Partnership, The National Legislative Framework Partnership Law
• Based upon medieval law merchants: the commenda and the societas
• Codification in the Partnership Act 1890 (UK)
o Reproduced in Australia – Partnership Act 1892 (NSW) Definition of Partnership
• “The relation which exists between persons carrying on business in common with a view of profit” (s 1(1))
• Partnership is a relationship founded upon the agreement of the parties, express or implied o Must be carried on ‘in common’ – the requirement that each partner must be a
principal in the business and indicating the common bond between the associates
• The objective of profit is an essential feature of partnership Determining the Existence of Partnership
• The parties’ characterisation (legal status) which partners seek to assign, or repudiate
• The sharing of net profits is prima facie evidence (Cox v Hickman), EXCEPT (s 2(1)(3)):
a) Payment of a debt paid out of accruing profits of the partnership;
b) Remuneration of servants or agents by a share of profits of the business;
c) Annuities to the widow or children of a deceased former partner paid from profits;
d) Advance of money by way of loan to a person carrying on a business with interest varying with profits or by a share of profits of the business provided that the contract is in writing and signed by the parties; and
§ Where a loan is made within this provision, the rights of the lender are postponed to other creditors in the event of insolvency of the borrower e) Receipt of a portion of profits in consideration of the sale of goodwill of a business.
• The sharing of losses as well as profits
o There is an equal contribution to losses in the absence of agreement (s 24(1)(1))
• Whether the partner has the status of a principal in relation to dealings with others o Noted as the decisive test in Cox v Hickman
• The ways in which partners deal with each other, are treated in the internal management of the business, and/or participate in its control or management decisions
• Mutual confidence and trust between parties
• The contribution of capital
Re Megevand; Ex Parte Delhasse (1878) 7 Ch D 511 Facts:
• Delhasse agreed to advance a sum to M and S who were partners, and stated that it was by way of loan and not to make Delhasse a partner (s 2(1)(3)(d))
• Under the agreement, Delhasse was to share in profits, among other things Issue:
• Was Delhasse considered a partner under the agreement?
Judgement:
• James LJ: There is every element of partnership. There is the right to control the property, the right to receive profits, and the liability to share in losses.
• The loan is said to be made to the two, but, when you read the whole of the agreement together… it was a loan to the business… to be repaid out of the business
Badeley v Consolidated Bank (1888) 38 Ch D 238 Facts:
• Badeley advanced money to a railway construction contractor, Smith. By deed, Smith assigned to Badeley his plant, machinery and other items as security
• Smith covenanted to apply the moneys advanced in the carrying out of the work – Badeley could enter and complete them if Smith became bankrupt.
Issue:
• Can a partnership be inferred from the agreement?
Judgement:
• Lindley LJ: Partnership cannot be inferred from the mere fact that one person shares the profits of another. When you look at the whole of the evidence it appears that this was a contract of loan upon security. It was not a participation in profits with a view to create a partnership.
Principal Characteristics of Partnership
• Two fundamental legal characteristics of partnership in Australian and English law:
o The absence of distinct entity status for the partnership
o The unlimited liability of partners for firm debts and other obligations Partnership as a Legal Entity
• The firm and its members collectively are not given a distinct legal entity status
• Rights and liabilities of a partnership are no more than the aggregate of individual partners
• The absence of separate legal status has a number of legal consequences:
o A partner, as a principal, cannot also be an employee of the firm o A partnership does not have perpetual succession (ss 26, 32-34) o A partnership cannot own property
Unlimited Liability
• Partners have unlimited liability to the creditors of the partnership
• The common law of agency to bind fellow partners:
o Actual authority – express or implied
o Ostensible authority – representation by principal that the agent has authority
• Limitation of liability of some partners
o Limited partners contribute to capital and share profits but have no right to participate in management of the partnerships
o General partners have unfettered control over business conduct Other Characteristics
• No person may be introduced as a partner without consent of all existing partners (s 24(1)(7)
• If a partner dies, the deceased’s representatives or heirs have the right to become partners
• A partnership interest is not freely transferable in the absence of consent of other partners Creation of Partnership
• Formation
o Partnership is a relationship resulting from contract and there must be supported by valuable consideration
