UNIT: LAW OF PARTNERSHIPS AND COOPERATIVES

UNIT CODE: CLS 204

COURSE INSTRUCTOR: MD. MUSIKALI

CAT 1 GROUP 7

NAME ADMISSION NUMBER

SHERRY CHERUIYOT 1051265
MARYANNE SHARLEEN 1051264
SHARON MWEMA 1051361
ESTHER OJIJO 1052040
INTRODUCTION

Part I, Section 2 of the Partnerships Act1states that; a “partnership” means the

relationship which exists between persons who carry on business in common with a
view to making a profit. Glidewell J defined a partnership in the case of Customs&
Excise Commissioners v Evans2 as; “…a partnership is not a person, but only a
group of persons trading jointly.”

To determine whether their business constitutes a partnership and of which kind, the
following needs to be considered:

a) A partnership must consist of more than one person- From the scenario above,
Bob and Alice comply to this.
b) A partnership must be carrying out a business – Alice and Bob run a business
known as AB Juices, which is entirely for the purpose of making profit.
c) A partnership must comply to the formalities of its formation- Alice and Bob have
a carefully drafted partnership agreement outlining their roles and
responsibilities.
d) Proof of being partners- According to the case of Cox v Hickman3, the sharing
of profits is a vital but not a conclusive criterion of all the fundamental elements
of a partnership. Mutual agency is the real test for establishing partnerships.
In view of the above we can conclude that, AB Juices is a partnership as both
Alice and Bob can bind the firm as agents to 3rd parties in contracts.

As for the kind of partnership it is, their firm name seems to imply it is a general
partnership as it does not bear the word limited or limited liability. This is because in a
general partnership, the firm is not a separate legal entity from the partners.

Below, we analyze the legal implications arising from the scenario above:

1) Breach of duty by partners

According to Part II Section 10,11 and 12 of the Partnerships Act, the duties of partners
are;

1 THE PARTNERSHIP ACT CAP 29

2 Customs & Excise Commissioners v Evans [1981] QB
3 Cox v. Hickman (1860) 8 H.L.C. 268
i. Duty of confidentiality

ii. Duty of good faith

iii. Duty to disclose secret profits

iv. Duty to disclose transactions

v. Duty to avoid conflict of interests.

A general partnership is an agreement between partners to establish and run a

business together. Alice and Bob have jointly embarked on a business venture of
making fruit cocktails. As general partners, they are responsible for managing the
business and making decisions on behalf of the partnerships.

Bob, on an impromptu visit to the shop to check on the previous week’s earnings
enters into a contract with Matunda to allow him supply bananas in addition to the
mangoes he had been supplying. He did not, however notify Alice of this agreement.
According section 10(2)(a) of the Partnership Act, The Duty of good faith:

(1) A partner has a duty to act in good faith towards—

(a) the partnership; and

(b) the other partners in the partnership,

in relation to all matters affecting the partnership.

(2) A partner shall—

(a) keep each of the other partners or their legal representatives informed of all
matters affecting the partnership;

In general, this requires partners to put the firm’s interests ahead of their own. Partners
are fiduciaries as to each other and as to the partnership, and as such, they owe a
fiduciary duty to each other and the partnership.4 In the case of Meinhard v. Salmon5,

4 https://saylordotorg.github.io/text_law-for-entrepreneurs/s26-01-operation-relations-among-part
Accessed on 28th, October, 2023
5 Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928)
Judge Benjamin Cardozo, in an often-quoted phrase, called the fiduciary duty,
“something stricter than the morals of the market place. Not honesty alone, but the
punctilio of an honor the most sensitive, is then the standard of behavior.

Bob has breached his fiduciary duty of failing to inform his co-partner, Alice, when he
entered into a contract with Matunda for the supply of bananas.

Bob has also breached the duty of good faith which he is required to exercise with
reasonable care and skill in their dealings involving 3rd parties. Therefore, making both
him and Alice liable for any act or wrongful omission that follows after the making of a
contract.

If the move that Bob has made causes losses to the partnership, therefore, because
of this action, it makes both Alice and Bob liable.

2) Liability of the partnership in breach of contract

Section 4 of the Partnership Act provides the liability of partners. It provides that each
partner in a partnership has unlimited liability. This means that, in the case where the
firm is unable to perform its debt obligations, a general partner has full liability and
their personal assets can be attached for the payment of debts. Section 22 of the
Partnerships Act provides for the same that;

“A partner who has unlimited liability is personally liable for the whole amount of any
obligation incurred by the partnership while he is a partner...”

The issues arising from the contract entered by Alice and Mwamko are –

a) Can partners enter into contracts with 3rd parties on behalf of the firm without the
knowledge and approval of the other partners?

b) Is the contract binding on all partners regardless of whether they were aware of the
contract or not?

c) What are the legal responsibilities of the partners in the occasion of a breach of
contract?

a) It was within Alice’s managerial duties as a general partner to enter into a contract
with Mwamko, who was to supply fruit cocktails daily to their premises, for the purpose
of their day-to-day business of making cocktails. As a general partner, she has the
authority to act on behalf of the business. However, she did not let Bob know of the
said agreement and breached her duty as a partner.

Issue(b)- From the above, since Alice has the right to enter into a contract with
Mwamko on behalf of their firm, the contract is legally binding on both partners of the
partnership. Each partner is liable for the actions of the others. If one partner executes
an agreement without the knowledge of other partners, the other partners are still
obligated to uphold the terms of the agreement.

In the case of Hurst v Bryk and others [2000],6 The court held that; However much
an individual partner may have been wronged by his fellow partners, he remains jointly
liable with them for the debts of the firm.”

Issue(c)- Since the firm is unable to pay Mwamko contrary to their agreement, they
have breached the contract and are legally responsible. A partner is jointly and
severally liable with other partners for the debts and obligations incurred when being
a partner.

Mwamko can sue them in a court of law to seek damages for the breach of contract.
He can only, however, file only one cause of action against them. This means that he
will probably, for his benefit, sue them jointly as to recover the damages he has
incurred. He can also decide to sue either of them, probably one who has better
capacity to pay for the damages. Therefore, both Bob and Alice can equally be sued
for the debts of the firm. They will be bound to fulfil the obligations given by the court.

3) Liability in Tort

In a general partnership, the partners are jointly and severally liable for any act or
omission that causes loss or injury to 3rd parties.

However, the partner must be acting in the ordinary course of the business of the firm,
or with the authority of his co-partners.

In this case the omission occurred in the ordinary course of the business as the
machine had a malfunction that caused the 3rd party to slip and injure him/herself.

6
Hurst v. Bryk and Others UKHL 19; [2000] 2 All ER 193
Partners in a general partnership have shared liability for the debts and obligations of
the business. Every partner agrees to unlimited personal liability for their actions, the
actions of all other partners, and those of all employees.

In Polkinghorne v holland 7the firm was held liable for a partner’s negligence in not
giving competent advice to miss Polkinghorne. The court held that the partners were
liable for negligent misstatement.

A firm is liable to a third party that suffered loss or injury if the tortious or wrongful act
was committed by a partner during:

a) the ordinary course of business of the firm or

b) Carrying out on the job with the authority of his partner.

In the case of Bachand v. Vidal8, it was held that; partners are the general agents
of each other while transacting the partnership business and one partner is liable for
the tort of another committed in the course and within the scope of the business of the
firm.

Also, In the case of Teague v. Martin,9 the court held that in committing a tortious act
which is outside of the agency or common business a partner acts only for himself,
and he alone is responsible.

If a court finds that a partnership is at fault in a lawsuit, then every partner is

responsible for paying any monetary legal liability or compensation awarded.

Section 22 (1) of the partnership act states that a partner who has unlimited liability is
personally liable for the whole amount of any obligation incurred by the partnership
while he is a partner where—

(a) a judgment, order or arbitral award has been made against the partnership in the
same or earlier proceedings, establishing the amount of the partnership obligation; or

(b) the Court has ordered the partnership to make payment in respect of the
partnership obligation.

7 Polkinghorne v holland 1934 51 clr 143 graw 92 2001

8 Bachand v. Vidal, 328 Mass. 97, 100 (1951)
9 Teague v. Martin, 228 Mass. 458, 461 (1917)
In this case both Alice and Bob will be held jointly and wholly liable for the injury caused
to the customer as they have unlimited liability.

4) Who is a partner?

Maina, an employee of AB Juices, seeks to get a share of the profits from the business.

The issue at hand is whether Maina is a partner or not? And therefore, if he is entitled
to the business’s profits.

According to the FIRST SCHEDULE (Section 7) 1(b) 10of the Partnerships Act;

1. A person does not carry on a business with another merely because the person-
(b) is an agent of a person engaged in a business and has a contract for his
remuneration by a share of the profits of the business

Maina’s duty is to help manage the daily operations and is also tasked with the duty
of creating juices and handling clients during Alice's absence. In the case of Cox v.
Hickman 11, the court held that a person who has agreed to share profits of a business
is not necessarily a partner. The court emphasized that the intention to create a
partnership is crucial, and mere sharing of profits does not automatically make
someone a partner. Similarly, in the case of Davis v Davis12 ,the court held that; “for
a business to be considered a partnership, the partners must share returns equally.
Maina in this case does not share the profits equally with Alice and Bob but instead
only receives remuneration from the proceeds of the business.

It is important to note that partners are bound by an agency relationship which means
that the partners act as the agents to the principal (firm), acting on behalf of it to 3rd
parties.

The relationship between Bob, Alice and Maina was basically an Agent-servant
relationship. Parties involved in an Agent -servant relationship are NOT partners.

An employee of the partnership, even if they receive a share of the profits as part of
their remuneration is NOT A PARTNER according to the Partnerships Act. In a certain

10 Partnerships Act No. 16 of 2012

11 Cox v. Hickman (1860) 8 H.L.C. 268
12 Davis v Davis Chancery 1894
decided case, the court ruled that a person who is merely an employee or a creditor
of a business cannot be considered a partner unless there is clear evidence of
an intention to create a partnership. The court emphasized that the sharing of profits
alone does not automatically make someone a partner.

5) Dissolution of the partnership

Advice to Alice on the most effective method for dissolving the business;

The most effective way of dissolving the general partnership is through a Court
Order. This process involves legal intervention to dissolve the partnership. In a
partnership, dissolution through a court order can occur when the partners are
unable to agree on the terms of dissolution or when there are disputes that cannot
be resolved amicably.

As per Section 39 of the partnership Act in Dissolution by the court order:

On application by a partner, the court may decree a dissolution of the partnership in

many cases, and the few cases relating to the act in Alice’s scenario are:

(c) when a partner, other than the partner suing, has been guilty of such conduct as,
in the opinion of the court, regard being had to the nature of the business, is
calculated to affect prejudicially the carrying on of the business;

(d) when a partner, other than the partner suing, wilfully or persistently commits a
breach of the partnership agreement, or otherwise so conducts himself in matters
relating to the partnership business that it is not reasonably practicable for the other
partner or partners to carry on the business in partnership with him;

(f) whenever in any case circumstances have arisen which, in the opinion of the
court, render it just and equitable that the partnership be dissolved.”

Alice can file for dissolution of the partnership via court order due to misconduct and
breaches of duty, especially the duty of good faith by her co-partner, (Bob).

In the case of Re Yenidje Tobacco co ltd 13where the court issued a dissolution
order of the partnership, because the relationship between partners became so
strained that they stopped speaking to each other. The court was of the opinion that

13
Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426
a state of mutual hostility or hatred is incompatible in running a partnership business
and that the circumstances constituted enough ground to dissolve a partnership.

In the case of Carmichael v Evans14, one partner in the partnership filed a lawsuit
seeking the dissolution of the partnership based on the other partner's misconduct
and breach of fiduciary duty. The court agreed with the plaintiff and ordered the
dissolution of the partnership, as well as the appointment of a receiver to oversee the
winding up of the partnership affairs.

Once the partnership has been dissolved via court order, the partnership will be
legally dissolved. The business from then on, is conducted for the purpose of
winding up the partnership. Hence, the partners (Bob and Alice) will no longer bind
each other to the partnership. All debts have to be paid and whatever remains is
shared out among the partners. The court may also appoint a receiver or liquidator
to wind up the partnership's affairs, including settling debts, distributing assets, and
resolving any remaining disputes.

14
Carmichael v Evans [1904] 1 Ch 486