Lecture 1 – Law of Partnership
Recommended Reading:
• MacNeil (ed), Scots Commercial Law, Avizandum, 2014, Chapter 5
• McGregor (ed), Commercial Law in Scotland, 6th ed , W. Green, 2020, Chapter 5
And optionally:
• Black (ed), Business Law in Scotland, 4th ed, Thompson/W Green, 2019, Chapter 15
• Partnership (reissue) of Stair Memorial, available on Lexis Library, Sections 1,2 and 3
Podcast 1
In this first lecture podcast we will consider:
The three different forms of partnership
Formation of partnership
Definition of the partnership under the Partnership Act 1890
Business names and trading disclosures of partnerships
Forms of Partnership
There are three forms of partnership:
Partnership Act 1890 (Our Focus)
The Act is a codifying statute bringing together, as a Sale of Goods Act 1893 did, the ways in which the
law could be brought into some form of coherent code. So, the 1890 act is a codification of this law
applicable before the 1890 Act case. Law can be used to interpret the 1890 Act either being case law
before the 1890 Act or after.
Limited Partnership Act 1907 (Limited Partnerships)
This Act introduced the concept of the limited partnership. There you are required one general and
one limited partner.
Limited Liability Partnership Act 2000 (LLP’s)
Introduced the concept of the LLP. It is, in fact, I think, a hybrid between the law of partnership and
company law. It provides for some form of limited liability. It provides for some form of accounting
requirements and formation requirements in accordance or similar to company law. And it restricts
parties being partners liability to the capital that we've contributed. There are similar reporting
requirements at different at two companies.
The Main Difference between the three forms of Partnership
All partners in a partnership under the Partnership Act 1890 (PA 1890) have unlimited joint and
several liability for partnership obligations personally, if the firm fails to pay or meet a contractual
,agreement with a third party . In the two forms of limited partnership, some partners’ liability is
limited to what they have agreed to contribute.
When might you want to form a Partnership under PA 1890?
▪ Statistics: no change reported between 2019-20 as yet
Most businesses are run as sole traders (59% or 3.5m), 34% are companies (2.0 m) and 7% (405,000)
are partnerships (Federation of Small Businesses, 2020)
▪ Arguably Partnerships are less formal than a company, not the same formation requirements
to that extent, but a partnership agreement is strongly advised otherwise the PA 1890 applies
as default rules.
A partnership provides some form of privacy for the partners because there's no requirement,
unlike a company, to publish their accounts.
▪ Partners in a partnership are subject to income tax on their individual income
Formation of Partnership
Partnership is a consensual contract, and does not have to be formed in writing, but it is strongly
advised to do so.
A partnership may be for a fixed time or open-ended (partnership at will)
But it is very important for the parties to record their agreement in writing, in case of dispute. The PA
1890 fills the gaps with default rules where the partnership agreement doesn't exist or is unclear.
Like any other contract, the parties must reach agreement, all parties must have contractual capacity,
and the contract must not be for an illegal purpose.
The minimum number of partners is 2, and there is now no maximum number.
Definition of Partnership under the Partnership Act 1890
S.1(1) ‘Partnership is a relationship which subsists between persons carrying on business in common
with a view of profit.’
The partnership must subsist meaning it must exist between persons, plural, carrying on business in
common. So, they are not doing different things and thinking they're a partnership and with a view to
a profit objective.
Ilott v Williams [2013] EWCA Civ 645
“An agreement to form a partnership in future is only a partnership when the partnership activities
connects.”
, M Young Legal Associates Ltd v Zahid [2006] 1 WLR 2562
This is an important case as it indicates the question as to whether a person who simply receives a
salary or fee, irrespective of any work done, and no capital contribution to the partnership, is a partner
of a law firm.
The Court of Appeal held that a solicitor was brought in and agreed to paid a salary or a fee for joining
the firm, was indeed joining the firm as a partner, so there was a partnership in existence. This was
important because the firm had accrued debts and the creditor was suing the firm. So by suing the
firm, they would be able not just to sue the other partner, but also the second partner who joined the
firm.
So the court held that it was an agreement for a person to be paid a specified sum of money and for
work to be done by him on behalf of the firm wouldn't preclude that person from becoming a partner.
Looking at the facts and circumstances of that case, the person was a partner.
Khan v Miah [2000] 1 WLR 2123
The appellant, Khan, had obtained and fitted out premises with the respondent, Miah, to run a
restaurant together. Khan withdrew before the restaurant began trading. The Court of Appeal said
that the parties were not partners until trading of the restaurant had commenced.
The House of Lords disagreed with the Court of Appeal. They held the parties to a joint venture,
became partners as soon as they performed part of the joint enterprise, which they agreed to engage
in. So, the opening of the restaurant was not relevant for that purpose.
The House of Lords said that the Court of Appeals approach was narrow and did not reflect the
commercial reality that the parties were equal partners in Khan v Miah.
Keith Spicer Ltd v Mansell [1970] 1 All ER 462
This was another appellate case at the Court of Appeal level. Parties were working together carrying
on business in common with a view to profit but they undertook various acts together in the three
weeks prior to forming a company. These acts where ordering goods and opening a bank account.
However, one of the parties became insolvent before the company was formed. Seller of the Goods
wanted payment so sued both parties as partners on the basis that there was a partnership at the
time the goods were ordered.
The court disagreed that there was a partnership. The parties were merely working together to form
a company. These acts that they carried out beforehand were acts with the intention of creating a
company not apart.
Essential Elements of a Partnership
(1) there must be more than one person since the definition states that business must be carried on
“in common”;
*Worbey v Campbell [2017] CSIH 49, per Lord Glennie at para 65 – business must be carried on in
common for a partnership to exist.
This case is a very illustrative point which suggests that the meaning of in common, whilst not defined
by the act itself, means that the parties are working and carrying on the business together for their
