UNIVERSITY OF MAIDUGURI

CENTRE FOR DISTANCE LEARNING

ACC 207: Business Law II (2 Units)

Course Facilitator:

STUDY GUIDE
Course Code/ Title:
Credit Units:
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Timing:
Total hours of Study per each course material should be twenty Six hours
(26hrs) at two hours per week within a given semester.
You should plan your time table for study on the basis of two hours per
course throughout the week. This will apply to all course materials you
have. This implies that each course material will be studied for two hours
in a week.
Similarly, each study session should be timed at one hour including all the
activities under it. Do not rush on your time, utilize them adequately. All
activities should be timed from five minutes (5minutes) to ten minutes
(10minutes). Observe the time you spent for each activity, whether you
may need to add or subtract more minutes for the activity. You should also
take note of your speed of completing an activity for the purpose of
adjustment.
Meanwhile, you should observe the one hour allocated to a study session.
Find out whether this time is adequate or not. You may need to add or
subtract some minutes depending on your speed.
You may also need to allocate separate time for your self-assessment
questions out of the remaining minutes from the one hour or the one hour
which was not used out of the two hours that can be utilized for your SAQ.
You must be careful in utilizing your time. Your success depends on good
utilization of the time given; because time is money, do not waste it.
Reading:
When you start reading the study session, you must not read it like a
novel. You should start by having a pen and paper for writing the main

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points in the study session. You must also have dictionary for checking
terms and concepts that are not properly explained in the glossary.
Before writing the main points you must use pencil to underline those
main points in the text. Make the underlining neat and clear so that the
book is not spoiled for further usage.
Similarly, you should underline any term that you do not understand its
meaning and check for their meaning in the glossary. If those meanings in
the glossary are not enough for you, you can use your dictionary for
further explanations.
When you reach the box for activity, read the question(s) twice so that you
are sure of what the question ask you to do then you go back to the in-text
to locate the answers to the question. You must be brief in answering those
activities except when the question requires you to be detailed.
In the same way you read the in-text question and in-text answer carefully,
making sure you understand them and locate them in the main text.
Furthermore before you attempt answering the (SAQ) be sure of what the
question wants you to do, then locate the answers in your in-text carefully
before you provide the answer.
Generally, the reading required you to be very careful, paying attention to
what you are reading, noting the major points and terms and concepts. But
when you are tired, worried and weak do not go into reading, wait until
you are relaxed and strong enough before you engage in reading activities.
Bold Terms:
These are terms that are very important towards
comprehending/understanding the in-text read by you. The terms are
bolded or made darker in the sentence for you to identify them. When you
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come across such terms check for the meaning at the back of your book;
under the heading glossary. If the meaning is not clear to you, you can use
your dictionary to get more clarifications about the term/concept. Do not
neglect any of the bold term in your reading because they are essential
tools for your understanding of the in-text.
Practice Exercises
a. Activity: Activity is provided in all the study sessions. Each activity
is to remind you of the immediate facts, points and major
informations you read in the in-text. In every study session there is
one or more activities provided for you to answer them. You must be
very careful in answering these activities because they provide you
with major facts of the text. You can have a separate note book for
the activities which can serve as summary of the texts. Do not forget
to timed yourself for each activity you answered.
b. In-text Questions and Answers: In-text questions and answers are
provided for you to remind you of major points or facts. To every
question, there is answer. So please note all the questions and their
answers, they will help you towards remembering the major points in
your reading.
c. Self Assessment Question: This part is one of the most essential
components of your study. It is meant to test your understanding of
what you studied so you must give adequate attention in answering
them. The remaining time from the two hours allocated for this study
session can be used in answering the self- assessment question.
Before you start writing answers to any questions under SAQ, you
are expected to write down the major points related to the particular
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 question to be answered. Check those points you have written in the
in-text to ascertain that they are correct, after that you can start
explaining each point as your answer to the question.
When you have completed the explanation of each question, you can
now check at the back of your book, compare your answer to the
solutions provided by your course writer. Then try to grade your
effort sincerely and honestly to see your level of performance. This
procedure should be applied to all SAQ activities. Make sure you are
not in a hurry to finish but careful to do the right thing.
e-Tutors: The eTutors are dedicated online teachers that provide services
to students in all their programme of studies. They are expected to be
twenty- four hours online to receive and attend to students Academic and
Administrative questions which are vital to student’s processes of their
studies. For each programme, there will be two or more e-tutors for
effective attention to student’s enquiries.
Therefore, you are expected as a student to always contact your e-tutors
through their email addresses or phone numbers which are there in your
student hand book. Do not hesitate or waste time in contacting your e-
tutors when in doubt about your learning.
You must learn how to operate email, because e-mailing will give you
opportunity for getting better explanation at no cost.
In addition to your e-tutors, you can also contact your course facilitators
through their phone numbers and e-mails which are also in your handbook
for use. Your course facilitators can also resolve your academic problems.
Please utilize them effectively for your studies.
Continuous assessment
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The continuous assessment exercise is limited to 30% of the total marks.
The medium of conducting continuous assessment may be through online
testing, Tutor Marked test or assignment. You may be required to submit
your test or assignment through your email. The continuous assessment
may be conducted more than once. You must make sure you participate in
all C.A processes for without doing your C.A you may not pass your
examination, so take note and be up to date.
Examination
All examinations shall be conducted at the University of Maiduguri Centre
for Distance Learning. Therefore all students must come to the Centre for
a period of one week for their examinations. Your preparation for
examination may require you to look for course mates so that you form a
group studies. The grouping or Networking studies will facilitate your
better understanding of what you studied.
Group studies can be formed in villages and township as long as you have
partners offering the same programme. Grouping and Social Networking
are better approaches to effective studies. Please find your group.
You must prepare very well before the examination week. You must
engage in comprehensive studies. Revising your previous studies, making
brief summaries of all materials you read or from your first summary on
activities, in-text questions and answers, as well as on self assessment
questions that you provided solutions at first stage of studies. When the
examination week commences you can also go through your brief
summarizes each day for various the courses to remind you of main
points. When coming to examination hall, there are certain materials that
are prohibited for you to carry (i.e Bags, Cell phone, and any paper etc).
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You will be checked before you are allowed to enter the hall. You must
also be well behaved throughout your examination period.

Acc 207 Business Law II

This subject is a two units compulsory second semester course for Accounting students of
level two hundred. The course is made up of, Sales of goods Act, C.I.F & F.O.B contracts,
Hire purchase and Consumer credit, Legal personality, Partnership. .

STUDY SESSION ONE: - Definition, The passing of the property and risks, The buyers

title to the goods, Implied terms, Condition and Warranties, Delivery, Payment and
Acceptance of the goods, Right of the unpaid seller, Remedies of the buyer, C.I.F and
F.O.B contracts, Hire Purchase and Consumer credit, Rights and obligation between
the parties, Termination of the Agreement, The Enforcement of the agreement by the
Creditor, Remedies of the Debtor.

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 INTRODUCTION
Although the relationship between a buyer and a seller of goods is contractual, the law
imposes additional rules upon the parties over and above those in the law of contract. These rules
are contained in the sales of the goods Act and unfair contract terms Act. The term “sales of goods”
embraces agreements which are apparently very different. The sale of a packet of sweets and the
sale of a multi- million pound aircraft are well within the ambit of the legislation.

1.0 DEFINATION
Section 2 (1) defines a contract of sales of good as “ a contract whereby the seller transfer of
agrees to transfer the property in goods to the buyer for a money consideration called the price.
a) Property means the ownership (title) to goods and therefore the Act does not cover contracts of
bailment i.e. to borrow or hire another person’s goods
b) “Transfer or agrees to transfer the property”. The term ‘contract of sale’ includes:-
i. Sale where the property in the goods is transfer at once; and
ii. Agreement to sale. This is define by section 2 (5) as “a contract of sale under which the
transfer of the property is to take place at a future time or subject to a conditions”.
c) Goods. Section 61 states that goods are personal chattels other than things in action (e.g.
cheques, stocks and shares) and money. The goods may be:-
i. Specific goods – which are identified and agreed upon at the time the contract of sale is
made (section 61). For example, “that washing machine”.
ii. Unascertained goods – goods which are not specifically identified but are referred to buy
description, for example “500 tons of wheat from the cargo of 1,000 tons on the challenger
“or” 3 Hepplewhite chairs”.
Specific or unascertained goods may be existing or future goods
 Existing goods – goods which are owned or possessed by the seller at the time of the contract of
sale is made (section 5(1)).
 Future goods – goods to be manufacture or acquired by the seller after the making of the
contract of sale.
d) “A money consideration called the price “. A contract of barter i.e. where goods are exchange
for other goods is not a contract of sale. However, where goods are exchange for a combination
of money and other goods, the contract is one of sale of goods.

1.2 Formation of the contract

a) Form. The general rules of contract apply i.e. offer acceptance, intention to create legal relation
etc. Section 4 provides that “a contract of sale may be in writing (either with or without seal). Or by
word of mouth, or partly in writing and partly by word of mouth, or may be implied from the
conduct of the parties”
b) Consideration. Section & provides that the price may be fixed:-
I. By the contract, for example a car for $500
II. In a manner agreed in the contract, for example by valuation of a third party;
III. By course of dealing between the parties.
If the exact price is not determine in accordance with the above provisions and it is clear that the
parties intend that some price is payable, the buyer must pay a reasonable price.
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 2.0 THE PASSING OF THE PROPERTY AND RISK
2.1 INTRODUCTION
The transfer of property means the transfer of ownership in the goods and therefore is very
different from the physical delivery of possession of the goods. Thus the seller might be in
possession of the goods even thought the property has passes to the buyer. The passing of the
property is important for three reasons.
a) Unless the parties agree a different time for payment the seller can sue for the price only after
property has passed (section 49)
b) Unless the buyer has ownership of the goods he cannot normally transfer the ownership on a further
person.
c) The risk of damage normally passes with the property (Section 20)

2.2 THE TIME AND TRANSFER OF PROPERTY

. The rules as to the time that property passes depend on whether the goods are specific or
unascertained.
a) Specific goods Section 17 states that property in specific goods passes to the buyer at such time as
the parties intend it to be transferred. The invention of the parties can be determined by reference to
the terms of the contract, the conduct of the parties and the circumstance of the case.
b) Unascertained goods. Section 16 states that there is a contract for the sale of unascertained goods;
no property is transferred to the buyer unless and until they are ascertained.
c) The rules in section 18. Unless a contrary intention appears the following rules are used for
ascertaining the intention of the parties as to the time at which the property in the goods is to pass:
Rule 1 where there is an unconditional contracts for the sale of specific goods in a deliverable
state, the property in the goods passes to the buyer when the contract is made and it is immaterial
whether the time of payment or the time of delivery are postponed section 61(5) states that
“deliverable state” means that the goods are in such a state that the buyer would under the contract
be bound to take delivery of them. Thus, if goods require anything to be done to them in other for
them to be ready for delivery or in other to, make them completely with the contract; they will not
be in deliverable state.
Rule 2 where there is a contract for the sale of specific goods and the seller is bound to do
something to the goods, for the purpose of putting them in a deliverable state, the property does not
pass until such thing is done and the buyer has of this fact.
Rule 3 where there is a contract for the sale of specific goods in a deliverable state but the seller is
bound to weight, measure, test or do some other act of thing with reference to the goods for the
purpose of ascertaining the price, the property does not pass until such act or thing is done and the
buyer has notice of this fact.
Rule 4 when the goods are delivered to the buyer on approval “on sale or return” or other similar
terms the property passes to the buyer.
a) When he signifies his approval or acceptance to the seller or does any other act adopting the
transaction; or
b) Retains the goods without giving notice of rejection within the time fixed in the contract or, if none,
within a reasonable time.

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 Rule 5 where there is a contract for the sale of unascertained or future goods sold by description,
the property passes when goods of that description and in a deliverable state are unconditionally
appreciated to the contract by the seller with the assent of the buyer or by the buyer with the assent
of the seller

2.3 THE TRANSFER OF THE RISK

Section 20 states that unless the parties agree otherwise, the risk passes at the same time as
the property. Thus, if the goods are lost or stolen the loss falls on the seller if it occurs before the
property has passed otherwise on the buyer.
There are however several exceptions to the rule:
(a) If delivery has been delayed through the fault of either buyer or seller, the goods are at the risk of
the party at fault as regards any loss which might not have occurred but for such faulty as regards
any loss which might not have occurred but fir such faculty.
(b) If after the property in the goods has passed to the buyer the seller remains in possession as the
buyer’s bailee, agreeing to provide safe for the gods for such a certain period, the seller is liable if
the goods perish as a result of his negligence (section 20.)
(c) If the parties agree that the risk is to pass at a time before or after the property has passed to the
buyer (section 20).
(d) In C.I.F contracts where the agreed price covers the cost of the goods, insurance and freight
charges, the property passes when the buyer receives the shipping documents, but the risk passes as
soon as the goods are loaded on the ship.
(e) Where the seller of goods agrees to deliver them at his own risk to a place other that where they
were when sold, the buyer must, nevertheless, take any risk of deterioration in the goods
necessarily incidental to the course of transit (section 20).

2.4 PERISHIN OF THE GOODS

If the gods perish then the loss will normally fall on the party who bears the risk. However, the
perishing of the goods may have a different effect in the following circumstances:-
(a) Section 6 states that where there is a contract for the sale of specific goods and the goods
without the knowledge of the seller have perished at the time when the contract is made, the
contract is void.
(b) Section 7 provides that there is an agreement to sell specific goods which have perished,
without any fault on the part of the seller or the buyer, before risk passes to the buyer, the
agreement is void. In other words the contract is frustrated and the buyer is not liable for the
price and the seller is not liable to deliver the goods and cannot be sued for non-delivery.
Note however:-
(i) If the risk has passed to the buyer, he must bear the loss
(ii) The word ‘Perish’ in section 7 probably means the same as in section 6.
(iii) Section 7 only applies to specific goods. However if unascertained goods perish the contract
may be avoided under the ordinary rules of frustration. For example, if Alex agrees to sell
Yusuf 200 tons of potatoes from the 5,000 tons growing on Jos high hills and unknown to
the parties Jos high hills has been destroyed by fire, it will be impossible for Alex to
perform the contract. If however he had merely agreed to sell Yusuf 200 tons of potatoes, he
could supply them from another source and therefore the contract would not be frustrated.

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 3.0 THE BUYER’S TITLE TO THE GOODS
Section 21(1) states that were the goods are sold by a person who is not the owner; the
buyer acquires no better title to the goods than the seller. The section is in accordance with the
common law rule of nemo dat quod non habet (no one can give what he has not got). There are,
however, the following exceptions to section 21(1)
1. Estoppels
2. Sale by a factor
3. Sale by an agent under or statutory authority
4. Sale under a common law or statutory power
5. Sale in market overt
6. Sale under a voidable title
7. Resale by seller in possession
8. Sale by buyer in possession
9. Sale by hirer of motor vehicles.

4.0 CONDITIONS WARRANTIES

4.1 Introduction
Like every contract, the parties to a contract for the sale of goods must act in accordance with
the terms agreed between them.
The parties may expressly agreed to a certain term but more important sale of good act implies
obligation on vital matters such as the seller’s title to the goods, the quality and description of the
goods and the time and place of delivery.
A section in the sale of good act states that these implied obligations may be negative or varied by
express agreement, or by the course of dealing between the parties or trade usage but this right to
contract has been severely limited by the unfair contract terms act.
The terms of the contract may be either condition or warrant. A condition goes to the root of the
contract and entitles the injured party to prejudice the contract and sue damage; a warrant merely
gives him a right to damages. Whether a term is a condition or a warrant will depend upon the
construction of the contract. The buyer may lose his right to prejudice the contract for a breach of
condition if the contract is not severable and he has accepted any part of the goods.

4.2 Implied Terms as to Title

In any commercial transaction
In the course of a Business: The provision only covers business sales i.e. those made by a
shopkeeper or a declarer this are very important. If the sale is a private one, and this is very
important. If the sale is a private one, the buyer will have to prove not that the goods are not
merchantable, but that they do not answer the description so that the seller is in breach of section
13.
a. Merchantable quality, Section 14(6) defines ‘merchantable’ as follows: are of merchantable quality
if they are as fit for the purpose for which goods of appliedto them, the price (if relevant) and all
the other relevant circumstances”.

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b. Exceptions. The first where the implied conditions will not apply is where the defects are specially
drawn to the buyer’s attention. The second case means that the buyer cannot reject goods that are
not merchantable where he has examined the goods before purchase and the examination ought to
have revealed the defects.

4.3 Sales by Description

4.4 Implied Terms as to Merchantable Quality

4.5 Sales By Sample

Under section 15, if goods are sold by sample there are three implied conditions:
1. That the bulk shall correspond with the sample (and see section 13(2) above).
2. That the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
3. That the goods are free from any defect rendering them unmerchantable which would not be
apparent on reasonable examination of the goods.

4.6 Fitness as to purpose

Section 14(3) states that where the seller sells goods in the course of a business and the buyer,
expressly or by implication, makes known to the seller any particular purpose for which the goods
are being bought, there is an implied condition that the goods are fit for that purpose, whether or
not that is a purpose for which such goods are commonly supplied, except where the circumstances
show that the buyer show that the buyer does not rely, or that it is unreasonable for him to rely, on
the skill or judgment of the seller.
a. Different Between Section 14(2) and Section 14(3)
Section 14(3) applies where the goods are not fit for the purpose specified by the buyer, even
though they are merchantable, i.e. fit for the purpose they are commonly used for.

Example
Daffy Duck goes into a shop and ask for “something to heat my bath water with”. Sylvester, the
shopkeeper, gives him a hot water bottle. Daffy Duck complains that his bath water is still very
chilly. The hot water bottle as probably the finest possible kind for its normal purpose i.e. it is
merchantable, but it still does not fulfill section 14(3).
b. Specification of purpose. The specification of the purpose may be expressed or implied the purpose
will be implied where the purpose for which the goods are required is obvious.
c. Reasonably fit for the Purpose. If the buyer has some peculiarity such as an abnormally sensitive
skin, he will not be able to rely on this condition if he fails to reveal this and the goods are fit for a
normal buyer.
d. Exceptions. This condition will not be implied if the circumstances show that the buyer did not rely
or it would have been unreasonable for him to rely on the seller (section 14(3)). If therefore Daffy
Duck in the example in (a) above had asked for “a hot water bottle” or “a hot water bottle to heat
my path water” he would not be relying on the seller’s skill and judgment.

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 5.0 Delivery, Payment and Acceptance of the goods
5.1 Introduction
The parties can make whatever agreement they like about the time, place and manner of delivery
and payment (Section 27). What follows is an explanation of the rights and duties between the
buyer and the seller when they have not agreed anything difference in the contract.

5.2 Definition of Delivery

Section 61 states that delivery is the voluntary transfer of possession from person to another.
Delivery may be achieved in one of several ways:-
i. By physical transfer where the goods are handed to the buyer with the intention of
transferring possession.
ii. By delivery of the means of control. For example, by handing over the key of the warehouse
where the goods are stored.
iii. By attainment, i.e. where third party acknowledges to the buyer that he holds the goods on
his behalf (Section 29(4)).
iv. By delivery of document of title, for example, where the bill of trading is transferred where
goods are in shipment.

5.3 Place of Delivery

Section 29(2) states that the place of delivery in the absence of agreement to the contrary is the
sellers place of business or if he has none, his residence thus, it is the duty of the buyer to collect
the goods. If the seller does agree to convey the goods to the buyer, someone whom he reasonably
assumes to be authorized to receive them, then he has carried out his duty of delivery.

5.4 Time of Delivery

We have already seen that if a delivery date is specified, the seller is in breach of condition if he
does not make delivery by that date. When no date is stipulated, and it is therefore the duty of the
buyer to collect the goods, the seller must be ready to hand them over (against payment) to the
buyer on demand at any time after the making of the contract. If he fails to do so, he is in breach of
condition and the buyer can treat the contract as repudiated and sue for non delivery. Section 26(5)
states that the buyer’s demand for delivery must be at a reasonable hour.

5.5 Payment and Delivery

Section 28 provides that unless otherwise agreed, payment and delivery ae concurrent condition.
The seller must be ready and willing to give possession of the goods in exchange for the price and
the buyer must be ready and willing to pay the price in exchange for possession. Thus:-
a. If the buyer is suing the seller for non delivery, he merely has to prove that he was ready and
willing to pay the price.
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b. If the seller is suing for non acceptance of the goods, he need not prove that he has delivered the
goods but was merely ready and willing to do so.
NOTE; However, that if the goods have been destroyed or stolen at a time when they were at the
buyers risk then he will be liable to pay for them, even though delivery is impossible.

5.6 Quantity of Goods Delivered

a) Where the seller delivers to the buyer a quantity of goods less than he contracted to sell, the buyer
may reject them, but if he accepts them he must pay for them at the contract rate (Section 30(1)).
b) Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the
buyer may accept the goods included in the contract and reject the rest, or he may reject the whole.
If the buyer accepts the whole of the goods so delivered, he must pay for them at the contract rate
(Section 30(2) and (3)).
c) If the goods delivered are mixed with goods of different description not included in the contract,
the buyer may accept the goods which are in accordance with the contract and reject the rest, or he
may reject the whole (Section 30(4)).
d) The above provisions are subject to any usage of the trade, special agreement or course of dealing
between the parties (Section 30(5))>
e) The law ignore trifling branches of contract.

5.7 Delivery by Installments

These are three possible situations:-
a. The parties did not agree that delivery could not be by installment Section 31(1) states that in such
a situation the buyer is not bound to accept the delivery by installments. Thus, the seller cannot
excuse short delivery by undertaking to deliver the balance of the order in due course.
b. The parties agreed that delivery could be by installment not to be paid for separately. Here the
contract is not several and therefore a breach of condition (such as quality) in the first installment
will entitle the buyer to te the whole contract but if he has accepted one or more installments he
will not be able to reject later installments (Section 11(4))>
c. The parties agree for the goods to be delivered by installment which are to be separately paid for.
The contract is divisible and it is a question of construction whether the innocent party is entitled to
repudiate the whole contract or merely the defective installment (Section 31(2))>

5.8 Acceptance
(a) Under section 35, the buyer is deemed to have accepted the goods:
i. When he intimates to the seller that he has accepted them; or
ii. (Except where section 34 provides otherwise) when the goods have been delivered to him
and he does any act in relation to them which is inconsistent with the ownership of the seller
or
iii. When, after the lapse of reasonable time, he retains the goods without intimating to the
seller that he has rejected them.
(b) He is not deemed to have accepted them until he has reasonably opportunity of examining them
(section 34). Unless otherwise agreed, when the seller tenders delivery of goods to the buyer, he
is bound on request to afford the buyer a reasonable opportunity of examining the goods for the
purpose of ascertaining whether they in conformity with the contract (Section 34(2)).
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 (c) If the buyer refuses to accept the goods, he is not bound to return them to the seller. It is
intimates to the seller that he refuses to accept them (section 34(2)).

6.0 Right of the unpaid seller

6.1 Introduction
The unpaid seller has remedies against the goods or against the buyer personally i.e. damages.

6.2 Remedies against the Goods

a. General:- Section 39(1) provides that even the property in the goods has passed to the buyer, the
unpaid seller of good has an implied right to exercise the following remedies:
i. Alien on the goods or the right to retain them for the price while he is still in possession of
them;
ii. In the case of the insolvency of the buyer, a right of stopping the goods in transit after he
has parted with possession of them;
iii. A right of resale as limited by the act.
b. Right of Lien:- a seller in possession of the goods has a lien over them i.e the right to retain
possession of them until payment or tender of the whole price. A lien does not normally carry with
it a right of resale but the unpaid seller has a statutory power of resale and will generally exercise
his lien as preliminary to this statutory right.
c. Stoppage in transit:- Here the goods have left the seller’s possession but are still in the course of
transit. The unpaid seller may resume possession and retain the goods until payment or tender of
the price (even though the property of goods has passed) as long as:-
i. The buyer is insolvent (i.e. he has ceased to pay his debts in the ordinary course of business
or cannot pay his debts as they fall due, whether he is bankrupt or not (section 61(4)).
ii. The goods are still in transit;
Under section 45, transit is deemed to have ended when:
1. The buyer or his agent takes delivery from the carrier, even if he does so before the goods have
reached their destination;
2. If, on reaching the appointed destination, the carrier or other bailee (e.g. a. warehouse)
acknowledge to the buyer that he is holding the goods to the order of the buyer:
3. If the carrier or other bailee wrongfully refuses to deliver the goods to the buyer.
The seller may exercise his rights either by taking actual possession of the goods or by giving
notice to the carrier (whereby the carrier must redeliver the goods to the seller at the seller’s
expense).
d. Right of resale:- the right of lian and the right of stoppage in transit do not by themselves give the
seller any right to resale the goods. The seller is allowed to sell the goods if:-
i. The goods are not a perishable nature; or
ii. The seller gives notice of his intention to resale and the buyer does not tender the price
within a reasonable time thereof;
iii. The right of resale is expressly reserved in the contract (S.48)
The act of resale rescinds the contract the contract and the seller cannot thereafter buyer but only
damages for any loss suffered through the buyer’s default, for example if the goods are sold at a
loss.
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e. Effect of buyer’s sale of good on seller’s right: - Section 47 states that the unpaid seller’s right of
lian or stoppage in transit against the goods are not affected by any sale or other disposition thereof
by the buyer unless:
I. The seller has assented to it ; or
II. A document of title to the goods has been transferred to the buyer and the in good faith and for
value.

6.2 Remedies against the buyer

a. in addition to the remedies against the goods, the seller has a personal action either:
I. For the price: or
II. For damages for non-acceptance.
If the property has passed and the buyer has accepted the goods, the seller has an action for the
price (Section 49(1)). If the property has not passed and the buyer has wrongfully not accepted the
goods, the seller has an action in damages (Section 50(1)). If the property has passed and the buyer
wrongfully refuses to accept the goods, the seller may sue for the price or for damages for non-
acceptance (Section 49(1) and (50)).
Section 37states that an action for recovery of the price may include a claim for losses and
expenses such as storage where the buyer would not take goods in an action for damages such
expense will be included in the assessment for the loss.
b, The measure of damages: - in an action for recovery of damages for non- acceptance the court
must assess the loss. The rules are as follows:-
i) The measure of damages is the estimated loss directly or naturally resulting in ordinary
course of events.
ii) Where there is
Introduction
Like every contract, the parties to a contract for the sale of goods must act in accordance
with the terms agreed between them.
The parties may expressly agreed to a certain term but more important sale of good act implies
obligation on vital matters such as the seller’s title to the goods, the quality and description of the
goods and the time and place of delivery.
Section 55 of the sale of good act states that these implied obligation may be negative or varied by
express agreement, or by the course of dealing between the parties or trade usage but this right to
contract has been severely limited by the unfair contract terms act
The terms of the contract may be either condition or warrant. A condition goes to the root of the
contract and entitles the injured party to prejudice the contract and sue damage; a warrant merely
gives him a right to damages. Whether a term is a condition or a warrant will depend upon the
construction of the contract (section 11(3)). The buyer may lose his right to prejudice the contract
for a breach of condition if the contract is not severable and he has accepted any part of the goods
(section 11(4)).

17
 6.3 Remedies against the buyer
a) Introduction. In addition to the remedies against the goods, the seller has a personal action against
the buyer either:
(i) for the price or
(ii) for damages for non acceptance.
If the property has passed and the buyer has accepted the goods, the seller has an action for the
price. If the property has not passed and the buyer has wrongly not accepted the goods, the seller
has an action in damages. if the property has passed and the buyer wrongfully refuses to accept the
goods, the seller may sue for the price or for damages for non acceptance and a section in the sale
of goods act states that an action for recovery of the price may include a claim for losses and
expenses such as storage where the buyer would not take the goods. In an action for damages such
expenses will be included in the assessment of the loss.
b) The measure of damages. In an action for recovery of damages for non acceptance the court must
assess the loss. The rules are as follows:-
i) The measure of damages is the estimated loss directly or naturally resulting in the ordinary
course of events
ii) Where there is an available market for the goods in question (i.e demand outstrips supply
the measure) the measure of damages is prima facie to be ascertained by the difference
between the contract price and the market price at the date of breach. Thus if the seller
resells the goods and:-
1) the market price is less than the contract price, the seller can sue for damages
2) the market price is more than contract price, the seller can sue for nominal damages only
3) the market price is less than the contract price but the seller does not get the market price
because it is his duty to mitigate his loss.
The market price is the price at the time of the breach.
iii) Where there is no available market then the seller is entitled to damages for the loss of his
bargain. Thus:
. 1) if he does not resell the goods at all, he can recover his total profit.

2) if he later resell the goods, a problem arises.

For example F red agrees to Sell his Honda Accord to Bill for N200,000. The supply of Honda
Accord outstrips demand. Bill refuses to take delivery and Fred after some difficulty manages to
sell the car to Mary for N190, 000. Fred could always claim N10, 000 from Bill as his loss but as
an alternative he could state that if Bill had fulfilled his bargain he would have sold two cars
instead of one and thus his loss is N20,000, or rather the profit he would have made on a sale at
N20,000.
In the case of W. L. Thompson Ltd v Robinson (Gunmakers) Ltd. where B refused to take delivery
of a new Vanguard motor car at time when supply outstripped demand. It was held that the
plaintiffs were entitled to recover the profit they would have made as they had sold one car for less
than they otherwise would have done.
In the case of Lazenby Garage Ltd. v Wright, however B refused to take delivery of a second-hand
motor car at a time when supply exceeded demand but later resold it at a higher price. The court
18
 held that a second-hand car does not have a fixed retail price and in such a case the seller cannot
recover loss of profit for selling one car fewer than he otherwise would have sold. If he manages to
find another purchase of the car at the same or higher price he will recover no damages from the
first buyer who had backed out.
NOTE it has been argued that even if there is an available market, the sellers can still damages for
the loss of the sale because even if he does resell the goods, he only made one sale instead of two.
Charter v Sullivan: In this case Sullivan refused to accept delivery of a Hillman Minx car at a time
when Charter could sell all the Hillman Minx’s he could get. Charter claimed damages for the loss
of profit of the sale, even though he later sold the car in question because he had made one sale
instead of two.

7.0 REMEDIES OF THE BUYER

7.1 Repudiation of the Contract
The buyer may reject the goods and claim damages for a breach of condition by the seller, but
he will be unable to do so if:-
a) He has waived the breach of condition and elected to treat it as a breach of warranty; or
b) If the contract is not severable and the buyer has accepted part of the goods. The meaning of
accepted is dealt with in paragraph. 5.8 above.

7.2 Damages
Damages may be claimed for non-delivery (where this is a condition or a warranty) or for other
breaches of warranty such as late delivery.

a) For non- delivery. This is available where the seller wrongfully neglected or refuses to deliver the
goods. If there is an available market the buyer will recover the difference if any between the
market price and the contract price and if he can buy similar goods cheaper on the market, the
damages will be nominal.
b) For breach of warranty. Section 53 states that on a breach of warranty, or of a condition which the
buyer choose or is required to treat as a breach of warranty, the buyer cannot reject the goods but
may :-
i) Set up against the seller the breach of warranty in diminution or extinction of the price; or
ii) If he has already paid, maintain an action for breach of warranty. The amount will usually
be the difference in value of the goods delivered and the goods answering to the warranty.
Where there is late delivery, damages will be assessed on the actual loss resulting from the
breach. For example if Alex should have delivered goods to Yusuf on January 1st when the
market price was N3500 a ton and in fact delivers them on February 1st when the market
price was N2500 a ton, the measure of damages would be N1000 a ton. But if Yusuf in fact
resells the goods at N3000 a ton, the damage would be the difference between N3500 and
N3000 a ton, i.e. N250 a ton.

7.3 Specific Performance

19
 As an alternative to damages the court may make an order for specific performance if the contract
is for specific or ascertained goods.
The remedy will only be awarded when the article sold is unique, such as an original painting or a
ship and therefore monetary damages would not be adequate.

7.4 Tort
The buyer may have a remedy in the following tort:
a) Conversion, where the property in the goods has passed to the buyer he may bring an action for
conversion:
i) Against the seller if he has wrongly detained the goods;
ii) Against the seller or a third party who has dealt in the goods

b) Negligence Against the manufacturer or retailer of goods where the buyer can prove that, that
person owed him a duty of care and as a result of that person’s negligence the buyer suffered
damage. The remedy is particularly useful where the buyer is not in a contractual relationship with
the negligent party, for example, where he wishes to sue the sue the manufacturer of the goods, as
opposed to the person that he bought them from. (see for example Donoghue v Stevenson). A party
who has given no consideration may also sue in negligence as for example where the buyer of the
goods gives them to a third party who is then injured by a defect in the goods which was cased by
the seller’s negligence.

8.0 C.I.F AND F.O.B. CONTRACT

These terms relate to contracts for the sale of goods to be carried by sea. ‘C.I.F.’ means ‘Cost,
Insurance and Freight’ ‘F.O.B’ means ‘Free on Board’. In a c.i.f. contract, the seller pays insurance
and freight while in f.o.b. contract, he delivers the goods to the vessel and the buyer is responsible
for insurance and freight from that time on.
a) C.I.F. Contract Under a c.i.f. contracts, the seller under takes to ship the goods at his own expense
to the port of destination and to insure them during the voyage; the property normally passes when
the shipping documents are tendered to the buyer, though the risk passes when the goods have been
lifted over the ship’s rail; thus if the goods are lost at sea, the buyer must still pay the price against
tender of the documents.
b) F.O.B. Contracts Under an f.o.b. contract , carriage and insurance are arranged by the buyer, the
seller’s duty being merely to deliver the goods on board an appointed ship; the seller must give the
buyer sufficient information to enable him to insure the goods. The risk and the property usually
pas to the buyer when the goods cross the ship’s rail.

9.0 HIRE PURCHASE AND CONSUMER CREDIT

9.1 Introduction- the type of Agreement

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a) Hire-purchase agreements. A hire purchase contract is a contract by which goods are delivered to
a person who agrees to make periodical payment by way of hire with an option who agrees to make
periodical payments by way of hire with an option of buying the goods after the stated hire
installments have been paid. The goods after the stated hire installments have been paid the goods
may be returned to the owner at any time before the option is exercised on payment of the sum
stated in the contract. Until the option is exercised, there is no agreement to buy the goods.
b) Credit sale agreements. A credit sale agreement is an agreement for the sale of goods payable by
installments. There is no express provision as to the transfer of the property and therefore the
ownership of the goods passes to the purchaser at the time the agreement is made. Thus, anyone
purchasing from the buyer will obtain a good title.
c) Conditional sale agreements. This is an agreement for the sale of goods payable by installments but
there is an express provision that the ownership in the goods is to remain in the seller until the
installments have been paid. Thus, the buyer cannot transfer a good title to a purchaser.

9.2 Definition of a Consumer Credit Agreement.

A consumer credit agreement is a personal credit agreement by which the creditor provides an
individual with credit not exceeding a certain amount.
a) “Individual” means that the Act does not cover agreements where the debtor is a company. An
unincorporated body, for example a partnership is an individual.
b) “Credit” includes a cash loan and any other form of financial accommodation.
c) “Not exceeding a certain amount” if a credit agreement provides for a fixed sum credit of certain
amount or less then it is within the definition. The relevant figure is not the total amount which the
debtor is to pay. But the capital amount borrowed. For example Charles agrees to let David an
individual have a car in return for periodical payments. The agreement provides for the property in
the goods to pass to David on payment of a total N750, 000 sum and the exercise by David of an
option to purchase. The sum of N750, 000 includes a down payment of N100,000 and finance
charges of N150,000. The price for which David could have bought the car was N600, 000. This
agreement is one which provides fixed sum credit of exactly N500, 000 and is therefore a consumer
credit agreement.

9.3 Sub-Categories of Consumer Credit Agreements

a) A consumer credit agreement is either a restricted-use credit agreement or an unrestricted-use credit
agreement. It falls in the latter category if the credit agreement if the credit is in fact provided in
such a way as to leave the debtor frees to use it as he chooses. Thus a basic loan will be an
unrestricted-use credit unless the loan agreement is for the loan to finance a particular transaction
and the loan is provided in such a way that it could be used by the debtor only for that transaction.
Hire purchase conditional sale and credit sale agreement are all restricted-use credit agreements.
b) A consumer credit agreement may be either a debtors-creditor-supplier agreement. A debtor-
creditor-supplier agreement is a type of agreement where there is a business connection between
the creditor and the supplier of the goods or creditor is also the supplier of the goods

9.4 Further Relevant Definition.

a) a small agreement is regulated agreement, other than a hire purchase agreement or a conditional
sale agreement, for the provision of credit not exceeding a certain amount.
b) A non-commercial agreement is a consumer credit agreement not made by a creditor in the course
of any business carried on by him.
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 Many small agreement and non-commercial agreement are not subject to certain provisions of the
Act in particular the formality and cancellation provision.

9.5 Persons capable of Making a Consumer Credit Agreement

Under the Consumer Credit Act, a license issued by the Director-General of Fair Trading
must be obtained by person wishing to carry on a consumer credit business. If a consumer credit
agreement is unenforceable against the debtor, unless the Director-General makes an order that
agreement made during a certain period by the creditor are to be treated as though he had been
licensed.

10.0 RIGHTS AND OBLIGATIONS BETWEEN THE PARTIES

10.1 Introduction
Under the Act powers are conferred on the Secretary of State to make regulations as to the form
and content of documents embodying consumer credit agreements. The purposes of the provision
are to ensure that the debtor is fully aware of the nature and cost of the transaction including the
cost of the credit and that a written agreement gives him a clear account of his rights and
obligations.
Non-commercial agreement and certain small agreement are exempt from the formality
requirements detailed below.

10.2 The formalities

a) the true annual cost of the credit expressed both as an annual percentage and as a total sum must
be disclosed in writing to the prospective consumer before he enters into the regulated
agreement (regulation to be made under section 55);
b) All the terms of the regulated agreement must be in writing (other than the implied terms (see
below)) (section 61 (1) (b));
c) All the terms of the written agreement must be legible;
d) The agreement must contain details of details of the debtors right, if any of cancelation (section
64 (1) () a);
e) The written agreement must comply with the regulations as to its forms and contents. Section 60
states that the secretary of state shall make regulations as to the form and documents. These
regulations are likely to include.-
i. The names of the parties to the agreements;
ii. The amounts of all payments due under the agreement and when and whom they are
payable,
iii. The Total charge for credit.
iv. The debtor’s right to pay off his dept earlier then agreed.
v. Any security given by the debtor to the creditor.

22
 f) the agreement must be signed by the customer (i.e. debtor) in person and by on behalf of the
creditor (section 61 (1) (a)).
g) The customer receives one copy of the agreement when he is given or sent the agreement to sign
(section 62 (1) and section 63 (1)). If, the agreement is not actually made; when he signed it, it must
be given to the costumers within seven days of the making of the agreement.

10.3 Failure to comply with formalities

Any agreement which does comply with the entire formality agreements id “improperly executed”
and has the following effects:
a. The debtor will not be in any way be penalized. He therefore can if he wishes enforce the
agreement even if it was never signed or put into writing.
b. If the debtor did not even signed the agreement or the creditor has failed to serve the copies of the
agreement required by section 62 and 63 or the copy did not contain the required detail of
cancelation, then the creditor may not enforce the agreement at all.
c. If the agreement is ‘improperly executed’ for reasons outside point (b) above, the creditor can only
enforce the agreement subject to five conditions:
i) He can enforce it only by action in court (Section65);
ii) He cannot without an order of the court retake possession of the good associated with the
agreement (Section 65)
iii) He cannot enforce any security except to the extent that the court allows him to enforce
the regulated agreement (Section 133);
iii) The court has power in granting any order enforcing the agreement:
1. To reduce or extinguish the sum payable (Section 127) ;
2. To excluded from the contract any term not contained in the signed agreement (Section 127):
3. To impose any conditions (for example delivery of a further copy to the hirer) (Section 135);
4. to suspend the operation of the enforcement order or any part of it (Section 135);
5. to amend the agreement as the court consider just (Section135);
Before the court will make any order enforcing the agreement, the creditor must convince the court
that in view of non compliance it is nevertheless just and fair that the order be made. The court
must consider to what extent the debtor of hirer has been prejudiced by the non compliance and to
what extend the creditor or owner is to be blamed for it.

10.4 Cancellation
The cancellation provisions in the act are aimed at “doorstep” credit arrangement. Person used to be
persuaded by high pressure door to door salesmen to buy goods; the term for which was
extortionate. Until the consumer credit act there was no way of cancelling such an agreement.
Section 67 provides that certain regulated agreement can be cancelled by the debtor. Such as
agreement is cancelled if two conditions are fulfilled.
a. The antecedent negotiations included oral representations made to the customer by or on behalf of
the negotiator.
b. The customer signed the agreement elsewhere then at the business premises of the creditor, dealer
or any party linked to the transactions (other than the customer or his relative).

23
 Thus an agreement could be cancelled if the customer signed it in the street, at home, or on his own
trade premises provided oral representations (i.e. sales talk) had been made in his presence.
Small agreements and non commercial agreements are not cancelled.
Section 68 states that the debtor in order to exercise his right of cancellation must serve a notice
indicating his intention of withdrawing from the transaction.
a) The notice need to in any particular form as long as the intention to cancel is firmly indicated.
b) This notice must be served at the end of the fifth day following the day he received a copy of the
agreement or at the end of the fourteenth day following the day on which he signed the agreement.
c) This notice of cancellation must be served on one of the following persons: -
i) The creditor
ii) The person specified in the agreement as being a person to whom such notice may be
sent;
iii) The dealer.

10.5 Effect of Cancellation

The customer is entitled to recover payments already made (Section 70). He is obliged to return
goods but he need not take them back; he can wait until they are collected from him in pursuance of
written request (Section 72). He has a lien on the goods for the return of his payments (Section
70(2)). He must take responsible care of the goods for 21 days after serving his notice of
cancellation.

The exception to this rule is that the customer is under no duty to return perishable goods, goods
supplied to meet an emergency or goods which before cancellation were consumed or incorporated
into something else, for example, plants in a garden or spare parts in a car. In two of these cases,
namely where goods and services were supplied to meet an emergency or where the customer has
incorporated goods into something else, the customer is liable to pay for the goods or services
(Section 69(2)).

10.6 Early and Late Payment by the Debtor

A debtor under a regulated agreement has the right, after giving a notice to the creditor, to complete
his payment ahead of the due time (Section 94). He may then qualify for a rebate of his interest
charges (regulations to be paid under Section 95).

Where he is late making the payments under the agreement, he may well in accordance with
agreement have to pay extra interest to take account of the delay. However, he cannot be obliged to
pay a rate higher that that payable under the agreement as a whole (Section 93).

10.7 Liability of the Parties for Defects in the Goods

(a) Duties of the Supplier. A distinction must be drawn between hire purchase and
conditional purchase and credit sale agreements.
i) Conditional sale and credit agreements are contracts for the sale of goods and
therefore the same conditions are implied in such agreements as in a contract for the
sale of goods.

24
 ii) Hire purchase agreements are not contracts for the supply of goods but Supply of
Goods (Implied Terms) Act 1973 extends to the supplies of goods under a hire
purchase agreement for the same protection as it provides for a customer buying for
cash. Thus there are implied terms as to the title (Section 8), description (Section 9),
merchantable quality (Section 10(2)); fitness for purpose (section 10(3)) and sample
(Section 11). The condition that the goods be reasonably fit for a particular purpose
is implied only if that particular purpose for which the goods are required is made
known before the contract is made (Section 10(3)).

Note that the consumer credit agreements may also cover supply of services and o
equivalent terms are implied in such an agreement.

(b) Duties of the Creditor. Where the customer acquires goods or services from one person (the
supplier) and the credit to pay for them from another (the creditor) the latter is only liable in
respect of defects of the goods in two situations:
i) Where the creditor himself contracts the customer to supply the customer with goods
or services;
ii) Where the agreement is a debtor-creditor-supplier agreement i.e. there is a business
connection between the supplier and the creditor (Section 75). This does not apply to
small agreements (Section 75(3)).

10.8 Liability of the Creditor and Supplier for Other Defaults

The supplier or goods or services is liable for other breaches in the agreements, such as failure to
deliver them at all. He is also liable for misrepresentations.

The creditor (if different from the supplier) is liable for the supplier’s misrepresentations or breach
of contract on the same term as described in paragraph 10.7(b).

11.0 TERMINATION OF AGREEMENT

11.1 Termination by the Debtor

The debtor may terminate the agreement in one of the following ways:

(a) He may pay off all the installments early

(b) He may terminate the agreement under a clause in the contract.

In a hire purchase contract, for example, the debtor always has an option to terminate the
agreement. In such circumstances the debtor must return the goods to the creditor and also will
have to pay damages.

i) The contract may contain a minimum payment clause whereby the purchaser undertakes
to pay the creditor a certain amount. The economic justification of the minimum
payment clause is that if the -owner is re-possessed of the goods they are often
depreciated in value. In such circumstances, the court must examine the amount to see
whether it is excessive. If the fixed amount is not a genuine pre-estimate of loss, then it
is a penalty clause and only the actual amount of loss can be recovered.

25
 ii) If there is no minimum payment clause or the creditor chooses to disregard it, the
damages will be his actual loss (including capital and interest) less the amount raises on
sale of the goods.
(c) In the case of a hire purchase agreement or a conditional sale agreement, the debtor has the
statutory right of termination even if the contract does not allow termination. In a credit sale
agreement the debtor does not have such a right.
Section 99 states that in a hire purchase or conditional sale agreement which is a consumer
credit agreement, the debtor ha s a statutory right to terminate the agreement at any time by
giving notices to the creditor. The debtor must, as well as returning the goods, pay:
i) The amount of the minimum payment stipulated in the agreement; or
ii) The amount necessary to bring his payment up to half the total purchase price;
iii) The loss sustained by the creditor in consequence of the termination.

11.2 Termination by the Creditor

If the creditor wishes to

- Terminate the agreement; or

- Demand earlier repayment of any sum; or
- Recover possession of any goods; or
- Treat any right conferred on the debtor by the agreement as terminated, restricted or
deferred; or
- Enforce any security,

he must serve a notice on the debtor (section 87). Such action may be:

(a) For reasons other that the debtor’s breach of agreement i.e. failure to pay installments. In
this case, the creditor must serve a written notice giving at least seven days’ warning
(Sections 76 & 98).
(b) For the debtor’s breach of agreement. In this case the creditor must serve a default notice
giving the debtor at least seven days’ notice and allowing the debtor in that time to remedy
his default e.g. pays the arrears of installments.
Section 88 provides that the default notice must specify:-
i) The nature of the alleged breach;
ii) If the breach is capable of remedy, what action is required to remedy it;
iii) If the breach is nit capable of remedy, the amount required to be paid as
compensation for the breach;
iv) The exact date by which the breach must be remedied or compensation paid;
v) The consequences it the debtor does not comply with the notice.
If the debtor complies with the notice within the specified time by rectifying the
breach, it must be treated as if it never occurred.

If the agreement id terminated the creditor is entitled to return of the goods and the minimum
payment (if specified) or damages. The measure of damages is discussed below (paragraph 12.2).

12.0 THE ENFORCEMENT OF THE AGREEMENT BY THE CREDITOR

26
12.1 Introduction

The creditor may be forced to sue the debtor to enforce his rights in the following circumstances:-

(a) Where the debtor has terminated the agreements and refuses to return the goods.
(b) When the creditor wishes to terminate the agreements due to breach by the debtor, for
example, nonpayment of installation an has served a default notice in accordance with
paragraph 11.2(b) above but the debtor has not remedied the breach within the specified
time.
(c) Where the creditor wishes to terminate the agreement other than a breach of the debtor’s
obligations and has served a notice on the debtor in accordance with paragraph 11.2(a)
above but the debtor refuses to return the goods.

The creditor’s remedies in these situations are governed by the kind of agreement the debtor has.
The provisions of the Act relating to hire purchase and conditional purchase are identical; credit
sale agreements are treated differently.

Any court action by the creditor to enforce the agreement must b e brought in the County
Court (Section 141).

12.2 Hire Purchase and Conditional Sale Agreements

The creditor may after serving a notice in accordance with paragraph 11.2 above, exercise the
following remedies:

(a) Recovery of the Goods

i) If the goods are “protected goods” the creditor cannot take possession of the
item without bringing a court order. Section 90 provides that goods are
protected if the debtor is in breach of the agreement and has paid at least one-
third of the total price. There are, however, two situations where the creditor
cannot recover such goods without court action.
1) He can recover them with the debtor’s consent.
2) If the debtor has permanently disposed off the goods to a third party or has
abandoned them, the creditor will not be in contravention of the rule
because he is only prevented from obtaining possession from the debtor.

If the creditor does recover possession in contravention of the rule, the

agreement is terminated and the debtor is released from all liability under it
and can recover all sums which he has already paid.

Goods are not protected if the debtor has terminated the agreement. Thus, if
the debtor falls into arrears it is much to his advantage to do nothing and let the
creditor serve a default notice and terminate the agreement.

ii) Section 92 provides that the creditor is not entitled to enter any premises to
take possession of the goods except under an order of the court. Thus in
practice, even if the goods are not protected unless the creditor can persuade

27
 the debtor to voluntarily hand over the goods, the creditor will have to bring a
court action to recover them.
Note: it is to the debtor’s advantage that a court action is brought to recover the
goods because in such circumstances the court can make a time order.
iii) Damages. In addition to his right to recover the goods, the creditor may recover
damages:
1) If the debtor has terminated the agreement under a provision in the
agreement, the damages will be either the minimum amount specified or if
none, the total loss which the creditor has suffered owing the debtor’s
failure to carry out the contract.
2) If the debtor has terminated the agreement under his statutory right to do
so, the measure of damages id that specified in paragraph 11.1 above.
3) If the creditor has terminated the contract owing to breach of agreement by
the debtor, the damages will be the minimum amount specified in the
contract, or if the creditor does not wish to rely on the clause, his actual loss.
If the debtor has demonstrated that he does not wish to go on with the
contract i.e. by failing to pay several installments or writing to the creditor
and informing him that he will not make any more payments, the damages
will be the creditor’s total loss. This will include all interest repayments and
capital less the amount as raised by selling the goods.
Financing Ltd. v Baldock
B agreed to hire a bedrock truck from P. B failed to pay the first two
installments and P repossessed the truck.
B told them that he would raise the money in the next few days, but failed to
do so, and P sued him for £538 claiming this sum as the loss they had
suffered through non-execution of the contract.
Held. P was only entitled to £56.
(b) Time Order
The debtor may apply to the court for the time order in the following circumstances:
1) Where the creditor has terminated the agreements and has brought an action for
recovery of goods.
2) Where the creditor has served a default or non-default notice desiring to terminate
the agreement, but as yet has brought no action.

Section 129 provides that the court can

i) Allow the debtor extra time to make payments which have already fallen due.
ii) Alter the pattern of future payments and allow extra time for them to be made.
iii) Give the debtor more time to remedy any other kind of breach.

The court ha s power to revoke or vary any time order it makes and thus a debtor
could come back to court and ask that he be given a further extension of time in which
to make the payments subject to the time order or the creditor could ask that the time
order be revoked.

28
 The court may decides not to give extra time and therefore make an immediate return
order requiring the immediate return of the goods to the creditor (Section 133). In this
case, the creditor may well ask for the minimum payment or damages as well as return
of goods.

The court may also make a transfer order (Section 133). A transfer order only if the
goods are divisible and the debtor has paid enough of the total price to cover both the
cost of a part of them and at least one-quarter of the rest of the total price. In that case,
the court can make a transfer order which:

i) Allows the debtor to keep his own part of the goods which he has paid; and
ii) Require him to return the rest of the goods to the creditor.

12.3 Credit Sale Agreements

As we have already seen that a debtor in a credit sale agreement has no statutory right of
termination and since ownership is transferred to the debtor at the time the contract is made,
the creditor has no right to recover possession of the goods if the debtor falls into arrears.
Thus, the remedies relating to protected goods, return orders and transfer orders do not
apply to such agreements because they all deal with recover of the goods.

The remedies of the parties are therefore as follows:-

a) The debtor may terminate the contract if he has the express right to do so in the
agreement. He must then pay damages to the creditor for breach of agreement.
b) The creditor may terminate the agreement by serving a default or non-default notice
and sue for all future installments and arrears (if any).
c) The debtor may apply to the court for a time order if a notice has been served. The
court may give the debtor time to pay the arrears or to remedy breaches but may not
interfere with payments which have not yet fallen due.

13.0 REMEDIES OF THE DEBTOR

(a) If the creditor has broken a condition, the debtor can repudiate the contract subject to
the general rule of contract.
(b) Damages. The debtor is unlikely to claim damages. If the goods are defective he will
normally stop paying the installments and wait for the creditor to sue him.
(c) Extortionate credit bargains. The debtor can at any time ask the court to re-open the
agreement as being extortionate (Sections 137 – 140; these sections came into force
on 16th May 1977). The court’s power to do so extends to exempt agreements and to
credit agreements which exceed £5,000. An agreement is extortionate if it requires
payments which are extortionate or if it grossly contravenes ordinary principles of fair
dealings (Section 138). If it finds the agreements extortionate, the court has wide
powers to alter its terms, even extending to being able to require the repayment to the
debtor of sums already paid.

29
14.0 SUMMARY OF STUDY SESSION I

At the end of this study session you have learnt what a the sale of goods acts is, the relationship
between a buyer and a seller of goods is and the additional rules that is imposed upon the parties
over and above those in the law of contract.

15.0 SELF ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 1

Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Please write your study diary and discuss
them with me at the next study context. Check your answers with the Notes on the self Assessment
Questions at the end of this module.

SAQ 1.1 (Test learning outcome 1.1)

1). How is the contract of sales of goods act is being defined?

SAQ 1.2 (Test learning outcome 1.2)

2) Define

i) A property under the sale of goods act

ii) Goods under the sale of goods act

Notes on SAQs

SAQ1.1 Section 2(1) defines a contract of sale of goods as a contract whereby the seller
transfers or agrees to transfer the property in goods to the buyer for a money consideration called
the price.

SAQ 1.2

i) Property means the ownership to goods and therefore the Act does not cover contract of
bailment i.e. to borrow or hire another person’s good.
ii) Section 61 states that goods are personal chattels other than things in action and money.
For example cheques, stocks and shares.
30
 SAG 2

i. What statute governs contracts of sale of goods?

ii. Define a contract for sale of goods
iii. What is meant by the term ‘unascertained goods?
iv. What is meant by the term ‘future goods’?
v. What are the rights of the buyer?
vi. What statute governs consumer credit transaction?
vii. Distinguish between a hire purchase agreement and a credit sale agreement.
viii. What rights and obligations exist under consumer credits agreement?
ix. What happens if a consumer credit agreement does not comply with all necessary
formalities?
x. When and how may a customer cancel a consumer credit agreement?

16.0 SUGGESTION READING

Nigerian commercial law by M. C Okany; Published by Africana-fed publishers ltd

31
STUDY SESSION TWO: Definition, Corporation, Companies, Unincorporated

associations, Partnerships, Differences between Company and Partnerships, Infants,

Husband and Wife, Mentally Disordered Persons and the Government.

INTRODUCTION In this study session we will define and identify the difference between
Corporation, Companies, Unincorporated associations, Partnerships, Differences between
Company and Partnerships, Infants, Husband and Wife , Mentally Disordered Persons and the
Government and their position under the law and in what capacity they can sue and be sued.

1.0 DEFINIATION

A person in law means any entity which is accepted by the law as having certain defined rights and
obligations. Nigeria law applies to natural persons and juristic persons such as companies, Status
means a person’s membership of a particular class, for example, his citizenship, marriage, infancy,
etc.

Capacity means a person’s ability to enter into legal relations with another, for example his
capacity to contract.

2.0 CORPOATION

2.1 Definition

A corporation is an organization having a separate legal existence from that of its members. Thus it
is treated as a juristic person existing in its own rights, rather than a collective name for the
members.

This concept is known as incorporation:

2.2 The Consequences of Incorporation

32
 As a result of having separate legal identity a corporation has;

a) A name under which it can contract, sue or be sued. Thus, if Usman makes a contract with a
corporation, he cannot sue or be sued by the members.
b) A common seal which is the corporation’s signature with which it makes contracts and
c) Perpetual succession. A corporation’s existence continues until it is dissolved by its continued
existence on the lives of its members.

2.3 Classification of corporations

a) Corporation sole. The members exist in succession so that at any one time the corporation consist
of one member only, for example, the Government, and the Public Trustee.
b) Corporation Aggregate. There are number of members at the same times for example, companies
have many members. Corporation Aggregate may be classified according to their mode of
creation:-
i) Chartered Corporations. These are created by Executive Charter from the government, for example
the Institute of Chartered Accountants, the Association of Certified Accountants.
ii) Statutory Corporations. These may be incorporated under special Public Acts such as the Nigerian
National Petroleum Company, or a Private Act, for example, public utility companies like Water
Boards.
iii) Registered Corporations. Most public and private companies are formed by registration under the
Company Allied Matters Act 1990.

2.4 The contractual Capacity of Corporations

Corporation contract like ordinary human beings except that, their contractual powers are limited
by the doctrine of ultra vires. All corporations, except chartered corporation must act within the
objects laid down in their constitution. If they act outside these objects, the act is ultra vires and the
contract is void. This means that the corporation cannot sue on the contract, but there is an
exception to that rule where a person can sue a company on an ultra vires act. This is where an
outsider dealing with the company can prove that he dealt with the company in good faith i.e. he
did not know it was ultra vires and the contract was decided on by the directors.
33
 3.0 COMPANIES

3.1 Definition and Nature

A company is the usual name for a corporation registered under the company act and therefore its
main features is that it has an identity quite separate from that of its members.

The constitution of the company is set out in two documents which have to be filed with the
Registrar of Company before it is granted a Certificate of Incorporation:-

a) The Memorandum of Association sets out the name of the company, whether it is public or private,
whether it is limited by shares, the address of its registered office and its objects for contractual
purposes; in short , matters which an outsider dealing with a company needs to know.
b) The Articles of Association are the regulation concerning the internal workings of the company, for
example, the voting and dividend rights of the members, the powers of the directors and the
conduct of meetings.

3.1 Types of Companies

There are two alternative classifications:

a) Limited and unlimited companies. Every company must be either limited or unlimited.
i. Limited Companies. Because a company has a separate legal existence any debts incurred during
the course of trading are the company’s responsibility. However, a company sued by a creditor
must, if it has insufficient assets to meet the debts, seek a contribution from its members and thus
the creditors indirectly enforce debts against the members through the company, however, the
members personal liability to contribute to the assets of the company is restricted. There are two
means by which liability may be limited:-
1) Limited by Shares. Here a member is only liable to pay up to the full par or nominal value of his
shares; if the shares are fully paid up there is no liability.
2) Limited by Guarantee. Here the liability of its members is limited to the amount which they have
undertaken to contribute to the assets of the company in the event of it being wound up, e.g N5000.
ii. Unlimited Companies. An unlimited company is one in which there is no limited on the liability of
its members. Such companies are not however large partnership. The members are liable to the
34
 company, not directly to the creditors of the company. The name will not include the word limited
and there is no limitation of liability clause in the memorandum. Such companies may be registered
with or without share capital.
b) Public and Private Companies.

The Companies Act 1990 has changed the previous distinction between public companies and
private companies. A public company is now defined as one which:-

i) States in its memorandum that it is to be a public company;

ii) Is registered as public company;
iii) Adopts the words public limited company at the end of its name
iv) Has not less than two members
v) Has a minimum issued share capital of N5000.

A private company is any company which does not conform with any one or more of these
requirements.

4.0 UNINCORPORATED ASSOCIATIONS

An unincorporated association is a group of persons associating for some legal purpose where the
group is not regarded as a legal person. These associations of people differ from corporations in
that an unincorporated association does not have distinct legal personality separate from the
members themselves. Partnerships, Trade Unions, clubs and societies are common examples of
such associations.

Because these associations lack legal personality, they cannot own property, or enter into contracts
in their own name. Property is owned on behalf of members by trustees. Contracts are entered into
by officials of the associations but they are personally liable on these contracts.

5.0 PARTNERSHIPS
A partnership is defined by the Partnership Act 1890, as “the relation which subsists between
persons carrying on business in common with a view of profit.”

The relationship between partners may be created orally, in writing, or implied by the conduct of
the parties. Generally a partnership deed is drawn up, defining the rights and duties of the partners.

A partnership is called a firm but it has no separate legal existence distinct from its members.
However, the Rules of the Supreme Court allow a person who wishes to sue the members of a
partnership to issue a writ in the name of the firm for the sake of convenience. As the “firm” and
35
the partners are one and the same thing, if the firm has insufficient assets to cover its debts the
creditors may proceed against the individual partners or as a famous judge once stated “partners are
liable down to their last penny and their last acre.” This is why people often choose to form limited
companies instead. There is, however, a type of partnership known as a limited partnership where
the liability of some partners may be limited to their capital contributions. In such a partnership
there must be at least one general partner with unlimited liability. Limited partnerships are
governed by the Limited Partnerships Act 1907.

There may not be more than 20 members in a partnership. The Department of Trade has the power
to provide by a statutory instrument that some firms shall be exempt from the maximum of 20 and
provision to this effect has been made, for example, in relation to patent agents, surveyors and
auctioneers.

6.0 DIFFERENCES BETWEEN COMPANIES AND PARTNERSHIPS

S/No. Companies Partnerships

1. A company has a separate A partnership does not have a separate
existence, distinct from its member. legal existence.
2. There is no maximum limit on the Other than certain ‘exempt’ partnerships
number of members. the number of members is limited to
twenty.
3. Shares are freely transferable. A partner cannot normally assign his
share in the partnership.
4. A companies contractual powers Contractual powers of partnership are
are subject to the ultra vires unlimited.
doctrine.
5. Companies have perpetual Death of a partner ends the partnership –
succession. Death of a member has results in dissolution of the firm (S. 33
no effect on continuation of the Partnership Act 1890).
company.
6. Liability of members may be Partners are liable without limit for the
limited to a predetermined amount. firms’ debts.

7. Ownership and management may Ownership and management generally in

be separated. Members (owners)
delegate to directors, who run the
firm.
8. Companies cannot reduce their
capital without the Court’s consent.
9. Debts and contracts of the company
are those of the company and not of
the members.
10. Capital can be raised in a variety of
ways, e.g. by the issue of shares,
debentures etc.
36
the same hands. Partners are agents of the
firm.
Capital may be returned to partners at any
time.
Every partner is jointly liable for all the
firm’s debts and obligations incurred
while he is a partner.
In practice a partnership’s ability to raise
capital is limited to contributions from
partners. In theory, however, there is no
reason why charges should not be created
 by a partnership.

7.0 INFANTS
Infants (minors) are persons who have not attained the age of eighteen Infants are subject to certain
special legal rules because they are deemed to be incapable of exercising the full rights of
citizenship, or of being made fully responsible under the law.

a) General Incapacity: A person under 18 cannot vote or sit in Parliament, he cannot be tattooed, and
he cannot marry under the age of 16 and requires the consent of his parents to marry under 18 years
of age. Moreover, he may not make a will unless a seaman at sea or a member of the armed forces
on actual military service.
b) Law of Property: A minor cannot be the owner of a legal estate in land, but he may hold an
equitable interest in land, for example, he may hold a beneficial interest in land under a trust. He
may also hold personal property.
c) Contracts: A minor is not generally bound by his contracts. (See Chapter on Contract).
d) Torts: A minor is generally liable for torts. He is not liable if the tort is one which requires an
element of intention or malice, and if the minor is too young to be capable of such intention. (See
Chapter on the Law of Tort).
e) Crime: A child under the age of ten is in English law deemed incapable of committing a criminal
offence. Children between the ages of ten and fourteen are also deemed incapable of criminal
intent, but this is a legal presumption which may be rebutted by proof that the particular minor was
fully aware of doing wrong. Persons over fourteen are fully accountable for their criminal offences,
but the procedure in trying them and the punishments to which they will become subject are
specially adapted to the needs of this age-group.

8.0 HUSBAND AND WIFE

Marriage has been defined as “the voluntary union for life of one man and one woman to the
exclusion of all other”, (Hyde v. Hyde).

Four conditions must be present if a marriage is to be valid at law:

a) The union must be voluntary;

b) Neither party must be under the age of 16;
c) The parties must not be related within the prohibited degrees set out in the Marriage Act 1949;
d) Neither party must be married already.

37
 Either spouse can own property separately, contract independently, and is responsible for his or her
own debts. Husbands and wives can also sue one another in tort. Husbands are no longer
responsible for their wife’s debts, unless the wife acted as the husband’s agent in entering into the
contract.

Before, divorce, orders for maintenance or judicial separation was not available to persons involved
in a polygamous marriage. Since then it is possible for the Court to grant relief if the marriage is
polygamous.

9.0 MENTALLY DISORDERED PERSONS

The capacity of mentally disordered persons will be discussed under the different branches of law
but briefly their liability is as follows:

a) Contract Law: Contracts entered into by mentally disordered persons are prima facie valid, but are
voidable at the option of the insane person provided he is able to prove that:
(i) He was insane at the time of contracting; and
(ii) The other party knew he was insane.
b) Law of Torts: Though as general rule insanity is not a defense to an action in tort, proof of insanity
would assist the defendant in that he could prove that he lacked the intention necessary for a
particular tort.
c) Criminal Law: A man is assumed to be sane until proved otherwise. Insanity is a defense to a
criminal charge but in order to be successful the accused must satisfy the test of insanity laid down
in 1843 in R v Mc Naghten. If he is found insane he is acquitted but may be sent to Broadmoor, a
hospital for the criminally insane, for an indefinite period.

Even though a person does not satisfy the Mc Naghten Rules a charge of murder will be regarded as
manslaughter if the defendant can prove “diminished responsibility” i.e. if the accused can show
that at the time of the crime, his power of reason was impaired by the abnormality of his mind, (the
Homicide Act 1957). The resulting conviction would then be at the discretion of the judge, but the
accused would be sent to prison rather than to Broadmoor.
d) Other Rules:
(i) Marriage: If at the time of contracting, the mentally disordered person was unable to appreciate the
nature of his acts, the marriage is void.
(ii) Property: Under the Mental Health Act 1959, the court has the power to deal with the property of a
mentally disordered person who is incapable of administering his affairs.

10.0 THE GOVERNMENT

The expression ‘the Government’ may be used to describe

(a) The Sovereign in her personal capacity, and

(b) In her corporate capacity, the Sovereign as Head of State.

38
The President is the representative of the corporation sole called the Government.

Prior to the Crown Proceedings Act 1947 the Government could not be sued in contract or in tort.
The main object of the Act was to place the Government in the same position as a private person or
employer. The Act enables proceedings to be brought against the Government in its official
capacity. The Crown’s personal immunity from legal proceedings has not been affected.

11.0 SUMMARY OF STUDY SESSION 2

At the end of this study session you have learnt what a legal personality is. How a corporation,
companies, unincorporated associations and partnership are differentiated.

12.0 SELF ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION TWO

Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Please write your study diary and discuss
them with me at the next study context. Check your answers with the Notes on the self Assessment
Questions at the end of this module.

SAQ 1.1 (Test learning outcome 1.1)

1) What is a corporation?

SAQ 1.2 (Test learning outcome 1.2)

2) What are conditions must be present if a marriage is to be valid at law?

NOTES ON SAQs

39
 SAQ1.1 A corporation is an organization having a separate legal existence from that of its
members.

SAQ 1.2 The conditions that must be present if a marriage is to valid at are:-

i) The union must be voluntary

ii) Neither party must be under the legal age
iii) The parties must not be related within the prohibited degree set out by the law
iv) Neither party must be married under the marriage act if we are to follow the
common law.

SAQ 3
i. What do you understand the term unincorporated association?
ii. Define legal personality.
iii. State the meaning of the words ultra vires.
iv. Do the individual members of a partnership have unlimited liability?
v. What are the two meaning of the term Sovereign in English Law?
13.0 SUGGESTION READING
Nigerian commercial law by m. C Okany; Published by Africana-fed publisher’s ltd

40
 STUDY SESSION THREE: NATURE OF PARTNERSHIP, THE DEFINITION OF A
PARTNERSHIP, THE CREATION OF A PARTNERSHIP, LIABILITY OF THE PARTNERS FOR
CONTRACTS AND DEBTS, LIABILITIY OF THE PARTNERS FOR TORTS, DURATION OF THE
LIABILITY FOR CONTRACT AND TORT, LIABILITY UNDER THE DOCTRINE OF HOLDING
OUT, THE RIGHTS AND DUTIES OF THE PARTNERS, THE DUTY OF UTMOST GOOD
FAITH, RIGHTS AND DUTIES OF PARTNERS IMPLIED IN THE PARTNERS IMPLIED IN THE
PARTNERSHIP ACT 1890, THE POWER TO EXPEL A PARTNER, ASSIGNMENT OF SHARES
IN PARTNERSHIP PROFITS & LOSSES , PARTNERSHIP PROPERTY

1.0 NATURE OF A PARTNERSHIP

1.1 The Partnership Act, 1890

The law of partnership is mainly contained in the Partnership Act, 1890, although there are, of
course, many cases on the interpretation of the Act. It is divided into four parts:
(a) The definition of partnership. Rules are laid down for determining the existence of a partnership.
(b) The relations of the partners to persons dealing with the firm. This governs the responsibility of the
partnership for the acts of the individual partners.
(c) The relations of the partners to one another. The mutual rights and duties of the partners while the
partnership is a going concern are outlined.
(d) Dissolution of the partnership. This covers the circumstances in which a partnership will be
terminated and the procedure to be followed.

The rules contained in (a) and (b) apply to all partnership defined by the Act but (c) and to some
extent (d), may be overruled or varied by express agreement between the partners.

1.2 Partnerships and Companies Distinguished

41
A partnership must be distinguished from a company registered under the Companies Acts 1990.
The major distinction lies in the fact that a company has a legal identity quite separate from its
members Saloman v. Salomanand can do or own things in its own name for which it is solely
responsible whereas the name of a partnership is merely a convenient expression for the collective
names of the partners and thus the partners are personally responsible for anything done in the
partnership’s name. The consequences following this distinction can be summarized as follows:

S/No. Company Partnership

1. The company The partners have rights in partnership
exclusively owns its property.
property.
2. The debts of the The partners are responsible for the
company belong to the debts of the partnership to the extent of
company and thus the “his last shilling and his last acre.”
creditors can never sue
the members directly.
3. The liability of the The liability of the partners cannot be
members may be limited (except in the case of a limited
limited. partnership [see below]).
4. The company is not Death or retirement of a partner causes
affected by death or dissolution (unless there is agreement to
retirement of its the contrary).
members (perpetual
succession).
5. Shares can be easily It is not possible for a partner to assign
transferred. his position as a partner although he can
assign his share of the profits.
6. Ownership and Every partner has the right to share in
management may be the management of a partnership (subject
separated. to contrary agreement).
7. Shareholders and Partners may not contract with the
directors may contract partnership.
with the company (see
Section 20 C. A. 1948).
There are other differences between a company and a partnership which do
not result from the concept of separate legal personality.
8. A company can create The Bills Of Sale Acts 1878-1882
a floating charge over prevent the creation of a floating charge.
its assets. They can grant a mortgage over the
partnership assets but this is a
considerably less flexible form of
security.
9. Size is unlimited. Size is limited to 20 maximum (but there
are exceptions, see below).
10. Formation Easy to form (even the agreement need
requirements are not be in writing).
formal and onerous,
e.g. memorandum and
articles and fee
necessary.
42
 11. During its existence the No external controls while the
company must have partnership exists.
AGM’s, returns to
Registrar, annual
returns, formal
resolutions to authorize
various acts.
12. Must file accounts. Need not file accounts.
13. Strict rules regarding No rules regarding capital.
maintenance of capital.
14. The activities of the The business of the partnership can be
company are restricted changed at any time by mutual
by the objects clause agreement.
which may be enlarged,
but may not be
completely altered.

1.3 Advantages and Disadvantages of Partnerships

The advantages of forming a company rather than a partnership are demonstrated in points 1 to 9
above, and mainly lie in the extent of the personal liability of the partners and the susceptibility of
the partnership to dissolution on death or retirement. A partnership, however, is easier to form and
does not have to comply with onerous regulations in the conduct of its everyday activities.
Moreover, partnership is the usual and, in many cases, the mandatory form of association for
professional persons. Most professional bodies prohibit association in the form of the limited
company for fear that this would erode the principle of individual personal accountability towards
the client.

1.4 Legal Proceedings in the Firm’s Name

Section 4 provides that partners are collectively called a firm, and the name under which the
business is carried on is called the firm name. Obviously, since a partnership is not a separate legal
entity any legal actions must be brought for or against the partners personally.

This disadvantage can be overcome by using the procedure laid down by Order 81 of the Rules of
the Supreme Court which allows the firm to sue or be sued in the firm’s name .Even so, if the firm
is being sued, the partners must still enter appearance in their own names and if it is suing a third
party, it must, if requested, inform him in writing of the names and addresses of all the partners.

2.0 THE DEFINITION OF A PARTNERSHIP

2.1 Definition
Section 1(1) defines a partnership as “the contract which subsists between persons carrying on a
business in common with a view of profit”.

43
2.2 Analysis of the definition
(a) “Business” is defined by s.45 as including “every trade, occupation or profession”. The section
cannot be taken too literally because certain professionals cannot be partners, e.g. barristers.

Section 2(1) states, that co-ownership of property alone does not imply a business or partnership.
Even, if, a profit is made, unless the joint owners go further and use their property in a business.
Thus, if two people own a house no partnership arises, but if they rent the house out for profit, a
partnership may be implied.
(b) “In common with a view of profit”. This means two things:
(i) Every partner should be entitled to participate in the running of the business (unless the contrary is
expressly agreed). Thus a mere creditor of the firm is not a partner.

Cox v. Hickman
If X being in financial difficulties, agreed with his creditors to carry on a business under their
supervision and to pay them a share of the profits in gradual discharge of his debts.
Held. Creditors did not thereby become X’s partners and were therefore not liable for X’s further
debts.
(ii) Every partner should share the profits. ‘Profit’ means ‘net profit’ i.e. the difference between gross
returns and outgoings of the business. Section 2(2) provides that the sharing of gross returns does
not itself create a partnership even if the persons sharing the returns have a joint interest in property
from which the profit arises.

Lyon v. Knowles
A, the proprietor of a theatre, agreed to share the gross receipts with B, a producer, A paying for the
staff orchestra and lighting and B paying for the royalties and actors’ salaries.
Held. A and B were not partners.

The reason for the rule is that if two people share gross returns they cannot be said to have a
common interest in the business. If two people share the net profits of a business, say 60% to X and
40% to Y, and then they will share the profits or losses in any one period in the same proportion.

On the facts of the above case, however, the expenses for the orchestra and lighting might have
been very low, but B’s expenses might have been exceptionally heavy and thus A could make a
profit and yet B could make a loss.

2.3 Further tests for the existence of a partnership

44
 Section 2(3) states that the sharing of net profits is not conclusive proof that a partnership exists but
only prima facie evidence. This means that the sharing of profits, without more, implies a
partnership; but if it is one of several facts, then all the facts must be considered together and no
special weight given to the fact of profit sharing.

Badeley v. Consolidated Bank

B advanced money to C to enable the latter to construct a railway. C assigned to B
machinery, plant and securities, and agreed to pay to B 10% on the money advanced plus 10% on
the net profits of the venture, subject to an allowance of £1,000 per year which C might draw for
his services in carrying out the construction contract.
Held. Looking at the agreement as a whole, B had made a bona fide loan upon the security and was
not a partner, despite his share of the profits. It was true that B’s capital was employed in the
venture but it was not risked because it could have been recovered from C if the project had failed.

Section 2(3) goes on to provide that the receipt of a share in the profits of a business does not make
the recipient a partner in the following cases:

(a) The receipt by a person of repayment of a debt by installments or otherwise out of accruing profits.
(b) The receipt by a servant or agent of a share in the profits by way of remuneration, e.g. payment of
a sales representative’s salary plus a commission based on a share of the profits.
(c) The receipt by the widow or child of a deceased partner of a portion of the profits by way of an
annuity.
(d) The receipt of a portion of the profits by the vendor of the goodwill of the business.

Pratt v. Strick
A doctor assigned his practice by deed to a purchaser and agreed that he would continue to reside in
the house for three months and introduce the patients to the purchaser. It was further agreed that the
earnings and expenses during that time were to be shared equally.
Held. They were not partners.

(e) The receipt by one who makes a loan to a person engaged or about to engage in business, of
interest varying with the profits, or a share of the profits. However, the sub-section continues
“provided that the contract is in writing and signed by or on behalf of all parties”. The proviso has
caused problems in its interpretation.

Does it mean that if a person receives interest on a loan varying with the profits and the contract is
not in writing he is a partner? It is generally accepted that in such circumstances the lender is not a
partner but may be called upon to explain the absence of a written agreement.

In all the above situations the common factor is that the recipient of the profits cannot be said to be
sharing in the risk of the venture. They share in the profits and if there are none they will not
receive anything, but at no time will they be asked to contribute towards any losses incurred.

45
 Keith Spicer v. Mansell
A and B agreed to go into business as a limited company and carried out preparatory acts, such as
the ordering of goods and the opening of a bank account.
Held. There was no partnership between A and B since the preparatory acts were not sufficient
evidence of the present carrying on of a business.

Finally, the case of Keith Spicer v. Mansell states that the promoters of a company are not usually
deemed to be partners in the period before incorporation if this is the only relationship between
them.

2.4 Salaried partners

In some cases a partner may receive a fixed salary rather than a share of the profits and in such
circumstances he cannot properly be said to be “sharing in the profits” because his share will vary
each year in relation to the other partners’ shares, depending on how much profit is made. In
profitable years he may receive less than the others but in bad years he may receive more. The mere
fact that he is called a partner is not sufficient to make him one. In assessing whether he is a partner
or a mere employee the court will look at the truth of the relationship. In Stekel v. Ellis it was held
that such a person was a partner because he was held out as such on the firm’s notepaper, he was
given partnership responsibilities and his salary was paid without deduction of tax.

3.0 THE CREATION OF A PARTNERSHIP

3.1 Ways in which a partnership may be created

It is not necessary for a partnership agreement to be evidenced in writing and whether or not a
partnership has been formed is a question of fact. A partnership may thus be created in the
following ways:-
(a) Conduct of the parties
Pooley v. Driver
B and H had entered into partnership for 14 years, and in order to raise further capital, had
transferred shares to a third party whose contributions were called “loans”.
Held. C was a partner because on a true construction the relationship was not one of debtor and
creditor. C was, for example, given a right to share in the capital and the profits on dissolution and
could insist that the partners conducted the business to the best of their ability and could sue them
for damages if they did not.

A statement in an agreement that the parties are not partners is itself not conclusive if, viewed
objectively, a partnership relationship is seen to exist. Fenston v. Johnstone.
46
 (b) Orally. The partnership agreement need not be in writing even if the partnership properly consists
of land. This is an exception to the ordinary rule that a contract for the sale of land is unenforceable
unless it is in writing or evidenced by writing.
(c) In writing or by deed (i.e. under seal). A written agreement is often called the partnership articles
and forms a contract between the parties. It is the most popular means of creating a partnership
because it enables the partners to vary the provisions of the Partnership Act. For example, the Act
states that every partner is entitled to an equal share in both management and profits but the parties
could provide in the articles that one partner has no powers of management and a smaller share of
the profits than the others.

3.2 Capacity to be a partner

The general rule is that anyone except an enemy alien is capable of being a partner. Even a limited
company can be a partner if authorized by its memorandum and articles, but some categories of
persons require further examination:-

(a) Married women: Since the Law Reform (Married Women and Tortfeasors) Act 1935 a married
woman has been capable of rendering herself liable in contract and debt, and may therefore enter
into a partnership and is in the same position as any other partner as regards her liability both to her
co-partners and to the firm’s creditors.

It is possible for a husband and wife to enter into a partnership together although the courts are
reluctant to find such an arrangement unless the agreement is by deed.

(b) Minors: Section 1 of the Family Law Reform Act, 1969 provides that as from January 1st, 1970, full
age is attained at 18 years.

Minors can enter into partnership, but they cannot be sued for trade debts and cannot be made
bankrupt in respect of debts contracted by the firm.

If a minor is in partnership with adults, the adult partners alone are liable for the debts of the firm,
but they are entitled to insist that the partnership assets shall be applied in payment of the of the
liabilities of the partnership and that until these are provided for, no part of them shall be received
by the infant.

A minor may repudiate the partnership on attaining 18. This must be done at once otherwise he
remains a partner and is equally liable with his co-partners, but he does not become liable for debts
contracted during his infancy.

If a minor avoids the contract of partnership on attaining his majority he can recover any money
paid by him under the contract provided he can show a total failure of consideration, i.e. that he has
received no benefit under it. This is based on the ordinary principles of contract law.

Steinberg v. Scala (Leeds) Ltd.

47
 The plaintiff, an infant, entered into a contract for shares in a company and sought to repudiate it,
while still an infant, in order to escape future liability for calls.
Held. The plaintiff was entitled to repudiate the contract, but not entitled to recover the money she
had paid to the company for her shares. There had been no failure of consideration, although she
had received no dividends and attended no meetings, because the shares were of substantial value
and conferred rights which she could have exercised.
(c) Persons of unsound mind
(i) At the date of entering into the partnership. It is quite possible for a person of unsound mind to
enter into a partnership, although it may be repudiated by that person.

If the insane partner alleges that he was insane at the time of entering into the contract of
partnership, he remains fully bound by the partnership unless he can show that he was so insane
that he did not know what he was doing and that the person with whom he contracted knew him to
be so insane as not to be capable of understanding the nature of the contract.

(ii) Although the subsequent insanity of a partner, unlike death, does not result in dissolution of the
partnership, it is a ground for asking the court to decree dissolution and the court will, in a proper
case, grant an injunction pending the hearing of such an action restraining the person of unsound
mind from interfering in the business.

3.3 Number of partners

(a) Banking Firms: Section 429 of the Companies Act, 1948, provides that the maximum number of
members is 10, although this has been increased to 20by s.119 oftheCompanies Act, 1967 provided
that each member is authorized by the Department of Trade.

(b) Other Firms: section 434 of the Companies Act, 1948, provides that no more than 20 members may
carry on business with the object of the acquisition of gain, unless such business is a registered
company under the Act. Section 120 of the Companies Act, 1967, abolishes the limit of 20 for firms
of solicitors and accountants and members of recognized stock exchanges, provided all the
members hold the appropriate qualifications. The Department of Trade also has the power to
provide by statutory instrument that other firms shall be exempt from the maximum of 20 and
provision to this effect has been made, for example, in relation to patent agents, surveyors and
auctioneers.

3.4 Illegality
(a) Partnership illegal at its inception: This may arise in the following circumstances:-
(i) Number: If a partnership exceeds the statutory maximum then it is illegal. (see paragraph 3.3
above).
(ii) Illegal Purpose: A partnership is illegal if it is formed for a purpose forbidden by law of which is
against public policy. Thus, for example, s. 20 of the Solicitors Act, 1974 forbids an unqualified
person to carry on the business of a solicitor and therefore a partnership between solicitors is
illegal. Likewise, a partnership to share in the profits of a brothel or criminal activities would be
illegal.

48
 The effect of such illegality is that the parties have no rights of a partner against each other, and
thus, for example, one partner will be liable to contribute to the losses suffered by the other.
However, an innocent creditor may recover from the partner a debt which to his knowledge is not
tainted with illegality. For instance, a creditor who had built a house for a partnership which was
intended for use as brothel, would be able to recover the price as long as he was unaware of the
illegal object.
(b) Subsequent illegality: A partnership which is legal at its formation may subsequently become
illegal, either by the passing of an Act of Parliament, or by other means. For example, a partnership
between one Englishman and a person resident abroad would become illegal if that person became
an enemy alien on the outbreak of war and again a partnership in respect of a gaming club would be
illegal if its license was withdrawn by the magistrates.

Section 34 states that in such circumstances a partnership is automatically dissolved by the

happening of the event giving rise to the illegality.

3.5 Choice of Name

As a general rule the partners may trade under any name they please, whether it be their own
names, a description of the business, or a totally fictitious name. However, this rule is subject to
two limitations.

(a) Prohibition of the word “limited”: Section 439 of the last word of the name of a partnership,
although there is no prohibition on the use of the word “company” and this, in fact, is often used.
(b) The Doctrine of passing off: It is a tort for a person by the use of his name to either fraudulently or
innocently represent that his business is the same as or connected to an existing business. In such
circumstances if it can be proved that the public are or are likely to be diverted from the old
business to the new, the court will grant an injunction preventing the new business from trading in
that name. The partnership can sue a company and vice versa.

North Cheshire and Manchester Brewery Co. Ltd. v. Manchester brewery Co.
Manchester Brewery Co. were an old established firm. A business called North Cheshire Brewery
Co. then became incorporated under the name north Cheshire & Manchester Brewery Co. Ltd.
Held: An injunction would be granted to prevent the use of this new name even though there was
no finding of fraudulent intention because it was probable that the goods of the new company
would be bought in mistake for those of the old firm since the public was likely to imagine that the
two businesses had amalgamated.

A firm having a word in ordinary use as part of its name cannot prevent another concern from using
the same word.

However, in the absence of a deliberate intention to deceive, the law is jealous to preserve the right
of an individual to trade in his own name, even if confusion may thereby be caused between his
business and that of another person with the same name.

49
 But if the use of a name is calculated to deceive or lead to confusion, the court will grant an
injunction to prevent persons trading under their own names.

Croft v. Day

An established firm of makers of blacking was called “Day and Martin” even though the partners of
these names were long since dead. A new business was started by a real “Day” and a real “Martin”
trading under the firm name of “Day and Martin” as makers of blacking.

Held. The old firm were entitled to an injunction to prevent the use of the firm name by the new
business even though it compromised their own names, because it was found to have been adopted
for the fraudulent purpose of representing that they were the old and established firm.

4.0 LIABILITY OF THE PARTNERS FOR CONTRACTS AND DEBTS

4.1 Introduction
If all the partners act jointly in making a contract, then they are all liable but in most cases and
outsider will find himself dealing with one partner who is acting on behalf of the firm. It is
therefore necessary to examine the liability of the partners as a whole (the firm) for contracts made
and debts incurred by individual partners. Section 5 states that every partner is an agent of the firm
and his other partners for the purpose of the business. Thus this area of partnership is really a
branch of the general law of agency. If a partner makes a contract or becomes indebted to an
outsider, whether or not the firm is bound by his act will depend upon the nature of authority the
partner possesses and the knowledge of the third party.

The types of authority can be divided into three categories:-

(a) Where the partner has actual authority from the firm.
(b) Where the partner has no authority and the outsider knows of this lack of authority.
(c) Where the outsider is unaware of the partner’s lack of authority.

4.2 Actual authority

If a partner has been given an express authority from the other partners to carry out a transaction,
then all the members of the firm will be bound. This is so even though the act in question is outside
the business of the firm as stated in the partnership articles because, unlike the objects clause in the
memorandum of association of a company, the articles are considered to be a private arrangement
between the partners themselves which can be changed at any time by mutual agreement; there is
no doctrine of ultra vires.

The firm is liable for the acts of a partner within his actual authority even if the third party did not
know that he was dealing with a partner. Thus, if one partner in a partnership takes no active part in
the running of a business (a sleeping partner) and a third party deals with the active partner

50
 believing that he is the sole principal, the sleeping partner will be liable for all acts that he has
expressly authorized.

4.3 Where the outsider knows that the partner has no authority
Section 5 also provides that the firm is not bound if a partner has no authority and the outsider is
aware of that fact. However, as stated above, the articles are a private agreement between the
partners themselves and therefore the mere fact that the articles restrict the authority of a partner
does not prevent the firm from being liable. The third party will only be affected if he has actually
read the articles and is aware of the restriction. This principle is confirmed bys.8 which provides:

“If it has been agreed between the partners that any restriction shall be placed on the power
of any one or more of them to bind the firm, no act done in contravention of the agreement is
binding on the firm with respect to persons having notice of the agreement”.

4.4 Where the outsider is unaware that the partner has exceeded his authority (The Doctrine of
Apparent Authority).
As stated above, if a partner has actual authority from the firm to carry out a transaction, then all
the members of the firm are bound, but if the partner has no authority, the firm will not be bound if
the outsider is aware of the fact. In most cases, however, the outsider will have no knowledge
whatsoever of the internal organization of a firm and will be totally ignorant that a partner has
exceeded his authority; in such circumstances he may be able to rely on the doctrine of apparent
authority.

Under the general law of agency, not only is a principal liable for the acts of his agent that he has
expressly authorized, he is also for all acts which are necessary or proper for carrying on a business
of that kind. This is called apparent authority. Thus, if P employs an agent to sell goods, he cannot
later repudiate his liability to a third party by stating that the agent only had power to buy certain
goods, or goods up to a certain value.

Section 5 states that the firm is bound by the acts of “every partner who does any act carrying on in
the usual way business of the kind carried on by the firm”. Obviously, however, there are
limitations to the apparent authority of a partner, namely:-
- The act must be done in relation to the partnership business.
- The act must be an act for carrying on the business in the usual way; and
- The act must be done as a partner and not as an individual.
(a) The act must be done in relation to the partnership business
In order to bind the firm, the act must be connected with the firm’s business. Section 7 provides that
where one partner pledges his firm’s credit for a purpose apparently not connected with the firm’s
ordinary course of business, the firm is not bound unless he is in fact specially authorized by the
other partners. Thus, if A and B carry on business as grocers, a contract signed by A in the firm’s
name to supply cars would not be binding on B unless made with his express permission. It is not,

51
 however, essential that the act done by the partner should be identical to the business carried on by
the firm.
Mercantile Credit v. Garrod
P was a partner of a firm carrying on a garage business mainly concerned with letting lock-up
garages and repairing cars. G was a sleeping partner. A clause in the partnership deed excluded the
buying and selling of cars. P, without G’s authority, sold a car to which he had no title to the
Mercantile Credit Company so that he could let it on hire-purchase to a customer. The company
paid P £700. When the company found that P had no title to the car, it claimed the £700 from G. G
pleaded that since buying and selling cars was excluded by the partnership agreement, the act was
not done “in relation to the partnership business”.
Held. The court would consider the matter from “what was apparent to the outside world in
general” and the outside world when looking at the garage would have assumed that it had the
power to buy and sell cars. Thus G was liable.

Therefore, whether the act is done in relation to the partnership business will be a question of fact
in each case.

Finally, note that s.7 makes it clear that even though the firm is not bound, the creditor has full
rights against the partner with whom he was dealing, and who deceived him.

(b) The act must be an act for carrying on the business in the usual way
Even though the act is clearly done in relation to the partnership business, the firm will not be
bound if it is outside the usual authority of that partner. This requirement is laid down by s.5 which
states that the firm will only be liable for acts “carrying on in the usual way business of the kind
carried on by the firm”.

Whether the act is within the usual authority of the partner will depend upon whether the
partnership is a commercial partnership or a non-commercial partnership.
(i) Commercial Partnership: A general commercial partnership is a business where the principal
operations are buying and selling. The apparent authority of a partner in such a partnership extends
to the following acts:-
(1) Pledging and selling partnership goods
(2) Buying goods on account of the firm
(3) Borrowing money, contracting debts, paying debts on firm’s account, etc.
(4) Dealing with negotiable instruments on behalf of the firm
(5) Engaging servants for firm’s business
(6) Receiving, and giving of a good receipt for debts due to the firm.

And also probably includes:-

(7) Creating an equitable mortgage of the firm’s lands or buildings by a simple deposit of deeds.
(8) Retaining a solicitor to conduct an action for recovering debts due to the firm or to defend an action
against the firm.

Note: as stated above (paragraph. 4.2), the mere fact that the articles forbid any of the above acts
does not prevent the firm being liable.

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 Example

Kermit was a partner in Muppets & Co. The articles state that he is a junior partner and cannot buy
goods on account of the firm. Kermit buys some goods from Miss Piggy who is unaware of the
restriction in the articles. As long as the goods were bought in relation to the firm’s business,
Muppets & Co. will be liable on the contract.

(ii) Non-Commercial Partnerships: where the business is not of a commercial nature, e.g. where it is a
professional business or where there is no buying and selling of goods, a partner has no usual
authority to accept, make or issue negotiable instruments other than cheques or to pledge the
partnership property.
Higgins v. Beauchamp
B was a sleeping partner in a business of cinema proprietors carried on by another partner, M. The
articles provided that no partner should contract any debt on account of the partnership without the
consent of the other partners. M borrowed money from H. He sued B to recover the money.
Held: The business was not a trading business and therefore M had no implied authority to bind the
firm in respect of the debt. Thus B was not liable.
(iii) Acts which are never within Usual Authority: In both commercial and non-commercial businesses,
a partner never has usual authority to do any of the following and a partner can therefore only bind
the firm I such cases if he has express authority:
(1) He cannot execute a deed, e.g. legal mortgage, on behalf of the firm (an agent can never bind his
principal by deed unless his authority is expressly conferred by deed). But in transactions in which
a deed is not necessary, a sealed writing executed by one partner will bind the firm.
(2) He cannot give a guarantee in the firm’s name.
(3) He cannot bind the firm by submitting a dispute to arbitration.
(4) He cannot accept fully paid-up shares in a company in satisfaction of a debt due to the partnership.
(c) The act must be done as a partner and not as an individual
A contract entered into by a partner in relation to a matter within the scope of both the partnership
business and his actual or ostensible authority does not bind the firm unless he has entered into the
contract in his character as a partner.

Section 5 states that the firm will not be bound if the third party does not know or believe the
person with whom he is dealing to be a partner. Section 6 further provides that a partner is to be
treated as contracting as a partner rather than as an individual if he does an act or executes a
document either in the firm’s name or in any other manner showing an intention to bind the firm.
4.5 The extent of each partner’s liability
Section 9 provides that every partner is liable jointly with the other partners for all the debts and
contracts of the firm incurred while he is a partner. Joint liability means that a creditor may only
bring one action against the members of a firm. He may decide to sue all of them or merely one,
but if he chooses the latter action, he loses his rights against those not included. This rule caused a
creditor hardship. If, for example, he sued all those partners who are ostensibly members of a firm
and obtains judgment, but is unable to satisfy his debt completely from their assets, he was unable
to commence fresh proceedings against a wealthy sleeping partner of whose existence he has only
just learnt.
Kendall v. Hamilton

53
 K lent money to A and B who were partners in a firm. The partners did not repay the loan. K
obtained judgment against them but it remained unsatisfied as A and B had become insolvent.
Subsequently, K discovered that H (a wealthy man) had been a sleeping partner at the relevant time
and attempted to sue him for the unsatisfied claim.
Held: Since the firm’s liability was joint, k had only one right of action. The judgment in the
previous action, even though unsatisfied, extinguished the obligations and thus K’s claim against H
failed.

This difficulty used to be overcome, however, by bringing an action against the partnership in the
firm name – using the procedure laid down by Order 81 of the Rules of the Supreme Court (see
para. 1.4 above).

By virtue of the terms of s.3 of the Civil Liability (Contribution) Act, 1978, however, the
provisions of s.6 (1) (a) of the Law Reform (Married Women and Tortfeasors) Act, 1935 (which
abolished the then rule that judgment against one tortfeasor was a bar to further proceedings against
others jointly liable) are extended to all actions where persons are jointly liable “in respect of the
same debt or damage”. The effect of this would appear to be to overrule the judgment in Kendall v.
Hamilton (above) and to allow a third party to have the same rights if the debt is joint as he would
have if it was several.

The Act does not affect the original rule whereby each individual partner is liable for the whole of
the debts and liabilities of the firm, but if one partner alone is sued; he can claim a contribution
from the other partners.

After the death of a partner, his estate is also severally liable for debts and contracts but subject to
the prior payment of his separate debts.

5.0 LIABILITY OF THE PARTNERS FOR TORTS

5.1 Liability for ordinary torts

A tort is a wrongful act or omission to act, such as dangerous driving or harming another person or
property. Section 10 states that the firm will be liable for a tort committed by one partner if it was
done:-
(a) With the authority of the partners (which is rare); or
(b) In the ordinary course of business.

This latter category requires some explanation.

A tort done “in the ordinary course of the firm’s business” is one which is committed in connection
with the firm’s business and within the usual authority of the partner.

Example
54
 Adder, an accountant was driving to see some clients when he ran over a cyclist. As he committed
the tort while engaged in the firm’s business, the firm will be liable. If, however, during the
journey, he decided to deviate from his route in order to visit his girl-friend, and he ran over the
cyclist during that deviation, the firm would not be liable.

Thus, a firm of accountants would be liable for a fraud committed by one of the partners and a firm
of doctors would be liable for any injury to a patient caused by the negligence of one of its
members.

Hamlyn v. Houston

If A partner in X & Co. Bribed a clerk in a rival firm to disclose confidential information relating to
it, the information was used by X & Co. and the rival firm suffered a loss in consequence.

Held: X & Co. was liable for the partner’s wrongful act as he had acting in the ordinary course of
business to obtain information about a trade rival.

The firm will still be liable even if it has expressly prohibited the act. The point may be illustrated
by using a case from the general law of tort.

Limpus v. London General Omnibus Company

A driver of a bus was specifically ordered not to interfere with the vehicles of rival companies.
While racing a rival bus, the driver pulled across the road to obstruct it thereby causing a collision.

Held: Even though the driver had been expressly prohibited from doing the treacherous act, the
principal was liable.

There is one tort which is an exception to the normal rules. Section 6 of the Statute of Frauds
Amendment Act, 1828, provides that a firm is not liable for fraudulent representations as to the
character or solvency of any person, unless the representation is in writing signed by all the
partners. The signature of the firm is insignificant even though all the partners were privy to the
misrepresentation.

5.2 Liability for fraudulent misappropriations

This can be divided into two situations:-

(a) Misappropriation by a partner before receipt by the firm. (Section 11(a)) provides that where a
partner acting within the scope of his apparent authority receives money or property belonging to a
third party and misapplies it, the firm is liable for the loss.
Harman v. Johnson
A partner in a firm of solicitors received client money for the purpose of general investment and
later misapplied it. The question arose whether the firm was liable under s.11(a).

55
 Held: The receipt of money for the purpose of general investment is not normally a transaction of
the ordinary business of solicitors and the firm was therefore not liable.

Earl of Dundonald v. Masterman

A firm of solicitors was retained to manage and settle the affairs of a client who was being pressed
by his creditors, and, as is usual, one of the partners in the firm became responsible for looking
after the client’s affairs, which necessitated the assignment of property upon trust for creditors and
the receipt of money. The solicitor concerned absconded with the money.
Held: It was within the ordinary everyday practice of a firm of solicitors to receive moneys from a
client for satisfying the demands of the creditors with whom they are employed to arrange the
matters. The firm was therefore liable.

For s.11 (a) to apply, the third party must have dealt with the partner as such and not in the capacity
of an individual.

British Home Corporation v. Patterson

X Co. appointed A, a solicitor in the firm of A & A to act for it in mortgage transactions. A gave
notice to the company that he had taken P into partnership and now the name of the firm was A &
P. Shortly afterwards, X Co. sent A, a cheque payable to A & A (the old firm). A, absconded with
the cheque and the company sued P.

Held: P was not liable because the company had dealt with A in his personal capacity and not that
of a partner of the firm.

(b) Misappropriation after receipt by the firm: Section 11(b) provides that where a firm receives
money or property in the course of its business and one or more of the partners misapply it while it
is in the custody of the firm the firm is liable to make good the loss.

Here, no question of the partner’s authority to receive the money or property arises. So long as the
property was received in the ordinary course of business and misapplied while in the custody of the
firm. It is immaterial which of the partners misapplied the property.
Rhodes v. Moules
R wished to obtain a loan so he mortgaged his property. He was told by A, a partner in X & Co., a
firm of solicitors, that the mortgages wanted additional security and thus he handed over to the firm
some share warrants payable to bearer. A misappropriated them and R sued the firm.
Held: The firm was liable because it had received the warrants in the ordinary course of business.

Sims v. Brutton
A & Co., a firm of solicitors received some money from a client which was to be invested on a
specific mortgage and it was so invested. One of the partners induced the mortgagor to repay the
money to him and absconded.
Held: The firm was not liable because the misappropriation was not made while the money was in
the custody of the firm.
56
 5.3 Employment of trust property for partnership purposes

Section 13 provides that if one member of the firm is a trustee and without the knowledge of his
partners he brings trust funds into the business as part of his capital he does not thereby make the
firm liable for his breach of trust.

However, the section provides that a partner who has notice of the breach of trust may still be liable
and if he property is still in possession or control of the firm the beneficiaries may recover it under
the general law of tracing.

5.4 The extent of each partner’s liability

Section 12 provides that liability for torts under s.10 and s.11 is both joint and several. The effect of
this is that the injured party may issue separate writs against each of the partners, either
contemporaneously or successively. Thus, if the first one sued becomes bankrupt, the injured party
may still sue another or indeed all of the other partners until his debts are satisfied. Of course, a
partner who was not a member of the firm at the time the tort was committed cannot be sued.

6.0 DURATION OF THE LIABILITY FOR CONTRACT ANT TORT

6.1 Introduction

It has been that a partner is liable for the acts of this co-partner on the basis of an agency
relationship between a partner and his firm. It is now necessary to discuss at what stage that agency
relationship commences and ceases. The general rule is that a partner is only bound by liabilities
incurred during the period of his membership of the firm.

6.2 The liability of new partners

Section 17 states that a new partner admitted into an old firm is not liable for the obligations
already incurred at the date when he joins unless he agrees to accept liability by novation. Novation
is an agreement with the creditors which is expressed or inferred from conduct.

6.3 The liability of old partners for existing debts and obligations

(a) Liability on dissolution of the firm – In the event of a dissolution and winding up of the business,
the liability of the partners only ceases when the liquidation is fully and completely ended.
However, s.38 states that after dissolution the partners may only do acts which are necessary to
wind up the affairs of the partnership and to complete transactions begun but unfinished at the time
of the dissolution, but not otherwise. Consequently the firm will not be bound by acts outside this
authority.

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 Re: Bourne

A partnership was dissolved by the death of one of the partners. The surviving partner carried on
the business and deposited with the bank the title deeds relating to some land owned by the
partnership in order to secure an overdraft. The executors of the deceased partner claimed that the
surviving partner was not allowed to do this and that they had a right to the land in preference to the
bank’s claim.

Held: The bank had a prior claim for the title deeds had been deposited in order to wind up the
affairs of the partnership.

(b) Retirement of a partner – Section 32 states that if a partner retires, the partnership is automatically
dissolved. Thus the partnership articles often expressly provide that the partnership will be
continued. In such circumstances a partner who retires remains liable for those debts existing at the
date of his retirement; although as between them there is often an agreement that existing liabilities
shall be borne by the continuing partners alone.

But this does not release such a partner from his liabilities towards third parties. The only way in
which he can free himself is by an agreement, i.e. a novation between himself, the creditors and the
firm as newly constituted.
(c) Death of partners – Section 33 states that in the absence of agreement to the contrary, the death of a
partner results in the dissolution of the firm and this it is often expressly provided in the articles that
the partnership is to be continued by the surviving partner. In such circumstances, the liability of
the personal representatives of the deceased parties, are the same as that of a retiring partner.

6.4 Liability of a partner for debts contracted after retirement, death or bankruptcy

(a) Retirement – Although in the absence of a novation, a partner who retires from a firm cannot rid
himself from the liability for past debts, he cease to be liable for the future liabilities of the new
firm because by retiring he cancels the agency. However, a partner will not cease to be liable for
future debts unless he gives the appropriate notice to interested parties:-

(i) Customers of the old firm who continue to deal with the new firm – Section 36 (1)provides that the
third party must be given actual notice of the change of constitution or else he may treat a retiring
partner as bound by the firm’s liabilities. Once notice in fact is proved, it is immaterial how the
creditors came by it, so that if, for example, it can be shown that the creditor was aware of the
deletion of the partner’s name from the letterhead, this will suffice. The deletion of the name of the
retiring partner from the Register of Business Names will not suffice unless it can be shown that the
creditor in fact knew of it.

(ii) A creditor who has had no previous dealings with the firm, but who knew who the partners were –
Section 36 (2) states that in such circumstances notice in the London Gazette is sufficient. The
creditor must prove that he obtained knowledge of the constitution of the firm prior to the
retirement of the partner whom he seeks to hold liable. The notice in the Gazette is sufficient even
though the creditor has not seen it.

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(iii) A creditor who has not had previous dealings with the firm or knowledge of its constitution. In
Tower Cabinet v. Ingram, Lynskey J. held that in such circumstances, no notice of any sort need be
given.

(b) Death or bankruptcy – Section 36 (3) states that if a partner dies or become bankrupt, the estate of
the deceased or bankrupt partner is not liable for subsequent debts, notwithstanding that no notice
of any sort is given.

7.0 LIABILITY UNDER THE DOCTRINE OF HOLDING OUT

7.1 Circumstances in which the doctrine is applied

Section 14 provides – Everyone who by words spoken or written or by conduct represents himself,
or knowingly suffers himself to be represented, as a partner in a particular firm, is liable as a partner
to anyone who has on the fault of any such representation given credit to the firm, whether the
representation has or has not been made or communicated to the person so giving credit or with the
knowledge of the apparent partner making the representation of suffering it to be made. The section
has an application to two separate circumstances:-

(a) Where a person is not a partner does acts characteristic of a partner. The doctrine of “holding out”
is based on the doctrine of estoppels. If a man holds himself out as a partner of a firm and in doing
so induces another to give credit to the firm, then he is stopped (i.e. prevented) from denying that
he is a partner. The representation may be made either by words or by conduct. Moreover, it is
immaterial that the representation was not communicated directly by the person holding out to the
creditor, e.g. the news was communicated to the latter by a third party; the only essential element is
that the creditor acted on the faith of the representation. Thus if X informs Y that he is a partner in
a firm and Y informs Z and Z, believing X to be a member in the firm, supplies the goods to them,
X is liable for the price.
Martyn v. Gray
If A permitted B to represent him as “a capitalist from London” who implied that he was a monied
partner. The merchant gave credit to the partner on the faith of his representation.
Held: A was liable to the merchant as if he was a partner.
(b) Where a partner has retired from a firm. The “holding out” principle has its most frequent
application on a change in the constitution of a firm. A partner who has retired from the firm may
be liable on the principle of “holding out” for debts subsequently contracted by the firm if he has
omitted to give due notice of the retirement to those dealing with the firm (see paragraph 3.4
above).
Example
Alan and Brian carry on business in the name of Alan and Brian’s Poodle Parlor. Alan retires, his
place being taken by Cecil. The firm with Alan’s permission continues to trade in the name of Alan
Brian and Cecil’s Poodle Parlor. No notice of Alan’s retirement is given to anyone. Alan would be
liable to a person who has given credit to the firm.

7.2What constitutes “holding out”?

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A man may represent himself to be a partner orally, in writing or by conduct as, for example, where
he interferes in management, giving outsiders the impression that he is a partner. More difficulty
arises where (in the words of s.14) he makes no representation himself but “knowingly suffers
himself” to be held out as a partner by other persons.

The word “knowingly” indicates that holding out must be a voluntary act and mere negligence or
carelessness will not suffice. Thus the mere fact that a retiring partner has neglected to destroy the
old notepaper with his name on or, he does not check to see whether the new firm is still trading
under the old firm name, which includes his name, does not constitute holding out.

Tower Cabinet v. Ingram

C and I carried on a business of household furniture under the name of Mary’s. The partnership was
dissolved in 1997, but C carried on business under the same name; 1948 Tower Cabinet Co. Ltd.
Which had not previously dealt with Mary’s received an order to supply them with furniture. The
price was never paid and the company obtained judgment against Mary’s and sought to enforce it
against me.

The only knowledge which the company had of I was that his name had appeared on some old
headed notepaper which had been used by C, without I’s authority, in confirming the order for the
purchase of the furniture and which I had failed to destroy before he left the firm.

Held: That, I was not liable under Section 14 because he had not knowingly suffered himself to the
represented as a partner.

N. B. The case has been criticized because it allows a retiring partner to turn a blind eye to the fact
his name is being used.

Moreover, the use of the word “suffers” suggests that a person will not be liable under the section if
the representations are made entirely without his authority; there is no legal duty on anyone to
prevent others from lying.

Finally, note that one of the essential elements of “holding out” is that the third party relied on the
representation and thus the mere fact a partner’s name remains on the Register of Business Names
(see paragraph. 3.5 above) does not constitute “holding out” unless it can be shown that the person
seeking to establish liability against him actually searched the Register or relied on the registration
certificate. Likewise, if a third party had not seen the name outside the premises or the name on the
notepaper, etc., he could not establish liability under the doctrine.

7.3The meaning of “giving of credit”

The meaning of the words “the giving of credit” in s.14 obviously includes the giving of a loan to
the firm or where goods are delivered against future payment. However, since the section expressly
refers to liability for credit (i.e. contract debts) a partner (or person pretending to be a partner)
cannot be made liable under this section for the firm’s torts.

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Example

Keen, Sharp and Blunt have been partners in the firm of Keen Sharp & Co., a firm of car dealers,
since 1972. Ambitious, a wealthy young man is employed as chief salesman. Ambitious tells his
girl friend that he is a partner in the firm and she tells her father, Gullible. As a result, Gullible
decides to buy a car from the firm and is knocked down by a car drives by Keen in the course of
demonstrating it to Gullible.

Answer: Ambitious would not be liable for the tort, because holding out does not apply to such
actions. Keen would probably under section 10 (see paragraph. 5.1 above).

Example

Denis, Harold and Ted are partners in a furniture polishing business. Denis retires from the
business without giving any notice section 36. A regular customer of the firm sends his table to be
re-polished and in the course of doing this Harold scratches it badly.

Answer: Denis would not be liable under the doctrine of holding out.

7.4Deceased partners and the doctrine of holding out

Section 14(2) states that where after a partner’s death the partnership business is continued in the
old firm name, the continued use of that name or of the deceased partner’s name as part thereof
shall not of itself make his executors or administrators estate or effects liable for any partnership
debts contracted after his death. Thus, generally, the doctrine of holding out does not apply to
deceased partners.

8.0 THE RIGHTS AND DUTIES OF THE PARTNERS

In assessing the rights and duties of the partners to one another, it is essential to look at three
things, namely the partnership articles, the conduct of the parties and the Partnership Act.

The rights and duties of the partners depend primarily upon the terms of the partnership articles.
However, the Partnership Act lays down rules which apply wherever there is no partnership
agreement or where such agreement as there is fails to cover a particular situation.

Section 19 provides that the mutual rights and duties of the partners, whether ascertained by
agreement or implied by the act may be varied by consent of all the partners and such consent may
be either express or implied. Thus, the section envisages that however definite partnership articles
may be on such matters as profit sharing etc. The partners may in fact vary the terms of their
association at will and without any express agreement. This applies even where the partnership
articles are contained in a deed.

Coventry v. Barclay

The articles of a partnership prescribed a particular mode of valuation of assets to be made

annually. After some years without amending the articles, the partnership adopted another mode of
valuation and used it for several years.
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 Held: The articles had been altered by the “course of dealings” and the alteration was binding upon
the partners unless they unanimously agreed otherwise.

Note that if a partner has expressly or impliedly consented to a variation of the partnership articles,
such consent will be binding on his personal representatives after his death, i.e. his executors could
not insist on holding the other partners to the precise provisions of the original partnership articles.

The primary duty, however, which is not mentioned specifically in the Partnership Act, is the duty
of utmost good faith.

9.0 THE DUTY OF UTMOST GOOD FAITH

9.1 Good faith in general law

Whatever the terms of the partnership articles or in the absence of any written agreement at all, the
general law imposes: on every partner the duty to exercise utmost good faith and fairness towards
his fellow partners. Thus, for example case law has laid down the following:-

(a) A power in a partnership agreement enabling partners to expel one of their numbers for breach of
certain specified articles must be exercised in good faith.
Green v. Howell
A clause in a partnership agreement stated that a partner who was guilty of a flagrant breach of his
duties, could be expelled by the other partner subject to an appeal to an arbitrator. The other partner
concerned, acting in good faith, served on him a notice of expulsion without giving him an
opportunity of explanation. The question was whether this constituted a valid notice.
Held: The notice was valid because it was exercised in good faith.
(b) There is a duty of disclosure of all information known which is relevant to a proposed sale between
the partners of a share of the partnership business. In the absence of full disclosure the sale may be
set aside unless of course, the purchaser has in some way ratified the sale.
Law and Law
A partner sold his share in the partnership to another partner for £21,000. It was later discovered
that the partnership assets consisted of mortgages and other securities which had not been disclosed
to the purchasing partner by the vendor.
Held: The sale would have been set aside but on the facts a settlement of the claim had been agreed
between the partners and the purchasing partner had elected to be bound by it.

9.2Good faith in the Partnership Act

There is no mention of the broad principle in the Act but Sections 28 to 30 deal with specific
circumstances:-

(a) Section 28 provides that partners are bound to render true accounts and full information of all
things affecting the partnership to any partner or his legal representatives.
(b) Section 29 states that every partner must account to the firm for any benefit derived by him without
the consent of the other partner from any transaction concerning the partnership, or from any use by
him of the partnership property, name or business connection.

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 Fawcett v. Whitehouse
A partner received a premium in consideration of his work in negotiating the assignment of a lease
to an intended partnership which included him.
Held: He was accountable to his co-partners for the money so received.

Section 29(2) states that the section also applies to transactions undertaken after the partnership has
been dissolved by the death of a partner but before the affairs thereof have been completely wound
up, either by any surviving partner or by the representatives of the deceased partner.

Thompson’s Trustee v. Heaton

T and H, who were in partnership, acquired a leasehold interest in a farm. After the death of H, but
before the partnership assets had been distributed, H’s executors bought the freehold reversion of
the lease and sold it at a substantial profit.

Held: A partner who acquires the reversion of a lease granted to the firm is under a fiduciary duty
to the other partner to account for the benefit derived from the transaction. This duty continued to
exist after the dissolution since the property remained undistributed partnership property. The
executors were therefore liable to account to the other partner for half of the net profits resulting
from the purchase and sale.

(c) Section 30 provides that if a partner without the consent of the other partners, carried on any
business of the same nature as, and competing with, that of the firm, he must account for and pay
over to the firm all profits made by him in that business. There is nothing, however, in the absence
of an agreement to the contrary, to prevent a partner from carrying on a non-competing business
which does not involve the use of the firm’s property.

Trimble v. Goldberg
G, T and B were in partnership for the purpose of buying and re-selling property in South Africa
belonging to H. These consisted of 5,500 shares in a company and other plots of land. While
buying the property T bought some plots of land belonging to the company. G learnt of this
purchase sometime afterwards and sued T claiming the benefit of the purchase.
Held: The action failed. The purchase of the plots was not within the scope of the partnership, nor
was it in rivalry with the partnership.

10.0 RIGHTS AND DUTIES OF PARTNERS IMPLIED IN THE PARTNERSHIP

ACT 1890

10.1 Introduction

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 As stated above, the rights and duties of partners among themselves depends on what is written in
the partnership articles, but s.24 lays down rules which apply in the absence of agreement to the
contrary. The rules relate to the following subjects:-

(a) The sharing of capital profits and losses

(b) The right to indemnity
(c) Interest on advances and capital
(d) Management and remuneration
(e) Settlement of differences of opinion between partners
(f) Introduction of new partners
(g) Access to the books.

10.2 The sharing of capital, profit and losses

Section 24(1) states, which all the partners are entitled to share equally in the capital and profits of
the business and must contribute equally towards losses, whether of capital or otherwise. This
entire rule means is there is no necessary connection between the proportion in which capital is
contributed and that of profit and loss and that therefore in the absence of agreement to the
contrary, partners share profits and bear losses equally notwithstanding that the capital contributed
by each may not be equal. Thus, if A invests £500 in a firm and B only £100, they will nevertheless
share profits equally unless there is an agreement to the contrary in the partnership articles or which
can be implied from the conduct of the parties. Moreover, if there is an express agreement to share
profits unequally and nothing is said about losses, it is presumed that losses are shared in the same
proportion as profits and not equally (Re:Albion Life Assurance).

10.3 Right to Indemnity

Section 24(2) states that the firm must indemnify every partner in respect of payments made and
personal liabilities incurred by him:-

(a) In the ordinary and proper conduct of the business, or

(b) In anything necessarily done for the preservation of the business or him.

Under the general law of agency, a principal is obliged to indemnify his agent for acts done in the
ordinary course of business and thus the right in part (a) above is implied from s.5. But the right to
indemnification for necessary acts goes beyond this; it arises where the partner has incurred
expense on behalf of the firm, and the firm has received the benefit of his action, e.g. where he
provides emergency funds to pay off firm’s debts, or to buy capital equipment. Note that the right
extends to necessary acts and not to mere voluntary ones which the partner who undertakes the
liability thinks may be advantageous.

The amount of indemnity depends on the circumstances and on any agreement between the
partners. The partner becomes a creditor of the firm to the extent of his indemnity. Thus he might,
if he wished, drive the firm and each of his co-partners into bankruptcy in pursuit of his indemnity.

10.4 Interest on advances and capital

Section 24(4) states that a partner is not automatically entitled to any interest on the capital which
he had agreed to subscribe. However, in practice, partnership agreements often provide that a
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 partner shall receive some measure of interest on his capital, which is paid in priority to any
division of profits. In the case of Watney v. Wells it was held that where interest is payable on
capital, it ceases to be payable (unless otherwise agreed) on dissolution of the firm, even though
years may elapse before the winding up is completed.

Section 24(5) provides that if a partner advances (lends) money to the firm beyond the amount of
capital which he has agreed to subscribe, in the absence of contrary agreement; he is entitled to
interest of 5% per annum.

10.5 Management and remuneration

Section 24(5) provides that every partner is entitled to participate in the management of the firm. If,
however, the partnership is limited partners have no such right. In practice it may be agreed that
some partners shall manage the business while others shall remain “dormant” taking no part in
management.

Section 24(6) states that no partner shall be entitled to remuneration for acting in the partnership
business. Since, however, profits are usually divided only once a year, it is usual for some provision
to be made enabling the partners to draw out monthly sums for their current private expenses on an
account of future profits.

10.6 Settlement of differences of opinion between partners

Section 24(8) provides that if a difference of opinion relates merely to the ordinary matters of
partnership business, then in the absence of agreement to the contrary, the question may be decided
by the majority. The rule is, subject to the overriding principle that every partner must act in good
faith and therefore a majority cannot bind a minority without notice to them and without giving
them the opportunity of discussion. Partnership agreements frequently contain an arbitration clause
which provides that differences not settled by a clear majority shall be referred to arbitration.

However, the section further provides that in the absence of contrary agreement, no changes may be
made to the nature of the business without the consent of all the partners, for example:

(a) A proposed change in or addition to the objects of the business;

(b) Variation of the terms of the partnership articles (see section 19 above, para. 8.0)
(c) Introduction of a new partner (section 24(7));
(d) Expulsion of a partner (see para. 11.0 below).

Note that in (c) and (d) the consent of only the continuing partners is needed.

10.7 Access to the books

Section 24(9) states that the partnership books must be kept at the place of business of the
partnership and every partner, may, when he thinks fit, have access to, and inspect and copy them.
The inspection may be carried out by an agent of the partner.

However, a partner (or his agent) may not use copies or extracts from the books for any purpose
hostile to the firm, even after he has ceased to be a partner.

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 Trego v. Hunt

H was taken into a partnership with T for seven years. T found out that H had employed a clerk of
the firm to copy the names and addresses of the firm’s customers so that when his partnership came
to an end he could canvass them himself. T applied for an injunction to restrain him from making
such copies for purpose other than the business of the partnership.

Held: The injunction would be granted.

11.0 THE POWER TO EXPEL A PARTNER

Section 25 states that there is no implied power to expel a partner. Expulsion is only possible if
power is conferred by express agreement between the partners, in which case the power must be
exercised in good faith and strictly in accordance with its terms (see para 10.2(a) above). A partner
who is improperly expelled may have two remedies:-

(a) Damages against his co-partners for breach of contract; and/or

(b) An injunction to compel the co-partners to reinstate him with full rights.

He cannot obtain damages unless he has suffered actual loss; therefore mere expulsion is not
enough – there must be evidence of actual loss, such as an improper refusal to distribute profits.

12.0 ASSIGNMENT OF A SHARE IN PARTNERSHIP PROFITS AND ASSETS

12.1 The general rule

As demonstrated above, in the absence of agreement to the contrary or some express provision in
the partnership articles, a person cannot be made a partner without the consent of all the partners;
thus if a partner assigns his share of the partnership, the transfer does not confer on that person all
the rights of a partner.

12.2 Voluntary assignments

Section 31(1) provides that a person can assign or mortgage his share in the assets or profits of the
firm. Such an assignee, however, will only be entitled to receive the share of profits to which the
assigning partner would otherwise be entitled. He will not be able to interfere in the management of
the business nor demand to inspect the books. Moreover, he cannot object to salaries bona fide paid
by the firm to individual partners for managing departments of the business, although his share of
profits may be in consequence considerably reduced.

Garwood’s Trusts, Paynter v. Paynter

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 A partner in a firm assigned his share of the profits and assets. The other partners later entered into
a bona fide agreement providing salaries for necessary work by the partners, and thus reduced the
share of profits to which the assignee would otherwise have been entitled.

Held: An action by the assignee to prevent the payment of salaries must fail since the agreement
between the other partners was entered into bona fide agreement.

Section 31(2) states that on dissolution, the assignee is entitled to receive the assigning partner’s
share of the assets and for the purpose of ascertaining that share is entitled to an account from the
date of dissolution.

If the partner purports to sell his share to a third party without the assignee’s consent, such an
arrangement is not binding on the assignee.

Watts v. Driscoll

A son setting up a partnership was lent £1,900 for this purpose by his father. The sum advanced
was secured by an assignment to the father on the son’s share in the partnership. Disputes arose
between the partners, and the son sold his share to the other partner for £500. The father then
claimed that he was entitled to an account to ascertain the value of the share in the partnership.

Held: He was entitled to one. The sale to the other partner could not affect the assignee’s rights,
since the sale had taken place without his consent.

12.3 Involuntary assignments

(a) Bankruptcy: The principles stated above apply equally to the bankruptcy of a partner. In such
circumstances his trustee in bankruptcy does not thereby become a partner.

(b) Charging order in favor of judgment creditor of a partner: By s.23 the court is empowered, on the
application of a judgment creditor of one of the partners, to make an order charging his interest in
the assets and profits with payment of the judgment debt and interest and may appoint a receiver of
the partner’s share of the profits. The other partners are then empowered to redeem or, if a sale is
directed, to purchase the share of the partner whose share is so charged.

Note that under s.33, if a partner allows his share to be charged, the partnership may be dissolved at
the option of the other partners. There is, however, similar provision with regard to voluntary
assignments or mortgages of a share.

13.0 PARTNERSHIP PROPERTY

13.1 Definition of partnership property

If the partnership agreement expressly described the partnership property, there is no difficulty, but
in the absence of an express agreement he law leans against the presumption that property belongs
to the firm. In (Miles v. Clarke) it was stated that no more property would be imputed to the firm
than was absolutely necessary to give business efficacy to the relationship between the parties.
Thus, where there is no express agreement, whether property has become partnership property or
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 not is a question of fact in each case, but the Partnership Act lays down that generally the following
property belongs to the firm.

(a) Section 20(1): Property brought into the common stock and credited in the books as part of the
partner’s capital contribution. Thus, unless the property is so credited on the books, it remains the
personal property of the individual partner and is not partnership property. (see Miles v. Clarke
below).
(b) Section 20(1): Property acquired after the formation of the partnership if acquired on account of the
firm or for the purposes, and in the course of, partnership business.
(c) Section 21: Property bought with partnership money unless a contrary intention appears.

Miles v. Clarke
Clarke carried on a business as a photographer at premises of which he owned the lease, for seven
years from 1948. In 1950 he and Miles, who was a freelance photographer, entered into partnership
by which all profits were to be shared equally. Miles brought with him his personal connection. The
partners quarreled, and a dispute arose as to whether the following items constituted partnership
property:
(i)the consumable stock-in-trade: (ii) the personal connection brought in by each partner; (iii) the
lease of the premises; (iv) the furniture, fittings and equipment of the studios, (which had been
brought in by the individual partners.
Held: No more agreement between the parties should be supposed than was absolutely necessary to
give business efficacy to the relationship between the parties. Accordingly, since the only
agreement was as to the share of the profits, only the consumable stock-in-trade should be regarded
as partnership property.

Section 20(3) states that if two partners are co-owners of property and make profits from that
property, in the absence of agreement, express or implied to the contrary, the property is treated as
belonging to the partners as individuals rather than to the firm.

Crawshay v. Maule

A mine worker was worked in partnership by two brothers as a collar business. The question arose
as to whether the mine itself had become partnership property.

Held: The mere fact that they worked together, in the mine, in partnership and owned, the mine as
co-owners did not make the mine part of the partnership property.

Davis v. Davis

Partners in a business borrowed money on the security of some property of which they were tenants
in common. They expended the money partly in erecting on a small part of the mortgaged property,
workshops as an addition to works in which they carried on the partnership business, and which
also belonged to them as co-owners.

Held: The workshops did not become partnership property, for there was no evidence that the
parties had such an intention.

Contrast

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 Waterer v. Waterer

A nurseryman carried on business on a piece of freehold land. On his death he devised it to his
three sons, who continued the business in partnership and, out of money belonging to the father’s
estate completed the purchase of adjacent land which he had agreed to buy. The question arose on
the death of one of the sons as to whether this was partnership property or whether the brothers
were merely co-owners of it.

Held: The property belonged to a partnership because it had become involved in the partnership
dealings.

Note One of the factors which the court will consider in assessing whether the property belongs to the
firm or to the partners is the uniqueness of the property. In Davis v. Davis it did not matter whether
the firm was based in those premises or other premises, but in Waterer v. Waterer, as nurseryman,
the quality of that particular land obviously seriously affected the amount of profit that they made.

13.2 The importance of ascertaining whether property belongs to the firm or to the individual
partners

It is important to know the true position for the following reason:-

(a) Any increase in the value of partnership property accrues to the firm, whereas if the property
belongs to an individual partner the enhanced value is his alone.
(b) In the event of bankruptcy, partnership property is joint-estate, whereas the property of an
individual partner is his separate estate.
(c) By s.22 a partner’s interest in partnership land is to be treated as personality and not realty, unless
the contrary intention appears. On the other hand, a partner’s own land is realty. This is essential,
for example, where a deceased partner leaves a will stating that he leaves all his real estate to X and
personal estate to Y.

14.0 SUMMARY OF STUDY SESSION THREE

At the end of this study session you have learnt what a partnership is , how is been formed, what
are the requirement of law that is need to formed I, liability of the partners for contract and debts,
liability of partners for torts, duration of liability under the doctrine of holding out, the rights and
duties of the partners, the duty of utmost good faith, rights and duties of partners implied in the
partnership act, the power to expel a partner , assignment of a share in partnership profit & loose
and what is partnership property .

15.0 SELF ASSESSMENT QUESTIONS (SAQs) FOR STUDY SESSION 1

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Now that you have completed this study session, you can assess how well you have achieved its
learning outcomes by answering the following questions. Please write your study diary and discuss
them with me at the next study context. Check your answers with the Notes on the self Assessment
Questions at the end of this module.

SAQ 1.1 (Test learning outcome 1.1)

1) What is a Partnership ?

SAQ 1.2 (Test learning outcome 1.2)

2) How is a partnership is been created?

Notes on SAQs

SAQ 1.1 Section 1(1) of the partnership act 1890 defines a partnership as the contract which
subsists between persons carrying on a business in common with view of profit.

SAQ 1.2 For a partnership to be created, it is necessary for a partnership agreement to be

evidenced in writing and whether or not a partnership has been formed is a question of fact. A
partnership may thus be created by :-

i) Conduct of the parties

ii) Orally
iii) In writing or by deed

SAQ 3
i. Define ‘ a partnership’
ii. State the ways a partnership may be created’
iii. What are the rights and duties of partners implied in the partnership Act 1890?
iv. What do you understand by the term liability of the partner for torts?
v. Discuss the term liability of partners for contract and debts.
vi. When a partnership does become illegal at its inception?
vii. What is the duration of the liability of partners for contract and tort?
viii. What is the meaning of giving of credit under a partnership agreement?
ix. What is partnership property?

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 x. How can assignment of a share in partnership profit and assets be made?

16.0 SUGGESTION READING

Nigerian commercial law by m. C Okany; Published by Africana-fed publisher’s ltd
Law of contract by ; Sagay

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