DUTIES OF PARTNERS

Introduction

As a partnership is a relationship, partners have certain rights and duties in relation to

each other. However, it is important to note from the onset that the relationship between
the partners is a fiduciary relationship. The 9th edition of Black’s Law Dictionary defines
“a fiduciary” as a person who is required to act for the benefit of another person on all
matters within the scope of their relationship; one who owes to another the duties of good
faith, trust, confidence, and candor.

David Bakibinga in Partnership Law in Uganda thus notes that the internal relationship
between partners hinges on two concepts;

1. The freedom of partners to change and determine the specific nature of the
partnership by contract. This is provided for under s.21 of the Partnership Act 2010
and provides that;
“The mutual rights and duties of partners, whether ascertained by agreement or
defined by this Act, may be varied by the consent of all the partners, and that
consent may be either express or inferred from a course of dealing. “
This means that partners are allowed to formulate their own rules as long as they
are in conformity with the law, by consent of the partners. Also, the duties
expressed in the Act apply to the firm by default. (insert case from Bakibinga)
2. The principle of utmost good faith (uberimma fides), which while not expressly
stated in the Act is as seen in three main duties, these are, the duty of full
disclosure, the duty not to make secret profits and the duty to not compete with
the firm, provided under ss. 30-32 of the Act.

The Duty of disclosure

This duty is provided for under section 30 of the Act that states that every partner is
bound to render true accounts and full information of all things affecting the partnership
to any partner or his or her legal representatives. This means that each partner has the
responsibility to inform the other partners or their representatives of all business relating
and incidental to the partnership.

This principle was illustrated in Law v. Law (1905) 1 Ch. D 140 where four brothers
carried on the business of wool manufacturing at Halifax, as partners that had been left
to them by their father in equal share. Two of them died, leaving their estates to the
surviving brother James and William Law. William Law lived in London thus most of the
running of the business was done by James Law, who remitted an annual amount to his
brother. On attaining old age, William Law sought to sell his share to James and a deed
was executed to that effect. Subsequently, William discovered that the defendant had not
disclosed several assets that belonged to the business valued at several thousands of
pounds, meaning that William had agreed to sell his share at a value way lower than it
actually was. He brought an action against his brother claiming that the deed was void
for fraudulent misrepresentation, for accounts and inquiries usual in a partnership action,
and consequential relief. Here, the question was whether in the purchase by one partner
of another’s share in the business a duty arose as to require the purchasing partner to
disclose to the selling partner all material matters that are within his own knowledge.

The court found that the contract was voidable citing the duty of full disclosure and found
that James was under duty to reveal all the information pertaining to the affairs of the
business and failure to do this was a breach of that duty. Cozens- Hardy LJ noted that
partners are bound to render true accounts and full information of all things affecting
the partnership to any partner or his legal representatives. This must apply in all
transactions between partners relating to the partnership assets and to every part of
the transaction.
Where a partner knows that he is more aware about the partnership accounts than the
vendor, he has a duty to put the vendor in the possession of all material facts and where
this is not done, the sale is voidable. In the present case however, before a settlement
was arrived at (before the second installment had been paid), the plaintiff had become
aware that there were partnership assets not disclosed by the respondent, though he was
not aware of the particulars or their values. At that stage, it was open to the appellant to
obtain full disclosure and then come to a settlement with the respondent on that footing,
which he did not do. He was thus bound by that settlement (final payment) and thus
could not rescind the sale contract.

Parties have a duty to not make secret profits.

This duty is provided for under section 31 of the Act which is to the effect that, “Every
partner must account to the firm for any benefit derived by him or her without the
consent of the other partners from any transaction concerning the partnership, or from
any use by him or her of the partnership property, name or business connection.” This
means that a partner may not privately derive a profit or benefit from the firm’s name,
its property or its connections.

We see this principle being illustrated in the case of Bentley v Craven (1453)18 Bears 75,
in which the defendant was a partner in a firm whose trade was related to sugar. At a
time in which the price of sugar was very low, the defendaxnt bought a large amount
with his own money and stored it in private stores. When the price increased, he sold it
to the firm and derived a large profit from that sale. The other partners sued for the
difference of the cost price and the price at which the sugar was sold to the firm. The court
held that the partners were entitled to the profit made by the defendant in that transaction
as a partner has not only a duty to account for all things concerning the business but also
not to make a secret profit, especially where their duties conflict with their personal
interests.

The duty to not compete with the firm

Such duty is laid out in s. 32 of the act and states that where a partner, without the
consent of the other partners, carries on any business of the same nature as, and
competing with, that of the firm, the partner must account for and pay over to the firm
all profits he or she made in that business, which essentially means that a partner is
precluded from running a business that competes with the partnership, which as was
noted by Lindley LJ in Ass v. Benham, is a question of fact. In that case, the defendant,
Benham, was a partner in a firm involved in ship brokering. Benham was approached by
a ship building company and while at it received information that this firm intended to
reconstitute the firm as one engaged in the building of warships and also sought to
acquire a yard that the defendant had acquired.

The defendant thus drafted a prospectus for the shipbuilding firm and assisted in its
reconstitution from which he earned a profit. The partners then sued for this profit in
which the court held that in this case, Benham had no duty to account to the partners,
noting that advising on the reconstitution of companies or ship building was not within
the scope of the partnership’s business, thus no such duty existed. He very importantly
noted that firstly, every partner must account to the firm for every benefit derived by him
without the consent of his co-partners from any transaction concerning the partnership
or from any use by him of the partnership property, name or business connection; but the
facts of this case did not bring it within this principle.

Secondly, that if a partner without the consent of his co-partners carries on business of
the same nature as, and competing with that of the firm, he must account for and pay
over to the firm all the profits made by him in that business, but the facts of this case did
not bring it within that principle.

He noted that there was no principle or authority that entitled a firm, to benefits derived
by a partner from the use of information for purposes which are wholly without the scope
of the firm’s business. He stated that what was meant by ‘information’ to which the
partnership was entitled was that which could be used for the purposes of the
partnership. He stated that It was not the source of the information, but the use to which
it is applied, which is important in such matters. To hold that a partner can never derive
any personal benefit from information which he obtains as a partner would be manifestly
absurd., and gave the analogy in which a partner in the course of his dealings as a partner
became so well acquainted with a particular trade that he wrote and sold a book on that
field. He found that such a partner would not be required to account for profits made and
such a business would not compete with the firm where this was not in the partnerships’
line of business.

Similarly, in Dean v. MacDowell (1878) 8 Ch. D 345, The parties by partnership deed
agreed to engage in the business of being salt merchants for a period of seven years. In
this period, the second plaintiff and the defendant were not allowed to engage in any
other business except on account of and for the benefit of the partnership, but the first
plaintiff could engage in any business or trade outside the partnership. On expiry of the
partnership, the plaintiffs discovered that the defendant had two years before the expiry
ostensibly been engaged as a partner in another firm engaged in salt manufacturing
under his son’s name and on the expiry of the partnership registered his name as a
partner in that firm. The plaintiffs sought a declaration to the effect that the defendant
had a duty to account to their firm in respect of the profits made by the firm from the
time it was formed till the day their partnership expired.

The court held that in partnership matters there ought to be utmost good faith, and there
is to that extent a fiduciary relationship between the parties. This means that a partner
must not directly or indirectly use the partnership assets for his own private benefit, he
must not, in anything connected with the partnership, take any profit clandestinely for
himself, nor must he carry on the business of the partnership or any other business
similar to that of the partnership in his own or another name separate from it, otherwise
than for the benefit of the partnership. Such business must however be in the scope of
that done by the partnership.

In the present case, where this was a clear breach of the partnership deed, the court found
that the defendant had not entered into any business analogous to or connected with that
which the partnership was engaged. It noted that the business of the firm was to deal in
salt as merchants and brokers while the latter firm was a salt manufacturer. If the
defendant had in any way occasioned any loss by the dealings of the latter firm, and such
loss was not alleged, the plaintiffs would be entitled to his share of the profits. For this
reason, it could not be said the defendant’s profits from the latter firm were as a result of
his partnership with the plaintiffs. It was not a benefit deriving from his connection with
the partnership, or one in respect of which he was in a fiduciary relationship with the
partnership.
He especially noted that one could not extend the case past a mere breach of covenant
especially where it could not be shown that it led to the covenanter neglecting the
business of the firm and diverting his time and attention from the business that it was his
duty to do.