Partnership

Partnership (earlier forms, partener, parcener, from Late Lat. partionarius for partitionarius, from partitio, sharing, pars, part), in general, the voluntary association of two or more persons for the purpose of gain, or sharing in the work and profits of any enterprise. This general definition, however, requires to be further restricted, in law, according to the account given below.

The partnership of modern legal systems is based upon the societas of Roman law. 'Societas was either universorum bonorum, a complete communion of property; negotiationis alicujus, for the purpose of a single transaction; vectigalis, for the collection of taxes; or rei unius, joint ownership of a particular thing. The prevailing form was societas universorum quae ex quaestu veniunt, or trade partnership, from which all that did not come under the head of trade profit (quaestus) was excluded. This kind of societas was presumed to be contemplated in the absence of proof that any other kind was intended. Societas was a consensual contract, and rested nominally on the consent of the parties - really, no doubt (though this was not in terms acknowledged by the Roman jurists), on the fact of valuable consideration moving from each partner. No formalities were necessary for the constitution of a societas. Either property or labour must be contributed by the socius; if one party contributed neither property nor labour, or if one partner was to share in the loss but not in the profit (leonina societas), there was no true societas. Societas was dissolved on grounds substantially the same as those of English law (see below). The only ground peculiar to Roman law was change of status (capitis deminutio). Most of the Roman law on the subject of societas is contained in Dig. xvii. tit. 2, Pro socio. Though the English law of partnership is based upon Roman law, there are several matters in which the two systems differ.

(1) There was no limit to the number of partners in Roman law.

(2) In societas one partner could generally bind another only by express mandatum; one partner was not regarded as the implied agent of the others. (3) The debts of a societas were apparently joint, and not joint and several. (4) The heres of a deceased partner could not succeed to the rights of the deceased, even by express stipulation. There is no such disability in England. (5) In actions between partners in Roman law, the beneficium competentiae applied - that is, the privilege of being condemned only in such an amount as the partner could pay without being reduced to destitution. (6) The Roman partner was in some respects more strictly bound by his fiduciary position than is the English partner. For instance, a Roman partner could not retire in order to enjoy alone a gain which he knew was awaiting him. (7) There was no special tribunal to which matters arising out of societas were referred.

Previous to the Partnership Act 1890 the English law of partnership was to be found only in legal decisions and in textbooks. It was mostly the result of judge-made law, and as distinguished from the law of joint stock companies was affected by comparatively few acts of parliament.

In 1890 the Partnership Act of that year was passed to declare and amend the law of partnership; the act came into operation on the 1st of January 1891. With one important exception (§ 23), it applies to the whole United Kingdom. It is not a complete code of partnership law; it contains no provisions regulating the administration of partnership assets in the event of death or bankruptcy, and is silent on the subject of goodwill. The existing rules of equity and common law continue in force, except so far as they are inconsistent with the express provisions of the act. Indeed, the act of 1890 has to be read in the light of the decisions which have built up these rules. On all points specifically dealt with by the act it is now the one binding authority. The act has made no important changes in the law, except in respect of the mode of making a partner's share of the partnership assets available for payment of his separate debts. This change does not affect Scotland. The act is divided into the four main divisions mentioned below.

I. Nature of Partnership. - Partnership is defined to be the "relation which subsists between persons carrying on a business in common with a view of profit." From this definition corporations and companies, such as joint-stock companies and cost-book mining companies, which differ from ordinary partnerships in many important respects, are expressly excluded. The act also contains several subsidiary rules for determining the existence of a partnership. These rules are of a fragmentary nature, and for the most part are expressed in anegative form; they have not introduced any change in the law. Co-ownership of property does not of itself create a partnership, nor does the sharing of gross returns. The sharing of profits, though not of itself sufficient to create a partnership, is prima facie evidence of one. This means that if all that is known is that two persons are sharing profits, the inference is that such persons are partners; but if the participation in profits is only one amongst other circumstances, all the circumstances must be considered, and the participation in profits must not be treated as raising a presumption of partnership, which has to be rebutted. To illustrate the rule that persons may share profits without being partners, the act gives statutory expression to the decision in Cox v. Hickman (1860, 8 H.L.C., 268), viz. that the receipt by a person of a debt or other fixed sum by instalments, or otherwise, out of the accruing profits of a business does not of itself make him a partner; and it re-enacts with some slight modification the repealed provisions of Bovill's Act (28 & 29 Vict. c. 86), which was passed to remove certain difficulties arising from the decision in Cox v. Hickman. Whenever the question of partnership or no partnership arises, it must not be forgotten (though this is not stated in the act) that partnership is a relation arising out of a contract; regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case. If a partnership be the legal consequence of the true agreement, the parties thereto will be partners, though they may have intended to avoid this consequence (Adam v. Newbigging, 1888, L.R. 13 App. Cas. 315). Partners are called collectively a "firm"; the name under which they carry on business is called the firm name. Under English law the firm is not a corporation, nor is it recognized as distinct from the members composing it; any change amongst them destroys the identity of the firm. In Scotland a firm is a legal person distinct from its members, but each partner can be compelled to pay its debts.

At common law there is no limit to the number of partners, but by the Companies Act 1862 (25 & 26 Vict. c. 89, § 4), not more than ten persons can carry on the business of bankers, and not more than twenty any other business, unless (with some exceptions) they conform to the provisions of the act. (See Company, and also Limited Partnerships below.) II. Relations of Partners to Persons dealing with them. - Every partner is an agent of the firm and of his co-partners for the purpose of the partnership business; if a partner does an act for carrying on the partnership business in the usual way in which businesses of a like kind are carried on - in other words, if he acts within his apparent authority - he thereby prima facie binds his firm. The partners may by agreement between themselves restrict the power of any of their number to bind the firm. If there be such an agreement, no act done in contravention of it is binding on the firm with respect to persons who have notice of the agreement. Such an agreement does not affect persons who have no notice of it, unless indeed they do not know or believe the person with whom they are dealing to be a partner; in that case he has neither real, nor, so far as they are concerned, apparent authority to bind his firm, and his firm will not be bound. If a partner does an act, e.g. pledges the credit of the firm, for a purpose apparently not connected with the firm's ordinary course of business, he is not acting in pursuance of his apparent authority, and whatever liability he may personally incur, his partners will not be bound unless he had in fact authority from them.

Apart from any general rule of law relating to the execution of deeds or negotiable instruments, a firm and all the partners will be bound by any act relating to the business of the firm, and done in the firm name, or in any other manner showing an intention to bind the firm, by any person thereto authorized. An admission or representation by a partner, acting within his apparent authority, is evidence against his firm. Notice to an acting partner of any matter relating to the partnership affairs is, apart from fraud, notice to his firm.

A firm is liable for loss or injury caused to any person not a partner, or for any penalty incurred by any wrongful act or omission of a partner acting in the ordinary course of the partnership business, or with the authority of his co-partners; the extent of the firm's liability is the same as that of the individual partner. The firm is also liable to make good the loss (a) where one partner, acting within his apparent authority, receives money or property of a third person and misapplies it; and (b) where a firm in the course of its business receives money or property of a third person, and such money or property while in the custody of the firm is misapplied by a partner. It is not sufficient, in order to fix innocent partners with liability for the misapplication of money belonging to a third party, merely to show that such money was employed in the business of the partnership, otherwise all the members of a firm would in all cases be liable to those beneficially interested therein for trust money improperly employed in this manner by one partner. This is not the case. To fix the other partners with liability, notice of the breach of trust must be brought home to them individually.

The liability of partners for the debts and obligations of their firm arising ex contractu, is joint, and in Scotland several also; the estate of a deceased partner is also severally liable in a due course of administration, but subject, in England or Ireland, to the prior payment of his separate debt. The liability of partners for the obligations of their firm arising ex delicto, is joint and several.

The authority of a partner to bind his co-partners commences with the partnership. A person therefore who enters into a partnership does not thereby become liable to the creditors of his partners for anything done before he became a partner. But a partner who retires from a firm does not thereby cease to be liable for debts or obligations incurred before his retirement. He may be discharged from existing liabilities by an agreement to that effect between himself and the members of the firm as newly constituted and the creditors. This agreement may be either express or inferred as a fact from the course of dealing between the creditors and the new firm. The other ways in which a partner maybe freed from partnership liabilities incurred before his retirement are not peculiar to partnership liabilities, and are not therefore dealt with by the Partnership Act.

A continuing guaranty given to a firm, or in respect of the transactions of a firm, is, in the absence of agreement to the contrary, revoked as to the future by a change in the firm. The reason is that such a change destroys its identity.

Any person, not a partner in the firm, who represents himself (or, as the phrase is, "holds himself out"), or knowingly suffers himself to be represented, as a partner, is liable as a partner to any person who has given credit to the firm on the faith of the representation. The representation may be by words spoken or written, or by conduct. The liability will attach, although the person who makes the representation does not know that the person who has acted on it knew of it. The continued use of a deceased partner's name does not impose liability on his estate.

III. Relations of Partners to one another. - The mutual rights and duties of partners depend upon the agreement between them. Many of these rights and duties are stated in the Partnership Act; but, whether stated in the act or ascertained by agreement, they may be varied by the consent of all the partners; such consent may be express or inferred from conduct. Subject to any agreement, partners share equally in the capital and profits of their business, and must contribute equally to losses, whether of capital or otherwise; they are entitled to be indemnified by their firm against liabilities incurred in the proper and ordinary conduct of the partnership business, and for anything necessarily done for its preservation; they are entitled to interest at 5% on their advances to the firm, but not on their capital. Every partner may take part in the management of the partnership business, but no partner is entitled to remuneration for so doing. The majority can bind the minority in ordinary matters connected with the partnership business, but cannot change its nature nor expel a partner, unless expressly authorized so to do. No partner may be introduced into the firm without the consent of all the partners. The partnership books must be kept at the principal place of business, and every partner may inspect and copy them. Partners must render to each other true accounts and full information of all things affecting the partnership. A partner may not make use of anything belonging to his firm for his private purposes, nor may he compete with it in business. If he does so he must account to his firm for any profit he may make.

Partners may agree what shall and what shall not be partnership property, and can by agreement convert partnership property into the separate property of the individual partners,. and vice versa. Subject to any such agreement, all property originally brought into the partnership stock, or acquired on xx. 28 a account of the firm or for the purposes and in the course of its business, is declared by the act to be partnership property. Property bought with money of the firm is prima facie bought on account of the firm. Partnership property must be applied exclusively for partnership purposes and in accordance with the partnership agreement. Co-owners of land may be partners in the profits of the land without the land being partnership property; if such co-owners purchase other lands out of the profits, these lands will also belong to them (in the absence of any agreement to the contrary) as co-owners and not as partners. The legal estate in partnership land devolves according to the general law, but in trust for the persons beneficially interested therein. As between partners, and as between the heirs of a deceased partner and his executors or administrators, such land is treated as personal or movable estate, unless a contrary intention appears.

When no fixed term has been agreed upon for the duration of the partnership, it is at will, and may be determined by notice at any time by any partner. If a partnership for a fixed term is continued after the term has expired without any express new agreement, the rights and duties of the partners remain as before, so far as they are consistent with a partnership at will.

A partner may assign his share in the partnership either absolutely or by way of mortgage. The assignee does not become a partner; during the continuance of the partnership he has the right to receive the share of profits to which his assignor would have been entitled, but he has no right to interfere in the partnership business, or to require any accounts of the partnership transactions, or to inspect the partnership books. On a dissolution he is entitled to receive the share of the partnership assets to which his assignor is entitled as between himself and his partners, and for this purpose to an account as from the date of dissolution.

Since the act came into operation no writ of execution may issue in England or Ireland against any partnership property, except on a judgment against the firm. If in either of these countries a judgment creditor of a partner wishes to enforce his judgment against that partner's share in the partnership, he must obtain an order of court charging such share with payment of his debt and interest. The court may appoint a receiver of the partner's share, and may order a sale of such share. If a sale be ordered the other partners may buy the share; they may also at any time redeem the charge. The mode of making a partner's share liable for his separate debts in Scotland has not been altered by the act.

IV. Dissolution of Partnership. - A partnership for a fixed term, or for a single adventure, is dissolved by the expiration of the term or the termination of the adventure. A partnership for an undefined time is dissolved by notice of dissolution, which may be given at any time by any partner. The death or bankruptcy of any partner dissolves the partnership as between all its members. If a partner suffers his share in the partnership to be charged under the act for his separate debts, his partners may dissolve the partnership. The foregoing rules are subject to any agreement there may be between the partners. A partnership is in every case dissolved by any event which makes the partnership or its business unlawful. The court may order a dissolution in any of the following cases, viz.: When a partner is found lunatic or is of permanently unsound mind, or otherwise permanently -incapable of performing his duties as a partner; when a partner has been guilty of conduct calculated to injure the partnership business, or wilfully or persistently breaks the partnership agreement, or so conducts himself in partnership matters that it is not reasonably practicable for his partners to carry on business with him; when the partnership can only be carried on at a loss; and lastly, whenever a dissolution appears to the court to be just and equitable. The act is silent as to the effect of the assignment by a partner of his share in the partnership as a cause of dissolution; probably it is now no more than a circumstance enabling the court, if it thinks fit, to grant a dissolution on the ground that it is just and equitable to do so. A dissolution usually is not complete as against persons who are not partners, until notice of it has been given; until then such persons may treat all apparent partners as still members of the firm. Consequently, if notice is not given when it is necessary, a partner may be made liable for partnership debts contracted after he ceased to be a partner. Notice is not necessary to protect the estate of a dead or bankrupt partner from partnership debts contracted after his death or bankruptcy; nor is notice necessary when a person not known to be a partner leaves a firm. If a person not generally known to be a partner is known to be so to certain individuals, notice must be given to them. Notice in the Gazette is sufficient as regards all persons who were not previously customers of the firm; notice in fact must be given to old customers. On a dissolution, or the retirement of a partner, any partner may notify the fact and require his co-partners to concur in doing so.

After a dissolution, the authority of each partner (unless he be a bankrupt) to bind the firm, and the other rights and obligations of the partners, continue so far as may be necessary to wind up the partnership affairs and to complete unfinished transactions. The partners are entitled to have the partnership property applied in payment of the debts of the firm, and to have any surplus divided between them. Before a partner can receive any part of the surplus, he must make good whatever may be due from him as a partner to the firm. To enforce these rights, any partner or his representatives may apply to the court to wind up the partnership business. It was well established before the act, and is still law, that in the absence of special agreement the right of each partner is to have the partnership property - including the goodwill of its business, if it be saleable - realized by a sale. The value of the goodwill depends largely on the right of the seller to compete with the purchaser after the sale. The act makes no mention of goodwill, but the rights of a seller in this respect were fully discussed in the House of Lords in Trego v. Hunt (L.R. 1896, App. Cas. 7). In the absence of special agreement, the seller may set up business in competition with, and in the immediate neighbourhood of, the purchaser, and advertise his business and deal with his former customers, but may not represent himself as carrying on his former business, nor canvass his former customers. The purchaser may advertise himself as carrying on the former business, canvass its customers, and trade under the old name, unless that name is or contains the name of the vendor, and the purchaser by using it without qualification would expose the vendor to the liability of being sued as a partner in the business. If, on a dissolution or change in the constitution of a firm, the goodwill belongs under the partnership agreement exclusively to one or more of the partners, the partner who is entitled to the goodwill has the rights of a seller, and those to whom the goodwill does not belong have the rights of a purchaser.

When a partner has paid a premium on entering into a partnership for a fixed term, and the partnership is determined before the expiration of the term, the court may, except in certain cases, order a return of the premium or of some part of it. In the absence of fraud or misrepresentation, the court cannot make such an order when the partnership was at will, or, being for a fixed term, has been terminated by death or by reason of the misconduct of the partner who paid the premium; nor can it do so if terms of dissolution have been agreed upon, and the agreement makes no provision for the return of premium.

When a person is induced by the fraud or misrepresentation of others to become a partner with them, the court will rescind the contract at his instance (Adam v. Newbigging, 1888, R. 13 App. Cas. 308). Inasmuch as such a person is under the same liability to third parties for liabilities of the firm incurred before rescission as he would have been under had the contract been valid, he is entitled on the rescission to be indemnified by the person guilty of the fraud or making the representation against these liabilities. He is also entitled, without prejudice to any other rights, to receive out of the surplus assets of the partnership, after satisfying the partnership liabilities, any money he may have paid as a premium or contributed as capital, and to stand in the place of the creditors of the firm for any payments made by him in respect of the partnership liabilities.

If a partner ceases to be a member of a firm, and his former partners continue to carry on business with the partnership assets without any final settlement of accounts, he, or, if he be dead, his estate, is, in the absence of agreement, entitled to such part of the subsequent profits as can be attributed to the use of his share of the partnership assets, or, if he or his representatives prefer it, to interest at 5% on the amount of his share. If his former partners have by agreement an option to purchase his share, and exercise the option and comply with its terms, he is not entitled to any further or other share in profits than that given him by the agreement. If, however, his former partners, assuming to exercise such an option, do not comply with its terms, they are liable to account for subsequent profits or interest to the extent mentioned above. Subject to 'any agreement between the partners, the amount due from the surviving or continuing partners to an outgoing partner, or the representatives of a deceased partner, in respect of 'his share in the partnership, is a debt accruing at the date of the dissolution or death.

In the absence of any special agreement on a final settlement of accounts between partners, losses (including losses of capital) are paid first out of profits, next out of capital, and lastly by the partners in the proportions in which they share profits. The assets of the firm, including all sums contributed to make up losses of capital, are applied in paying the debts and liabilities of the firm to persons who are not partners; then in paying to each partner rateably what is due from the firm to him, first for advances and next in respect of capital; and the ultimate residue (if any) is divisible among the partners in the proportion in which profits are divisible.

Limited Partnerships

In the law of partnership as set out above, the Limited Partnership Act 1907 introduced a considerable innovation. By that act power was given to form limited partnerships, like the French societe en commandite- that is, a partnership consisting not only of general partners, but of others whose liability is limited to the amount contributed to the concern. Such a limited partnership must not consist, in the case of a partnership carrying on the business of banking, of more than ten persons, and in the case of any other partnership of more than twenty persons. There must be one or more persons called general partners who are liable for all the debts and obligations of the firm, and limited partners, who on entering into partnership contribute a certain sum or property valued at a stated amount, beyond which they are not liable. Limited partners cannot withdraw or receive back any of their contributions; any withdrawal brings liability for the debts and obligations of the firm up to the amount withdrawn. A body corporate may be a limited partner. No limited partner can take part in the management of a partnership business; if he does so he becomes liable in the same way as a general partner, but he can at all times inspect the books of the firm and examine into the state and prospects of the business. Every limited partnership must be registered with the registrar of joint stock companies, and the following particulars must be given: (a) the firm name; (b) the general nature of the business; (c) the principal place of business; (d) the full name of each of the partners; (e) the term, if any, for which the partnership is entered into and the date of its commencement; (f) a statement that the partnership is limited, and the description of every limited partner as such; (g) the sum contributed by each limited partner, and whether paid in cash or how otherwise. If any change occurs in these particulars, a statement signed by the firm and specifying the nature of the change, must be sent within seven days to the registrar. An advertisement must also be inserted in the gazette of any arrangement by which a general partner becomes a limited partner or under which the share of a limited partner is assigned. Any person making a false return for the purpose of registration commits a misdemeanour and is liable to imprisonment with hard labour for a term not exceeding two years. The law of private partnership applies to limited partners except where it is inconsistent with the express provisions of the Limited Partnership Act.

See Sir Nathaniel [Lord] Lindley, A Treatise on the Law of Partnership (7th ed., London, 1905); Sir Frederick Pollock, A Digest of the Law of Partnership, incorporating the Partnership Act 1890 (8th ed., London, 1905); also article on "Partnership" in the Encyclopaedia of the Laws of England. Scots Law. - The law of Scotland as to partnership agrees in the main with the law of England. The principal difference is that Scots law recognizes the firm as an entity distinct from the individuals composing it. The firm of the company is either proper or descriptive. A proper or personal firm is a firm designated by the name of one or more of the partners.' A descriptive firm does not introduce the name of any of the partners. The former may sue and be sued under the company name; the latter only with the addition of the names of three at least (if there are so many) of the partners. A consequence of this view of the company as a separate person is that an action cannot be maintained against a partner personally without application to the company in the first instance, the individual partners being in the position of cautioners for the company rather than of principal debtors. The provisions of the Mercantile Law Amendment Act 1856 (19 & 20 Vict. c. 60, § 8), do not affect the case of partners. But, though the company must first be discussed, diligence must necessarily be directed against the individual partners. Heritable property cannot be held in the name of a firm; it can only stand in the name of individual partners. Notice of the retirement of even a dormant partner is necessary. The law of Scotland draws a distinction between joint adventure and partnership. Joint adventure or joint trade is a partnership confined to a particular adventure or speculation, in which the partners, whether latent or unknown, use no firm or social name, and incur no responsibility beyond the limits of the adventure. In the rules applicable to cases of insolvency and bankruptcy of a company and partners, Scots law differs in several respects from English. Thus a company can be made bankrupt without the partners being made so as individuals. And, when both company and partners are bankrupt, the company creditors are entitled to rank on the separate estates of the partners for the balance of their debts equally with the separate creditors. But in sequestration, by the Bankruptcy Scotland Act 1856, § 66, the creditor of a company, in claiming upon the sequestrated estate of a partner, must deduct from the amount of his claim the value of his right to draw payment from the company's funds, and he is ranked as creditor only for the balance. (See Erskine's Inst. bk. iii. tit. iii.; Bell's Comm. ii. 500-562; Bell's Principles, §§ 350-403.) United States. - In the United States the English common law is the basis of the law. Most states have, however, their own special legislation on the subject. The law in the United States permits the existence of limited partnerships, corresponding to the societes en commandite established in France by the ordinance of 1673, and those legalized in England under the act of 1907 (see above). The State of New York was the first to introduce this kind of partnership by legislative enactment. The provisions of the New York Act have been followed by most of the other states. In many states there can be no limited partnerships in banking and insurance. In this form of partnership one or more persons responsible in solido are associated with one or more dormant partners liable only to the extent of the funds supplied by them. In Louisiana such partnerships are called partnerships in commendam (Civil Code, art. 2810)..

1 In France, it is to be noted, the style of a firm must contain no names other than those of actual partners. In Germany it must, upon the first constitution of the firm, contain the name of at least one actual partner, and must not contain the name of any one who is not a partner; when once established the style of the firm may be continued notwithstanding changes.

In New York the responsible partners are called general partners, the others special partners. Such partnerships must, by the law of most states, be registered. In Louisiana universal partnerships (the societates universorum bonorum of Roman law) must be created in writing and registered (Civil Code, art. 2800). In some states the English law as it stood before Cox v. Hickman is followed, and participation in profits is still regarded as the test of partnership, e.g. Leggett v. Hyde (58 New York Rep. 272). In some states nominal partners are not allowed. Thus in New York, where the words "and Company" or "and Co." are used, they must represent an actual partner or partners. A breach of this rule subjects offenders to penalties. In most states claims against the firm after the death of a partner must, in the first instance, be made to the survivors. The creditors cannot, as in England, proceed directly against the representatives of the deceased. An ordinary partnership between miners for working a mine is not dissolved by the death of one of the partners, nor by the transfer by one of his interest in the concern. Contract is not deemed the basis of the relation between the partners, but rather a common property and co-operation in its exploitation (Parsons, Principles of Partnership, § i 5). A corporation cannot become a partner in any mercantile adventure, unless specially authorized by charter or general statute. If it could, the management of its affairs would no longer be exclusively in the hands of its directors, to whom the law has entrusted it. Hence, corporations cannot associate for the formation of a "trust" to be managed by the associated partners.

See 3 Kent's Comm., lect. xliii.; Story, On Partnership; Bates, Law of Partnership (1888); Burdick, Law of Partnership (1899).