Topic: The Law of Partnership

Under this topic, some of the questions we will need to ask ourselves and keep
at the back of our minds are the following:
1. What is the legal definition of a partnership?
2. What are the essentials of a special contract of partnership?
3. Why are partnerships worth establishing?
4. What is the legal character of a partner?
5. What are the cons/disadvantages & pros/advantages of going into
partnerships?
6. What are some of the key people development issues that require
highlighting when it comes to partnerships?
7. What is the main thread running through most of the conflicts that emanate
from partnerships as seen through the case law?
8. If you were to enter into a partnership agreement, what kind of attributes
would you desire in your partner(s)? Furthermore, what kind of due diligence
would you embark upon to ensure that said partner meets your
requirements? Lastly, what makes you an ideal partner for other
businesspeople?

A partnership is defined in the Partnership Proclamation No.78 of 1957 as:

“Any legal relationship between two or more persons, but not exceeding twenty
persons, who carry on, or intend to carry on, any lawful business or undertaking
to which each contributes something, with the object of making a profit and
sharing it between them.”
Gibson (South African Mercantile & Company Law1) defines a partnership as a
contract that creates a legal relationship between two or more persons, not
exceeding 20 in number, in which the persons concerned agree to contribute
money, labour or skill to a common stock and to carry on business with the
object of making a profit for their joint benefit.

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Kindly note that we use earlier editions of these textbooks (such as the 6 th edition) because the discussions
therein are closely aligned with what pertains to our law in terms of the Partnership Proclamation 1957 et al
 Compare this definition with another one which de-emphasizes the nature of
the contributions made by the partners and instead states, inter alia, “a contract
by which two or more persons contribute or bind themselves to contribute
certain things to a common stock…with the mutual obligation duly to account
to one another.” (Van der Linden as quoted by Gibson, ibid)
Is it absolutely critical therefore in terms of the partnership agreement to
specifically outline what the nature of the contribution of each partner is or will
be? What if any of the partners subsequently contributes something other than
what was initially contained in the partnership agreement? Will that necessitate
amending said agreement?
More than anything, the law of partnership is said to regulate the relationship
between the partners (inter se/between or among themselves) in the first
instance and the entity thus formed and third parties in the second instance
(Gibson, ibid).

The legal character of a partner:

*combines both the powers of agent and principal in all transactions
*mutually mandated so to act

NATURE OF PARTNERSHIP
*unlike a company which is an artificial person, a partnership is not a persona apart
from its members; it is simply a group of persons acting jointly or “a contractual
compound of several personae” (Gibson, ibid)
*legislation has however made several inroads in this common-law position
including our own Partnership Proclamation No. 78/1957.
*Section 4 starts off by reiterating the common law position “nothing in this
Proclamation shall upon any partnership the status of a body corporate”.
HOWEVER, Section 4 further states the following exception “provided that a
partnership registered under the Proclamation, may, under its registered name:

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  sue and be sued
 hold property or assets
 hold certificates of allotment of rights to occupy land
 holds deeds relating to immovable property
 be dealt with as though it were an entity distinct from the identity of the
individual partners in terms of any law requiring or authorizing partnerships
to be so dealt with.

REGISTRATION REQUIREMENTS
*a deed of partnership lodged with the Registrar within 60 days2 of its conclusion
is mandatory according to Section 2(1) of the Partnership Proclamation No. 78 of
1957
*the deed of partnership is simply the partnership agreement in its entirety
*it must be signed by all the parties/partners before a notary or an administrative
officer
*the Registrar is the custodian of the original deed of partnership

THE ESSENTIALS OF A PARTNERSHIP

*a contract
Gibson notes that “it is obviously desirable that the partnership agreement should
be in writing” (Gibson, ibid). The Partnership Proclamation mandates a detailed
deed of partnership recording the agreement of the partners which shall also
include the following statutory items:
According to Section 5(1), every deed of partnership shall record the following:
 the date of formation of the partnership
 the full names of all the partners
 the full postal and residential addresses of all the partners
 the purpose for which the partnership is formed
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The 60 day lodging period may be extended on good cause show

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  the period for which the partnership is formed
 the firm name under which the business of the partnership is to be carried
on
 the place/places at which or the area in which the business of the partnership
is to be carried on
 the amount of capital or the nature and value of the services and assets
brought into the partnership by every partner
 the duties and degree of participation of each partner in the business of the
partnership
 the right of each partner to draw amounts for their own benefit
 provisions for the drawing up of balance sheets within 6 months after the
formation of the partnership and thereafter at intervals of not more than 12
months
 provisions for the sharing of profits in readily ascertainable proportions
 provisions for the bearing of losses by the partners in readily ascertainable
proportions
 provisions regarding the safe custody of the partnership funds, the use of
such funds for the partnership business, the keeping of proper books of
account and the right of access of partners to such books
 provisions prohibiting any partner from using any money or property of the
partnership without the consent of the other partners and from engaging the
credit of the partnership except on account of or for the benefit of the
partnership business
*between two to twenty persons
Gibson states, “…it follows that a partnership of more than twenty members is
illegal and therefore void….it is a necessary corollary that, if a valid partnership
increases its membership to 21 or more, it will become illegal and cease to exist.
The partnership, as it were, dies and the phantom cannot be resurrected by the
subsequent reduction in membership to below 21.”
*contribution to a common stock3
Beinart ‘Capital in Partnership’ 1961 Acta Juridica 118

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Gibson p.278 (6th Edition)

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The partners may contribute money, things in specie, labour, industry or skill and
these contributions make up the common fund which is jointly owned by the
partners. When it comes to money contributions, it is essential to clear up a few
issues which may prove controversial during the subsistence of the partnership. For
example, contributing money does not imply that the partner in question is a
creditor of the partnership (that money is his or her contribution to the
partnership) unless agreed otherwise and in that case, the parties would have to
conclude a separate loan agreement. Therefore, co-ownership of the common
stock is an essential of the partnership.
However, co-ownership in and of itself is not sufficient to imply the existence of a
partnership as stated in the case of Oblowitz v Oblowitz 1953 (4) SA (C) at 433:
“…as a matter of law, co-ownership in itself cannot be equated with partnership,
the latter being a term of wider ambit. Partners may very well be co-owners of the
property owned by the partners, but the converse does not apply in the absence of
evidence clearly establishing this.”
Some clarifications regarding the term ‘partnership property’:
The common stock of the partnership is sometimes referred to as ‘partnership
property’. However, it should be noted that a partnership is not itself an entity e.g.
a company; it is not a persona apart from its members as laid down in the case of
R v Shamosewitz & Schatz 1915 AD at 693. As stated in Sacks v Commissioner for
Inland Revenue 1946 AD at 40:
“A partnership is either a contract or a relationship and as such cannot own
property. The true position is that during the subsistence of a partnership
agreement the partnership property is owned by the partners in undivided shares”.
In addition, any property acquired subsequent to the conclusion of the partnership
agreement falls into it. Where the property is movable, it vests in the partnership
by operation of law i.e. a constitutum possessorium takes place and due to the
contractual change of intention on the part of the partner who retains the physical
control, he or she now controls the property as agent for the partners. With regards
to immovable property and incorporeal property, the rights thereto become jointly
owned by the members of the partnership only by formal transfer in the former
case and by cession in the latter. Similarly, the intangible asset of ‘goodwill’

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acquired by the partnership in the course of carrying on business falls automatically
into the partnership property. Goodwill has been defined as “every positive
advantage that has been acquired by the firm in carrying on its business…it is the
whole advantage of the reputation and connection of the firm over the years.” In
the leading South African case on this issue of goodwill, O’ Kennedy v Smit 1948 (2)
SA (C) at 67, Herbstein J stated that a good test to apply in deciding whether a
particular business has developed any goodwill is to determined whether a
reasonable purchaser would pay anything over and above the value of the real
assets of that business for the right to be able to continue to carry on that business
(Gibson, ibid). Such a reasonable purchaser would:
(a) look at the profits which in fact have been earned by the business in the past
(b) weigh the probability of retaining the old customers and the possibility of
obtaining new ones
(c) take into account the likelihood of competition, and
(d) consider the value of the right to carry on the business at the same locality.
NOTE:
 property contributed to the partnership vests in the members of the
partnership not in their individual capacity but jointly as partners;
 one partner cannot exclude another partner from control of the partnership
property (Munro v Ekerold 1949 1 SA SWA at 589)
 an individual partner therefore cannot deal with the property except in so
far as she or he has authority from the partnership to do so (Gibson, ibid) i.e.
“this property they cannot alienate or mortgage or use except for the
purposes of the partnership, nor is it subject to attachment by the creditors
of the individual partners” as stated in Standard Bank v Wentzel & Lombard
1904 TS at 838 (cited in Gibson, ibid).
NOTE:
 on termination of the partnership, the partnership property is, as a general
rule, returned to the individual partners in the proportion in which it was
contributed unless they have expressly agreed otherwise;

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  where one partner’s contribution (e.g. labour or skill) has had no value
placed upon it or it has no clearly ascertainable value, the share of each
partner on dissolution depends on his share of profits (Gibson, ibid).
*carrying on a business to make a profit
The classical definition of ‘business’ cited in Standard General Insurance Co v
Hennop 1954 (4) SA 560 (A) at 565 is “anything which occupies the time and
attention and labour of a man for the purpose of profit.”
As a general rule, one or two isolated transactions cannot be described as the
carrying on of a business; there must be some proof of continuity. To this general
rule however there are exceptions:
*a single undertaking may be of such a nature that it can correctly be described as
a business
NOTE: it is the intention to make a profit that is essential, not the actual realization
of a profit (because truth be told, the business may not even make a profit in its
lifetime; most businesses do not see profits until year 3 or year 5 and that on its
own does not disqualify them as ‘businesses’)
NOTE: there must be a common interest in carrying on the business; if the business
remains vested in one of the parties and the other simply exercises management
and control of that business, there is no partnership (Blismas v Dardagan 1951 1
SA SR at 147)
NOTE: each partner is the agent of the other to carry on the business and to incur
liability on behalf of all, but this extends only to transactions which fall within the
scope of the partnership business. This is referred to as the “mutual mandate”.
*for joint benefit
It is essential that the profit must be made for the joint benefit of the partners i.e.
they must share the profits between them.
It is also essential that the partners share in both profits and losses. An agreement
that one partner only shall bear the loss and the other receive all the profits is void.
NOTE: the profits are shared by the partners in the proportions expressly agreed
between them.

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NOTE: if no such agreement exists, profits are shared in the same proportions as
the value of their contributions to the common stock (if such valuations are not
possible to make, the profits are shared equally).
RELATIONS OF PARTNERS INTER SE
The rights and duties of partners are (a) to contribute (b) to carry on business and
(c) to share in the profits –
*Contribution
Partners must deliver to the partnership whatever they have agreed to contribute.
Where any of the partners fails to do this, any of the other partners may bring the
actio pro socio to compel compliance.
*Carrying on business
The relations of partners are governed by principles similar to those which govern
the relations between principal and agent inter se.
The duties of an agent can be summarized as:
(1) to perform his or her mandate
(2) the mandate must be carried out honestly
(3) the mandate must be carried out carefully/diligently
(4) in accordance with the principal’s instructions
(5) to account to the principal
The duties of a principal can be summarized as:
(1) to pay the agent their remuneration
(2) to reimburse the agent for expenses properly incurred
(3) to indemnify the agent for all losses they have suffered as a result of the
execution of the mandate
In essence therefore, a partner is required to (i) perform partnership business (ii)
honestly and (iii) carefully (iv) in accordance with their express or implied authority
and (v) to account to the remaining partners. On the other hand, the partner is
entitled to (vi) reimbursement for expenses and indemnity for losses and (vii) a
share in the profits.

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NOTE (ethics):
 a partnership is a contract uberrimae fidei i.e. of good faith
 during the continuance of the partnership one partner cannot overreach the
other partner
 one partner cannot dissolve the partnership with an intention to overreach
and yet retain the benefits that flow from their act
 a partner may not make a secret profit from any transaction concerning the
partnership or from te use of the partnership property
 a partner may not allow their personal interests to conflict with those of the
partnership e.g. competing with the partnership in a similar business.
*Sharing of profits and losses
Should a partner fail to share profits, they may be compelled to do so via the actio
pro socio.
PARTNERSHIP AND THIRD PARTIES
Partners are jointly and severally liable, each for the whole of the debts of the
partnership, provided that the debts are incurred with the authority of the
partnership and in its name.
NB: an individual partner cannot be sued personally on a partnership obligation
while the partnership is in existence. In Mahomed v Karp Bros 1938 TPD 112 it was
stated inter alia:
“It is only after the dissolution of a partnership that a creditor of the partnership
can sue the members of the firm as individuals jointly and severally for the debt
and…proceed to execute on the assets of each member. Until that stage he must
proceed against the firm, i.e. the partners as carrying on business in partnership,
and any judgment and execution is directed primarily against the firm, even though
the ultimate recourse may be against the private assets of the individual partners.”
NOTE: the extent of the partner’s authority to bind the partnership to third persons
is governed by the rules of agency (Eaton & Louw v Arcade Properties 1961 4 SA
233). The authority may be express or implied and may be conferred subsequently
by ratification. It is observed that the extent of an agent’s implied authority is a
question of fact.

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NOTE: a partner has implied authority to do all acts incidental to the proper conduct
of the partnership business regardless of what the partners may have expressly
agreed among themselves (Meyer v Mosenthal Bros Ltd 1925 TPD 281 & Barker and
Co v Deiner 1934 TPD 203)
NOTE: the onus is on the third party to show that his/her transaction with the
partner fell within the scope of the partnership business and that the partner had
implied authority.
NOTE: where a partner transacts business with a third party outside his or her
implied authority, the partnership may nonetheless be liable on the basis of
estoppel e.g. if the other partners were aware that the partner was transacting
outside their implied authority and did nothing to stop it.
PARTNERSHIPS IN WHICH THE LIABILITY OF CERTAIN PARTNERS IS EXPRESSLY
LIMITED
In contrast to ordinary partnerships in which the partners are jointly and severally
liable for the debts of the partnership there are certain forms of extraordinary
partnership in which the liability of certain partners to third parties is limited.
According to Gibson there are three types of such limited partnerships, two of them
(anonymous partnerships and partnership en commandite) are governed by
common law and the third type is a creature of statute and in our case that would
be the Partnership Proclamation via Sections 11 – 24.

*Anonymous partnerships
An anonymous partnership is defined as one by which two or more persons agree
to share in some business which will be conducted by one of them in his own name.
It is essential that the anonymous partner is not disclosed to the public. It is
important to note that an anonymous partner is not liable to third parties for the
debts of the partnership but only to his or her partner.
Furthermore, the anonymous partner’s liability is not limited to any sum.

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*Partnership en commandite
In this scenario, the business is still carried on in the name of one partner only but
the undisclosed partner(s) contribute a specific sum of money, the issue of a share
in the profits and losses is defined and most critically, their liability does not exceed
their specific contribution.
NOTE: in the case of both anonymous partnerships and partnership en commandite
the liability of the sleeping partners is lost if their names are disclosed or if they
carry on partnership business openly.

*Limited/special partnerships
Limited or special partners coexist with general partners according to Section 12 of
the Partnership Proclamation.
General partners are partners who to all intents and purposes governed by all the
other provisions of the Proclamation which govern partners. Limited or special
partners are governed strictly by the provisions titled “Limited Partnerships” in the
Proclamation. The business arrangement between general and special/limited
partners is referred to as a Limited Partnership and is therefore governed by
Sections 11 – 24 of the statute.
As the word “limited partner” implies, these types of partners are not personally
liable for any of the debts of the partnership beyond the specific cash contribution
they’ve made (Sectio---1 -`----n 12.b). The exceptions to this general rule are as
prescribed by the statute. Furthermore, the partnership business has to be
conducted under the name of the general partners only. If the name of the special
partner is used with his or her consent or privity (knowledge) they shall be deemed
and treated as a general partner (Section 15).
As we can see, the limited partnership under the Partnership Proclamation
therefore contains some of the features of the anonymous partnership and the
partnership en commandite.
Note: General partners are however treated like ordinary partners and are
therefore jointly and severally liable (Section 12.a).

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Note: A Deed of Limited Partnership has to be registered in accordance with section
5 PLUS information regarding who the general and special partners are and the
amount of capital which each special partner has paid in to the common stock
(Section 13).

Scenarios under which a special partnership shall convert to a general

partnership:

*where the partners fail to register renewal/continuation of limited partnership

(Section 14)
*where the name(s) of the special partner is used publicly with their consent or
knowledge (Section 15)
*where alterations contrary to Section 17 have been made and the partnership
continues to carry on business unless renewed as a special partnership (Section 17)
*where the special partner transacts partnership business or concludes a contract
unless it can be demonstrated that in entering into said transaction he or she acted
as a special partner only (Section 21)
*where false statements have been made in the deed of limited partnership
(Section 24)

Rights of the Special/Limited Partner Inter Se

*may from time to time inquire into the state and progress of the partnership
*may advise as to the management of the partnership (Section 20)
*general partners are liable to account to the special partner(s) for their
management of the business (Section 22)
NOTE: The Proclamation uses the mandatory construction “shall”.

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Dissolution of a Limited/Special Partnership
*alterations to the deed of special partnership, which involve the names of the
partners, the nature of the business, the amount of capital or any other matter
recorded in the original deed, shall be deemed a dissolution of the special
partnership (Section 17)
TERMINATION OF A PARTNERSHIP
According to Gibson, at common law, a partnership may be terminated:
(a) by agreement between the partners, express or implied4
(b) the unilateral action of one partner
(c) the insolvency of the partnership or of any one of the partners
(d) on the death of a partner
(e) the object the partnership becoming illegal or impossible.
Section 7(1) of the Partnership Proclamation reinforces some of these common law
grounds (specifically death, lapse of time, completion of the purpose for which
such partnership was formed, insolvency or order of court) but also creates room
for other causes which must be registered in a deed of dissolution. Section 7(2)
requires a public notice of dissolution to be issued by the partners 30 days prior
which is to be circulated in newspapers
LIQUIDATION OF PARTNERSHIPS
The common law position seems to be that after the termination of a partnership
relationship, liquidation is necessary. This liquidation according to Gibson entails
the payment of the debts of the partnership, the realization of the assets and a
division of the surplus and for this purpose, the mutual mandate of the partners
continues even after termination.
The liquidator thus appointed fulfils the following functions:
 collects what is due to the partnership if anything
 pays the debts of the partnership
 realizes the assets

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An agreement by the partners to change the membership of the partnership will have the effect of terminating
the original partnership.

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  distributes the balance in the manner expressly agreed between the partners
in the same proportions as the value of the partners’ contributions to the
common stock.
In terms of our Partnership Proclamation however, it seems that only Section 23
has any bearing or makes any allusion whatsoever to the issue of liquidations. It
should be noted that Section 23 falls under the provisions governing special/limited
partnerships and it states as follows:
“In the case of the insolvency of any limited partnership, no special partner shall
under any circumstances be allowed to claim as a creditor until all the claims of all
other creditors of the partnership shall be satisfied.”
In the absence of any other relevant provision in the Partnership Proclamation, it
is suggested that the Insolvency Proclamation provisions on the insolvency of
partnerships may be applicable.

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