OHT 31-1

EXPECTED LEARNING OUTCOMES

On successful completion, you will be able to:

Ÿ define a partnership, and outline its

characteristics;

Ÿ identify the advantages and disadvantages of a

partnership;

Ÿ discuss tests and indicators for a partnership;

Ÿ explain the liabilities of partners to outsiders;

Ÿ outline the rights and duties of partners;

Ÿ list the ways a partnership will be dissolved;

Ÿ explain limited liability partnership;

Ÿ determine how partnership assets are

distributed on dissolution

Ÿ distinguish partnerships from joint ventures.

OHT 31-2

PARTNERSHIP

“The rules of equity and of common law

applicable to partnership shall continue in
force except so far as they are inconsistent
with the express provisions of the…”
Partnership Act 1892 (NSW). – s.46
DEFINITION OF A PARTNERSHIP

Definition found in s. 1 Partnership Act 1892

(NSW)

Two (2) or more persons who:

Ÿ carry on a business — must not be a 'one-

off' transaction (Smith v Anderson)

Ÿ in common — the principles of agency

law apply so that partners are both agents
and principals

Ÿ with a view to making a profit — Non-

profit clubs and societies are not
partnerships.
OHT 31-3
STATUTORY INDICATORS OF A
PARTNERSHIP

The rules are found in s.2.

Courts can decide if partnership exists by

applying statutory rules:

Ÿ Common ownership of property and

sharing of gross returns could indicate a
partnership but are not conclusive (Rules
1 & 2);

Ÿ Profit sharing is prima facie evidence of a

partnership (Rule 3).
OHT 31-
FORMATION OF A PARTNERSHIP

Ÿ Persons may be corporations

Ÿ Maximum limit on partners is usually 20

persons

Ÿ Professionals have higher maximum

limits, e.g. Accountants = 1000;
Solicitors = 400
OHT 31
AUTHORITY IN A PARTNERSHIP

How does a partnership enter into contracts?

One partner may enter into a contract that

binds all of the other partners.

Partners are legally bound by the conduct of

partners who:

Ÿ have actual authority

and/or

Ÿ have apparent authority — appearance of

authority to outsiders. Three elements
must be present:

- the partner was involved in

partnership's usual business;

- actions were carried out in the usual

way;

– the outsider was not aware of any

limitations on the partner.
OHT 31

AUTHORITY IN A PARTNERSHIP

Section 5 is very important.

“Every partner in a partnership … is an agent of

the firm and of the other partners for the purpose
of the business of the partnership; and the acts of
every partner who does any act for carrying on in
the usual way business of the kind carried on by
the firm of which the partner is a member, binds
the firm and the other partners, unless the partner
so acting has in fact no authority to act for the firm
in the particular matter, and the person with whom
the partner is dealing either knows that the partner
has no authority, or does not know or believe the
partner to be a partner.”
Section 8 is important.

“If it has been agreed between the partners

that any restrictions shall be placed upon the
power of any one or more of them to bind a
firm … no act done in contravention of the
agreement is binding on the firm with respect
to persons having notice of the agreement”.

Partners may agree to limit their authority in a

partnership agreement. A third party is not
bound by the limitation unless they know
about it. The third party may sue all the
partners jointly.

Remember – the contract with the third party

is valid even though one of the partners has
breached the partnership agreement.
An example of the application of these rules is
provided by Mercantile Credit Ltd v Garrod
[1962] 3 All ER 1103, where two partners in a
garage business had agreed that they would not
buy and sell cars. However, one of them did sell a
car which the business did not own, to a 3rd party.
The 3rd party obviously had to return the car to its
rightful owner, and then sued both of the partners
for breach of contract of sale in that clear title had
not been transferred. The partner who had not
participated in the transaction sought to avoid
liability on the basis of the agreement between the
two partners limiting their authority. However the
court held that the buying and selling of cars was
within the normal scope of business of a garage,
that there was no evidence that the 3rd party as
aware of the agreement, and so both partners were
liable.

Section 6
Partners bound by acts on behalf of firm

(1) An act or instrument relating to the

business of a firm … and done or
executed in the firm-name, or in any
other manner, showing an intention to
bind the firm by any person thereto
authorised, whether a partner or not, is
binding on the firm and all the partners.
IMPLIED AUTHORITY OF PARTNERS

This means the partners do not need the

permission of the other partners to carry out
these acts.

Ÿ To sell the goods or chattels of the firm;

Ÿ to purchase goods normally used by the

firm;

Ÿ to engage employees;

Ÿ to receive payments and issue receipts;

Ÿ to accept and issue negotiable instruments

(eg cheques);

Ÿ to raise credit for the firm (ie to borrow

money).
OHT 31-
LIABILITY OF PARTNERS FOR DEBTS
AND CONTRACTS

Section 9:

“Every partner in a firm … is liable jointly

with the other partners for all debts and
obligations of the firm incurred while the
partner is a partner; and (if the partner is an
individual) after the partner’s death the
partner’s estate is also severally liable in a due
course of administration for such debts and
obligations so far as they remain unsatisfied,
but subject to the prior payment of the
partner’s separate debts”.

Ÿ Partners have unlimited joint liability for

the debts of the partnership.

Ÿ Joint liability means creditors may sue the

partnership, all the partners or individual
partners. The sued partners may 'join'
other partners.

Ÿ NSW partners have joint and several

liability.
OHT 31-10
LIABILITY OF PARTNERS UNDER
TORT LAW

Section 11:

Ÿ Partners have joint and several liability

where any partner acting in the ordinary
course of business causes injury or loss to
an outsider.

Ÿ The tort must have been committed by a

partner who was:

- acting in the ordinary course of the

partnership business; or

- had actual or apparent authority

OHT 31-11
LIABILITY ON CHANGE OF
PARTNERS

Ÿ Partners may be liable after they retire

unless they notify clients and publicise the
retirement.

Ÿ They remain liable for debts and liabilities

incurred by the firm while they were
partners.

Ÿ New partners are generally not liable for

any debts incurred before their admission,
unless they agree to be liable.
OHT 31-12
LIMITED PARTNERSHIPS

Ÿ Partners can be 'silent investors'

Ÿ The liability of one or more of the

partners—but not all—is limited to an
agreed value

Ÿ At least one general partner manages the

business and has unlimited liability

Ÿ Limited partners have unlimited liability

if they participate in the general
management
OHT 31-13
MAIN RIGHTS OF PARTNERS

Ÿ Equal sharing of profits and losses

Ÿ Indemnity for outlays

Ÿ To share in management and decision

making

Ÿ To stop admission of new partners

Ÿ To inspect and copy accounts

Ÿ Interest on money lent to firm

OHT 31-14
DUTIES OF PARTNERS

All partners have a fiduciary duty to each

other.

They must act in the best interests of the

partnership by:

• keeping true and accurate accounts;

• turning over privately earned profits to the

partnership;

• not competing with the partnership.

OHT 31

DUTIES – SECTION 24

(1) The interests of partners in the partnership

property and their rights and duties in relation
to the partnership shall be determined, subject
to any agreement expressed or implied
between the partners, by the following rules:

(1) All the partners are entitled to share equally in

the capital and profits of the business, and
must contribute equally towards the losses
whether of capital or otherwise sustained by
the firm.

(2) The firm must indemnify every partner in

respect of payment made and personal
liabilities incurred by the partner.

(a) In the ordinary and proper conduct of the

business of the firm, or

(b) In or about anything necessarily done for

the preservation of the business or
property of the firm.
(3) A partner making, for the purpose of the
partnership, any actual payment or advance
beyond the amount of capital which the
partner has agreed to subscribe is entitled to
interest at the rate of seven per centum per
annum from the date of the payment or
advances.

(4) A partner is not entitled before the

ascertainment of profits to interest on the
capital subscribed by the partner.

(5) Every partner may take part in the

management of the partnership business.

(6) No partner shall be entitled to remuneration

for acting in the partnership business.

(7) No person may be introduced as a partner

without the consent of all existing partners.

(8) Any difference arising as to ordinary

matters connected with the partnership
business may be decided by a majority of
partners, but no change may be made in the
nature of the partnership business without
the consent of all existing partners.
(9) The partnership books are to be kept at the
place of business of the partnership (or the
principal place, if there is more than one),
and every partner may, when the partner
thinks fit, have access to and inspect and
copy any of them.
HOW CAN A PARTNERSHIP BE ENDED?

Ÿ Expiration of time or notice

Ÿ Operation of the law, e.g. by death or

bankruptcy of any partner

Ÿ Illegality

Ÿ Court order, e.g:

- insanity or incapacity

- breach of partnership agreement

- 'just and equitable'

OHT 31-16
DISTRIBUTION OF PARTNERSHIP
ASSETS ON DISSOLUTION

Section 44 of the Act:

Debts not paid from profits or capital are paid

from partners’ personal assets according to the
partnership agreement.

Debts are paid in following order:

1. Debts to creditors

2. Repayment of loans by the firm to

partners

3. Repayment of capital by the firm to

partners

4. The residue divided equally between the

partners or in accordance with the
partnership agreement.

Section 44 of the Act

OHT 31
DEFINITION OF JOINT VENTURE

A joint venture is a contract between two or

more individuals or business entities to enter a
commercial activity, usually one major
project, for the individual gain of each party.

Each joint venturer:

Ÿ owns a share of the assets;

Ÿ is individually liable to its creditors;
Ÿ has a right to receive a share of the
income; and
Ÿ does not legally bind others.

An agreement described as a joint venture

may be a partnership. See United Dominions
v Brian.