implied:
  > express = where there is a specific agreement between the partners granting the partner authority
  > authority arises through a course of conduct (e.g. particular course of dealing)

Question 4

Apparent / ostensible authority

Answer 4

• If a partner does not have actual authority, the partnership may still be bound under s5 PA 1890 if the partner nevertheless contracted with “apparent” or “ostensible” authority
• partner will act with apparent authority if:
  > The partner carries on “business of the kind carried on by the firm
  > In the usual way”; and
  > the person with whom the partner is dealing doesn’t know the partner doesn’t have authority; but knows, or believes the partner to be a partner

Question 5

Effect of contracting with apparent authority

Answer 5

• Contracts entered into by a partner with apparent authority will bind the firm (partnership), and hence the other partners
•  The partner who made the contract (and is responsible for the firm being liable) will have to indemnify the firm for any liability or loss they incur

Question 6

liability of incoming partners

Answer 6

• a new partner is not liable “to the creditors of the firm for anything done before he became partner” (s17(1) PA)

Question 7

liability of outgoing partners

Answer 7

• a partner who retires from the firm remains liable for partnership debts that are incurred before their retirement (s17(2) PA)

Question 8

ways for outgoing partner to avoid liability for partnership debts

Answer 8

1. indemnity
   - remaining partners contractually agree with the outgoing partner to repay them if the outgoing partner is sued by a creditor for a debt
2. novation agreement
   - extinguishes one contract and replaces it with another, transferring both the obligations and rights from the original contract to a new one
   - creditor can enter into a novation agreement with the partners at the time the contract was made and the new partnership to release the original partners from their liability with new partners taking over
   - can make new partners liable for debts incurred before they joined the partnership

if no new partner joins, a binding novation agreement must either: have consideration OR be executed as a deed

Question 9

liability for debts incurred after a partner leaves a firm

Answer 9

It is possible for a partner who leaves a firm before a debt is incurred to still be liable for that debt where:
- there is holding out (s14 PA 1890); or
- the outgoing partner fails to give sufficient notice of their departure (s36 PA 1890).

Question 10

holding out

Answer 10

s 14 PA: A person may be liable for a debt if they are “held out” to be a partner to a third-party creditor

Three elements to “holding out” (Nationwide Building Society v Lewis [1998]):
1. a representation (oral, written, by conduct) that X is a partner of the firm > either by X or with their knowledge
2. there must be reliance on that misrep
3. as a result of the reliance on the misrep, the creditor made payment to the firm

Question 11

failure to give appropriate notice of departure

Answer 11

Partner X may be liable for debts after they leave the firm if:
1. A creditor enters into a transaction with the company, knowing that X was a partner; and
2. The creditor is unaware that X is no longer a partner; and
3. X has failed to give the appropriate notice specified in s36 PA 1890.

Two notices are required:
- actual notice (s36(1)) to all existing customers
- notice in the London Gazette (s 36(2))

• cannot be relied upon if the creditor was never aware that the person had been a partner (s36(3)).
• no requirement for the estate/trustee of a partner who is dead/bankrupt to give notice (s36(3)).