BER220

Mr S Makhubu
 Syllabus theme
Entrepreneurial law
Study unit 1: Partnerships
PRESCRIBED READING – Chapter 23
Nagel et al Business law pages 341 - 350
Study Objectives
After studying this section you should be able to:
1. Define and distinguish a partnership as a business venture;
2. Name and discuss the characteristics of a partnership;
3. Explain how a partnership is formed;
4. Name and discuss the requirements of a partnership contract;
5. Name and discuss the rights of partners;
6. Name and discuss the duties of partners;
7. Name and explain the actions available to partners during litigation
procedures;
8. Discuss the authority of each partner to bind the partnership to third parties;
9. Discuss criminal and delictual liability of a partnership;
10. Name and explain the various grounds for dissolution of a partnership;
11. Apply the theory to a set of facts to solve unfamiliar but relevant problems.
Explanatory notes:

Definition of a partnership:
A partnership is the coming together of two or more
persons who conclude a partnership contract or agreement
with the aim of running a business for the purposes of
making a profit for their joint benefit. All partners should
contribute money, property, services/labour, skills or
experience that will be at the disposal of the partnership for
the purposes of running business and all these are
subjected to risk.
E.g. Thabo, James and Piet who are professional builders conclude a contract of
partnership to build contemporary houses in the Pretoria East. In the
partnership contract, Thabo undertakes to contribute 1 million and his brick
laying expertise, James undertakes to contribute his expertise as a structural
designer and Piet undertakes to contribute his expertise as a general builder.
Characteristics of a partnership:
• Formed by a contract/agreement
• Aim to make a profit
• Association of at least two persons or
more.
• Not a juristic person
• Exception during Litigation and
Insolvency
• Partners bear risk of the adventure
Formation of partnerships
The partnership contract should have all the essentialia which
are characteristics that distinguish it from other contracts.
Essentialia of the partnership contract:
o Each partner must contribute something of value.
o The common business must be carried for joint benefit of
partners.
o Purpose is to make profit.
o Partnership contract should be legitimate.
If all present then there is proof of partnership.
Intention of parties
• However, they still have to have an intention to conclude a
partnership.
The general requirements of a partnership
contract:
• The parties must reach consensus.
• The parties must have contractual capacity
• The contract and performance must be legal.
• The performance must be physically
possible.
• Contractual formalities if any must be
complied with.
Rights of partners:
The contractual agreement creates a relationship between parties and
this creates rights and duties among each other.
• Right to profit, remuneration, interests and indemnity
• Control and related matters
❑ Control - power to take part in management (naturale). Can be varied
in the partnership agreement.
❑ Access to books
❑ Access to partnership’s assets
➢ Co-partners have access to the assets of the partnership for the
purposes of promoting the partnership’s business.
➢ No partner can deny other partners access to the assets of the
partnership.
➢ No partner can for personal use, take or dispose the partnership’s assets
without consent of partners.
Duties of partners
Since partnerships are formed by conclusion of a
contract, each partner undertakes or commits to do
the following:
• To contribute something of value.
• To share in the losses.
• To exercise care
• To maintain bonafide (good faith) which
means to act honestly at all times.
Litigation between partners
• Actio pro socio
✓ Compel a partner to make his contribution
as per partnership agreement.
✓ Interdict a partner from misusing
partnerships assets.
• Actio communi dividundo
✓ Used by partners to dissolve an asset that
is jointly owned in undivided shares. (after
dissolution)
Authority of each partner to bind the
partnership to third parties:
• Mutual mandate. (Instances where the
transaction is within the scope of the partnership.
Naturale (operation by law).
• Estoppel – where partners created a false
impression that the partner has authority to bind
them.
• Instances where the transaction is beyond the
scope of the partnership. (Express authority).
• Ratification – accepted by partners after the fact
where the transaction is beneficial to the
partnership.
Delictual and Criminal cases
• As a partnership is not a legal person, thus it
cannot commit a crime. However, in terms of the
Criminal Procedure Act of 1977, section 322(7) all
partners can be guilty of an offence committed by
one of the partners when promoting the interests
or business of the partnership unless they prove
the following:
o They did not partake in the crime
o They could not prevent the crime or
o They were not members of the management
committee or other committee that committed
the offence.
Liability of partners to third parties;
Partners as parties to a contract
• During the existence of the partnership, partners
are joint creditors and debtors of third parties.
• Third parties can therefore institute actions
against the partnership not individual partners.
• The parties can agree with third parties that they
are jointly and severally liable for debts or one
partner’s liability is limited.
• However, they remain jointly and severally liable
to partnership creditors when the partnership is
dissolved but remain co-creditors for debts owed
to the partnership.
 Litigation

• In litigation such as in actio pro socio, parties cannot

institute actions in the name of the partnership.
• However, in other actions where the partners sue or are
sued by third parties, then name of the firm can be used.
This is provided by the rules of court.
• The plaintiff is not required to name the partners, if she
does then an error or omission is not a defence.
• Execution of judgement (satisfaction/fulfilment of the
judgment of the court) will first be against the assets of the
partnership and when they are finished, the assets of
individual partners will then be used to satisfy the
judgment of the court.
Various grounds for dissolution of a partnership;
Please study the explanation of the grounds of dissolution on
your own on paragraph 23: 49 to 23:60.
• Agreement between partners
• Lapse or expiry of time and completion of business
• Change in membership
Death
Notice of retirement
Retirement and admission of a new partner
• Order of court if the court deems it just and equitable for the
partnership to dissolve.
• Breach of essential term of partnership agreement
• Irreparable breach of relationship of trust
• No prospect of profit
• Personal circumstances
• Miscellaneous (various) operation of law
Sequestration of the partnership’s or private partner’s estate.
Apply the abovementioned principles/law to relevant but unfamiliar scenarios to solve
practical problems.

Practice question

QUESTION 1

In January 2018 Humbulani, Chris and Rian entered into a partnership agreement whereby they would run
a business together as partners under the name HCR & Associates. The sole purpose of the business was
to buy and sell classic cars for profit. The parties agreed to contribute R1 million each to the business and
to share profits equally. Humbulani and Chris paid their contributions immediately upon signing the
agreement while Rian undertook to pay his contribution on 31 March 2018. Clause 5 of the partnership
agreement provided that only Humbulani and Chris were authorised to conclude contracts on behalf of
HCR & Associates.

Yesterday Humbulani and Chris discovered that Rian had concluded a contract of sale on behalf of the
partnership for the purchase of 300 merino sheep from Mr Smith at a total price R300 000. Apparently
Rian received a commission of R3 000 from Mr Smith for concluding this agreement. Rian did not disclose
this commission to his two partners. Humbulani and Chris are incensed that Rian concluded this contract
in breach of clause 5 of the partnership agreement. They are also unhappy that to date Rian still has not
paid his contribution despite his undertaking to do so by 31 March 2018.

Answer the following questions in light of the above facts and the principles of the law of partnership.

(a) What recourse do Humbulani and Chris have against Rian in respect of the unpaid contribution?

(4)

(b) Is HCR & Associates bound by the contract concluded by Rian in this instance? (4)

End of the notes