These are comprehensive, in-depth and brilliant LPC notes that cover the entire Business Law & Practice module including workshop examples.
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Partnerships
Definition ❖ s1 Partnership Act 1890: “Partnership is the relation which subsists:
➢ Between persons
➢ Carrying on a business in common.
➢ With a view of profit”
❖ A partnership is created when the definition is satisfied. There are
no further formalities required.
❖ “Business”
➢ s45 PA 1890: “Business” “includes every trade, occupation or
profession”
▪ Virtually any activity of a commercial nature is
capable of giving rise to a partnership.
➢ Must be more than “mere agreement” Illot v Williams &
Others [2013] EWCA Civ 645
➢ No requirement that the parties have actually commenced
trading:
▪ “There is no rule of law that the parties to a joint
venture do not become partners until actual trading
commences. The rule is that persons who agree to
carry on a business activity as a joint venture do not
become partners until they actually embark on the
activity in question” - Khan v Miah [2000] 1 WLR
2123.
▪ In that case a partnership was held to exist where the
parties had agreed to open a restaurant together and
taken steps pursuant to this, including opening a joint
bank account, obtaining a bank loan, and acquiring
premises, furniture and equipment.
❖ “In Common”:
➢ i.e. there must be two or more people who share
responsibility for the business and for decisions which affect
the business.
▪ Contrast this with an employer/employee relationship
where the employee must accept the decisions and
instructions of his employer.
➢ A partnership can be formed by two or more companies.
❖ “View of Profit”:
➢ The purpose must be to make money.
➢ Charitable motives are unable to constitute partnerships.
,Characteristics 1. To be involved in making decisions which affect the business
Indicative of a (s24(5)).
Partnership 2. To share in the profits of the business; (s2(3) provides that this will
be prima facie evidence that an individual is a partner (s24(1)).
3. To examine the accounts of the business;
4. To insist on openness and honesty from fellow partners;
5. To veto the introduction of a new partner; and (s24(7)).
6. Responsibility for sharing any losses made by the business (s24(1)).
Decision ❖ By a majority vote (s24(8)).
Making ❖ However a decision to change the nature of the partnership
business can only be done unanimously (s24(8)).
❖ New partners can only be introduced with the consent of all existing
partners (s24(7)).
,Partner’s Responsibilities (15.2 – 15.3, 275 – 276)
❖ Partners are under a duty of the utmost fairness and good faith to each other.
o s28 – s30 expands upon this duty providing that:
❖ s28: Partners must divulge all relevant information connected with the business and
their relationship to the other partners.
o E.g. if, when selling business premises to the partnership, a partner
suppresses information about the value of the premises.
❖ s29: Partners must account to the firm for any benefit derived without the consent
of the other partners from a transaction concerning the partnership.
o Has the partner derived a benefit?
o Was this with the other partner’s consent?
o E.g. if a partner is asked by a client of the firm to do some work in his spare
time, the money received from this will be cash of the partnership unless the
other partners consent to him keeping it.
❖ s30: If a partner runs a business “of the same nature” and competes with the firm,
he must account for any profits made by this unless he has the consent of the other
partners.
o This catches businesses in direct competition with the partnership. This does
not necessarily include similar, but non-competing businesses e.g. business in
a different part of the supply chain.
,The Partnership Agreement
➢ Fundamental Principle – The Partnership Act implies basic terms into every
partnership agreement. These terms will not necessarily be appropriate for every
partnership agreement and the terms are not comprehensive in what they do cover,
so a written agreement is often necessary.
Area of Issue What the Partnership Act Why is this problematic/what terms are
Implies desirable?
Commencement ➢ Nothing. ➢ Desirable to include a clause which
Date ➢ The partnership comes specifies the start-date of the
into being when the s1 partnership so it is certain when
definition is satisfied. rights and obligations arise.
Duration and ➢ No duration supplied by ➢ Any partner may terminate the
Dissolution the Act. entire partnership “at any time by
➢ If there is no agreement giving notice of his intention to do so
to the contrary, the to all the other partners” (s26).
partnership will be a ➢ Notice is immediate, and does not
“partnership at will” need to be in writing unless the
(s26). partnership agreement is made by
➢ “Partnership at will” deed (s26(2)).
means that the ➢ Flexible for the partners, but unsecure
partnership continues for the business as whole partnership
unless a partner gives can be brought to an end on the
notice to terminate the whim of a single partner.
partnership. ➢ Amendments might include:
o Specifying a minimum period
of notice.
o Agreeing a fixed term, perhaps
continuing thereafter to be
terminable with a minimum
notice period.
o That the partnership shall
continue as long as there are
two surviving partners.
Dissolution Under ➢ Death or bankruptcy of a ➢ Desirable to depart from this and
s33 PA 1890 partner will provide that the remaining partners
automatically dissolve will automatically continue in
the partnership (s33). partnership on buying out the
deceased/bankrupt partner’s share.
Sale of Capital ➢ Partners share equally ➢ Partners may want to deviate from
Assets and in the capital of the this to reflect the capital contribution
business (s24(1)). of each partner to the business.
Sharing of Capital ➢ Increases/decreases in ➢ E.g. if Partner A provides a factory
Increases the value of assets are worth £50,000, and Partner B puts in
therefore also shared £10,000 cash, under the PA 1890 if
equally. the factory increases in value to
, £60,000, the £10,000 increase would
be split 50/50. Similarly if the factory
is sold, Partner A will only receive
£30,000 despite contributing an asset
worth £50,000.
➢ It may be worth specifying in the
agreement what assets are
“Partnership Assets” in which all
partners will have a beneficial
interest, and which are assets belong
to individual partners to prevent
disputes.
Sharing of ➢ Profits/losses of the ➢ Partners may want to deviate from
Profits/Losses business are to be this to reflect the contribution of
shared by the partners each partner to the business e.g. in
equally (s24(1). terms of time/experience/capital
➢ s24(6) explicitly contribution
prohibits partners from ➢ E.g:
receiving a salary unless o By paying on a salary basis.
an agreement to the o By specifying that partners are
contrary excludes this. allowed interest in proportion
to their capital contributions
– incentivises investment.
o That profits/losses be shared
in specific percentages as
opposed to equally.
Drawings ➢ Nothing ➢ May be desirable place a monthly
limit on how much each partner can
draw from the business to prevent a
partner draining funds.
Work Input ➢ Partners have a right, ➢ Perfectly permissible to have a
but not an obligation, to “sleeping partner”.
take part in the ➢ Partners may therefore want fix each
management of the partner’s obligations and avoid a
business (s24(5)). scenario where a partner may do
nothing but nevertheless be entitled
to an equal share in the profits of the
partnership.
➢ E.g. a partner must “devote his whole
time and attention to the business” or
specify a number of hours per week
etc. The clause would need to cover
sick leave, holiday entitlement etc.
Retirement ➢ Nothing. ➢ Desirable to provide a term enabling a
➢ Partners have no right to partner to retire without unanimous
retire under the Act. agreement.
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