1902 Encyclopedia > Partnership


PARTNERSHIP, in law, is a voluntary association of two or more persons for the purpose of gain. This is of course not an exhaustive definition, but will serve to include most of the definitions of partnership which have been attempted. The word partner is a contracted form of partitioner.

The partnership of modern legal systems is based upon the societas of Roman law. Societas is not defined by any of the Roman jurists. But the Roman view is no doubt sufficiently expressed in the definition by Voet:—societas est contractus juris gentium, bonxfidei, consensu constans, semper re honesta, de lucri et damni communione. Societas was either universorum bonorum, a complete communion of property; negotiationis alicujus, for the purpose of a single transaction; vectigalis, for the collection of taxes; or rei unius, joint ownership of a particular thing. The prevail-ing form was societas universorum qux ex quxstu veniunt, or trade partnership, from which all that did not come under the head of trade profit (quxstus) was excluded. This kind of societas was presumed to be contemplated in the absence of proof that any other kind was intended. Societas was a consensual contract, and rested nominally on the consent of the parties—really, no doubt (though this was not in terms acknowledged by the Roman jurists), on the fact of valuable consideration moving from each partner. No formalities were necessary for the constitution of a societas. Either property or labour must be con-tributed by the socius; if one party contributed neither property nor labour, or if one partner was to share in the loss but not in the profit (leonina societas), there was no true societas. Societas was dissolved on grounds substan-tially the same as those of English law (see below). The only ground peculiar to Roman law was change of status (capitis deminutio). Most of the Roman law on the subject of societas is contained in Dig. xvii. tit. 2, Pro Socio. The main points of difference between the Roman and English law will be treated below.

There is no statutory or judicial definition of partnership in English law. It is defined by the Indian Contract Act, § 239,2 as " the relation which subsists between persona who have agreed to share the profits of a business carried on by all or any of them on behalf of all of them." Sir N. Lindley declines to pledge himself to any definition, but lays down the following principles :—(1) partnership is the result of an agreement to share profits and losses; (2) partnership is prima facie the result of an agreement to share profits, although nothing may be said about losses, and although there may be no common stock ; (3) partner-ship is prima facie the result of an agreement to share profits, although community of loss is stipulated against ; (4) partnership is not the result of an agreement to share gross returns ; (5) partnership is not the result of an agreement which is not concluded ; (6) partnership is not the result of an agreement to share profits so long as anything remains to be done before the right to share them accrues (1 Lindley, bk. i. eh. i., § 1). It was held in 1793, in the case of Waugh v. Carver, (2 H. Blackstone, 235), that sharing in profits constituted partnership, though no partnership was in fact contemplated by the parties. But in 1860 the House of Lords in Cox v. Hickman (8 House of Lords Cases, 268), established the principle that persons who share the profits of a business do not incur the liabilities of partners unless the business is carried on by themselves or their real or ostensible agents. In 1865 the Act 28 & 29 Vict. c. 86 (which applies to the United Kingdom, and is commonly called Bovill's Act) was passed in order to remove certain difficulties arising from Cox v. Hickman. It enacts that the advance by way of loan to a person engaged or about to engage in any trade or undertaking, upon a contract in writing that the lender is to receive a rate of interest varying with the profits, or a share of the profits, is not of itself to constitute the lender a partner (§ 1) ; that no contract for the remuneration of a servant or agent by a share of the profits is of itself to render such servant or agent responsible as a partner or give him the rights of a partner (§ 2) ; that no widow or child of a partner of a trader receiving by way of annuity a portion of the profits is, by reason only of such receipt, to be deemed to be a partner (§ 3) ; that no person receiving by way of annuity or otherwise a portion of the profits in consideration of the. sale of the goodwill is, by reason only of such receipt, to be deemed to be a partner (§ 4) ; that in the event of any such trader being adjudged bankrupt, &c, the lender of any such loan is not to be entitled to recover his principal or profits and interest, or the vendor of a goodwill his profits, until the claims of the other creditors for valuable consideration have been satisfied. Participation in profits has thus ceased to be an absolute test of partnership. Another test that has been proposed is the existence of such a participation as to constitute the relation of principal and agent. But this has been objected to on the ground that agency is deducible from partnership and not partner-ship from agency (see Holme v. Hammond, Law Pep. 7 Exch. 218). The principles laid down by Sir N. Lindley above no doubt form the best means of deciding the matter, but every case must depend to a large extent upon its own particular circumstances. Though participation in profits is of itself no evidence of partnership, on the other hand societies and clubs, the object of which is not to share profits, are not partnerships. The liability of clubs or provisional committee men depends entirely upon the question of agency. They are not as a rule in the position of partners as against third persons. No partner-ship can exist in an office depending upon personal confrflence, as the office of executor or trustee. Joint tenants or tenants in common are not necessarily partners. If A and B agree to contribute a sum for the purchase of goods to be divided between them, they are joint owners after purchase and before division. But if they resell the goods and divide the profits, they then become partners (Smith's Mercantile Law, bk. i. ch. ii.).

A valid contract of partnership can be entered into by any person not under the disability of minority or unsoundness of mind, or of being a convict within the Felony Act, 1870 (33 & 34 Vict. c. 23), or an alien enemy. It is presumed that the disability of coverture no longer exists since the Married Women's Property Act, 1882. An infant may nominally be a partner, but he incurs no liability, and may disaffirm past transactions when he comes of age. A clergyman becoming a partner for pur-poses of trade is (with certain exceptions) liable to ecclesiastical penalties, but the contracts of the partnership are not void, 1 & 2 Vict. c. 106, § 31. At common law there is no limit to the number of partners, but by the ^Companies Act, 1862 (25 & 26 Vict. c. 89, § 4), not more othan ten persons can carry on the business of bankers, and not more than twenty any other business, unless (with some exceptions) they conform to the provisions of the Act. (See COMPANY.)

A partnership may be constituted by deed or other writing, or it may be implied from acts. It is usually, though not of necessity, evidenced by deed. The usual clauses in a partnership deed provide for the nature of the business, the time of the commencement of the partnership and its duration, the premium, the capital and property, the interest and allowances, the conduct and powers of the partners, the custody of the books, the taking of the accounts, retirement, dissolution, and expulsion, the valua-tion and transmission of shares, annuities to widows of deceased partners, prohibition against carrying on business in opposition after retirement, sale of goodwill, getting in debts, indemnity to outgoing partners, and arbitration clauses. Though a deed may serve to adjust the rights of the partners inter se, their liabilities to third persons cannot be affected by provisions in a deed of which the latter are ignorant. Whether a partnership exists in a particular case is a mixed question of law and fact. The partnership may last for any time agreed upon by the partners. It is determinable at will unless it has been agreed that it shall endure for a specified period, or unless it is dissolved by some of the circumstances which will be hereafter mentioned. A partnership may be general or special, e.g., the ownership of a single race-horse, or the conduct of a single case by a firm of solicitors. The rights and liabilities of partners may be considered as they affect the partners (1) inter se, and (2) in their relation to third persons.

1. The shares of partners are prima facie equal. Inequality must be proved by evidence. Each member of a partnership is entitled to take a share in its management, unless, as is frequently the case, one member is appointed managing partner. A partner is in a fiduciary position. It is therefore his duty to use reasonable diligence, to keep within the limits of his authority, and to observe good faith, e.g., not to compete with the partnership. He may be a partner in another firm, and the fact of his being a partner in firms A and B does not make A and B partners, fcO1 socius mei socii non est mews socius. In matters which are within the ordinary course of the business of the partnership, such as the period of division of profits, if the partnership articles be silent on the subject, the minority must yield to the majority. In matters beyond the scope of the partnership business, such as a change in the character of the business, one dissentient can forbid a change, and can obtain an injunction to prevent the change from being carried out. A partner is entitled to have accounts kept, and to inspect them at proper times. Where a partner has as agent for the firm paid more than his share, he is entitled to contribution from the rest. One partner cannot be expelled by the others unless there is a special power of expulsion given by the articles. A partner has no right to assign his share without the express or implied consent of the other partners. If the partner-ship be one at will, the assignment ipso facto dissolves it; if not at will, the others are entitled to treat the assign-ment as a ground of dissolution. The assignee takes the share subject to the claims of the other partners. Each partner has an equitable lien upon the partnership property, enabling him within certain limits to control the disposition of it. On the death of a partner his share goes to his representatives, not, as in joint-tenancy, by accretion to the survivors. It is an ancient maxim of law that jus accrescendi inter mercatores non habet locum (Coke upon Littleton, 182 a).

2. A more important and difficult question is the rela-tion of partners to those not members of the partnership. From this point of view partnership is to a great extent a branch of the law of agency (see AGENT). AS far as contracts are concerned, it is the rule that one partner is its general agent for the transaction of its business in the ordinary way, and the firm is responsible for whatever is done by any of the partners when acting for the firm within the limits of the authority conferred by the nature of the business which it carries on (1 Lindley, bk. ii. ch. i.). The authority is defined by the business, not by any private understanding between the partners. Thus a merchant can bind his partners by accepting a bill of exchange for the firm, but a solicitor or medical man cannot. A partner cannot execute a deed, except a simple release of a debt, so as to bind the firm. In many cases an act not warranted by authority, such as a submission to arbitration, may be adopted by ratification so as to bind the firm. And in other cases the rights of a bona fide claimant will prevail, even though the authority has been exceeded and there has been no ratification, e.g., where a bill given by a partner on his private account passes into the hands of a bona fide holder for value. Where the partner contracts on behalf of the partnership, it is the latter and not the individual who is primarily liable. If the name of a firm and an individual is the same, a bill drawn in that name for partnership purposes is prima facie a bill of the firm (Yorkshire Banking Co. v. Beatson, Law Rep., 5 C. P. D., 109). But a partner may hold himself out as the sole partner, and so make himself separately liable. Every member of a partnership is at common law liable in solido for the debts of the firm, a liability co-extensive with his power to transfer the whole property of the firm. This liability cannot be restricted except by statute (as the Companies Act) or by express contract with the creditors. A dormant partner is liable, like an ostensible partner, for debts contracted during his partnership; if, however, the ostensible partners have been sued to judgment, an action cannot be brought to charge the dormant partner (Kendall v. Hamilton, Law Rep., 4 App. Cas., 504). The liability of a dormant and an ostensible partner terminates in a different manner, in the former case by his simple retirement without notice, in the latter only after notice, a general notice in the Gazette being the usual means of informing the public of the change, while special notice is given to known customers. It is a question of fact whether the liability of the new firm lias been accepted in place of that of the previous firm. A guarantee to or for a firm ceases upon a change in the firm unless it appears by express stipulation or necessary implication that the guarantee is to continue, 19 & 20 Vict. c. 97, § 4. There are cases in which a relation of quasi-partnership is created, i.e., in which persons not partners inter se become partners qua third persons. A person who holds himself out as a partner incurs the liability of a partner. This was clearly laid down by Lord Chief Justice Eyre in Waugh v. Carver, and is now an established principle of law. " Holding out" means that credit has been obtained by the use of his name, or even by permitting reference to him as one who wishes to have his name concealed.

Where the liability arises out of tort, the law is not quite the same as it is where the liability arises from con-tract. The presumption is against the authority of a partner to commit a tort, and so opposed to the presump-tion in the case of contract. But a partnership is liable jointly and severally for any wrongful act or omission of one of its members in conducting the business of the firm, e.g., the neglect of a managing partner to keep the shaft of a mine in order, but not for a wilful wrong unconnected with the business, e.g., malicious prosecution. With respect to fraud by misappropriation of money, some obligation on the part of the firm to take care of the money must be shown. A receipt from the firm prima facie imposes this obligation.

An action should be brought by all the partners (except merely nominal partners, who need not be joined unless in an action on a contract under seal). They cannot delegate a right of action to one of themselves for convenience. This can only be done by statute, as 7 Geo. IV. c. 46, enabling banking companies to sue and be sued by a public officer. All the partners ought to be sued, subject to any statutory exception, as that contained in the Carriers' Act, 11 Geo. IV., and 1 Will. IV. c. 68, §§ 5, 6. But misjoinder or nonjoinder of parties does not defeat an action (Rules of the Supreme Court, 1883, ord. xvi. r. 11). The method of procedure does not affect the principle of the liability of each partner in solido, a principle on which is based one of the main points of difference between a partnership and a corporation. In a corporation the collective whole is distinct from the individuals composing it (see CORPORATION). But in a partnership the firm, as distinct from the individual partners, is recognized by English law only to a very limited extent, and as matter of procedure rather than of substantive law. Since the Judicature Acts, in an action against a partnership, power is given to sue and be sued in the firm name, but the partners are bound to disclose the names of the persons constituting the firm, and, though judgment goes against the firm, execution may issue against a partner (Rules of the Supreme Court, 1883, ord. vii. r. 2, xvi. r. 14, xlii. r. 10). An adjudication of bankruptcy cannot be made against the firm in the firm name, but only against the partners individually (Bank-ruptcy Rules, 1883, r. 197).
A partnership at will is dissolved by determination of the will or assignment of the partnership share. A partnership other than a partnership at will is dissolved by (1) effluxion of time; (2) retirement of a partner; (3) alienation by operation of law of a partner's share, e.g., by bankruptcy or (formerly) by marriage of a female partner ; (4) death; (5) business becoming unlawful, as by a partner becoming an alien enemy; (6) assignment of partnership share; (7) lunacy; (8) liability of a partner to criminal prosecution; (9) impossibility of carrying on the business. In the last four cases the partnership is not ipso facto dissolved, but they are grounds on which the court may order a dissolution (see Pollock, art. 47 sq.). Where a partner has been induced to enter into a partner-ship by fraud, he has in general the option of affirming or rescinding the contract at his election.
The dissolution of partnerships and the taking of partnership accounts are matters specially assigned to the Chancery Division (Judicature Act, 1873, § 34). After dissolution the persons who constituted the partnership become tenants in common of the partnership property until the division of assets, unless any other provision is made by agreement. The partnership debts are paid out of the partnership assets, and the private debts out of the private assets.

The principle of law that a partnership debt is joint and several comes into operation where the partnership is dissolved by bankruptcy or death. The joint estate is the primary fund for the payment of joint debts, but the joint creditors can look to any surplus of the separate estate (after payment of the separate debts) to satisfy any deficiency in the joint estate. See the Bankruptcy Act, 1883, § 59. Partners cannot compete with the creditors of the firm either against the joint estate or the several estate of a partner; that is to say, they cannot be satisfied until all the debts of the firm have been paid. In the case of death, although the partnership is dissolved by death, it is still treated as subsisting for the purposes of administra-tion. The creditor has the same rights against the estate of the deceased as he would have had in his lifetime in some cases, so that he may proceed against this estate in the first instance, without recourse to the surviving partners (see the judgment of Lord Selborne in Kendall v. Hamilton, Law Rep., 5 App. Cas. 539). Further, the death of a partner has the result of converting the real property of the firm. " Whenever a partnership purchases real estate for partnership purposes, and with partnership funds, it is, as between the real and personal representatives of the partners, personal estate" (Darby v. Darby, 3 Drewry 506).

At common law no criminal prosecution was maintainable by one partner against another for stealing the property of the firm. But this difficulty has been removed by 31 & 32 Vict. c. 116.

Though the English law of partnership is based upon Roman law, there are several matters in which the two systems differ. (1) There was no limit to the number of partners in Roman law. (2) In societas one partner could generally bind another only by express mandatum; one partner was not regarded as the implied agent of the others. (3) The debts of a societas were apparently joint, and not joint and several. (4) The heres of a deceased partner could not succeed to the rights of the deceased, even by express stipulation. There is no such disability in England. (5) In actions between partners in Roman law, the benefleium competentix applied, that is, the privilege of being condemned only in such an amount as the partner could pay without being reduced to destitution. (6) The Roman partner was in some respects more strictly bound by his fiduciary position than is the English partner. For instance, a Roman partner could not retire in order to enjoy alone a gain which he knew was awaiting him. (7) There was no special tribunal to which matters arising out of societas were referred.

The law of Scotland as to partnership agrees in the main with the law of England. The principal difference is that Scots law recognizes the firm as an entity distinct from the individuals com-posing it. English law, as has been said, does this only to a very limited extent. The firm of the company is either proper or descriptive. A proper or personal firm is a firm designated by the name of one or more of the partners. A descriptive firm does not I introduce the name of any of the partners. The former may sue I and be sued under the company name ; the latter only with the addition of the names of three at least (if there are so many) of the partners. A consequence of this view of the company as a separate person is that an action cannot be maintained against a partner personally without application to the company in the first instance, the individual partners being in the position of cautioners for the company rather than of principal debtors. The provisions of the Mercantile Law Amendment Act, 1856 (19 & 20 Yict. c. 60, § 8), do not affect the case of partners. But, though the company must first be discussed, diligence must necessarily be directed against the individual partners. Heritable property cannot be held in the name of a firm ; it can only stand in the name of individual partners. Notice of the retirement of even a dormant partner is necessary. The law of Scotland draws a distinction between joint adventure and partnership. Joint adventure or joint trade is a partnership confined to a particular adventure or speculation, in which the partners, whether latent or unknown, use no firm or social name, and incur no responsibility beyond the limits of the adventure. In the rules applicable to cases of insolvency and bankruptcy of a company and partners, Scots law differs in several respects from English. Thus a company can be made bankrupt without the partners being made so as individuals. And, when both company and partners are bankrupt, the company creditors are entitled to rank on the separate estates of the partners for the balance of their debts equally with the separate creditors. But in sequestration, by 19 & 20 Vict. c. 79, § 66, the creditor of a com-pany, in claiming upon the sequestrated estate of a partner, must deduct from the amount of his claim the value of his right to draw payment from the company's funds, and he is ranked as creditor only for the balance. (See Erskine's Inst., bk. iii. tit. iii. ; Bell's Comm., ii. 500-562; Bell's Principles, §§ 350-403.)

In the United States the English common law is the basis of the law. Most States have, however, their own special legislation on the subject. Partnership is defined by Chancellor Kent to be " a contract of two or more competent persons to place their money, effects, labour, and skill, or some or all of them, in lawful commerce or business, and to divide the profit and bear the loss in certain proportions" (3 Kent's Comm., lect. xliii.). The defi-nition of the New York Civil Code, art. 1283, runs thus :— " partnership is the association of two or more persons for the purpose of carrying on business together, and dividing its profits between them." The most striking feature of the law in the United States is the existence of limited partnerships, correspond-ing to the sociétés en commandite established in France by the ordinance of 1673. The State of New York was the first to introduce this kind of partnership by legislative enactment. The provisions of the New York Act have been followed by most of the other States. In many States there can be no limited partnership in banking and insurance. In this form of partnership one or more persons responsible in solido are associated with one or more dormant partners liable only to the extent of the funds supplied by them. In Louisiana such partnerships are called partnerships in commendam (Civil Code, art. 2810). In New York the respon sible partners are called general partners, the others special partners. Such partnerships must, try the law of most States, be registered. (In 1880 a bill providing for the legislation of such partnerships in the United Kingdom was introduced in the House of Commons, but failed to become law.) In Louisiana universal partnerships (the societates universorum bonorum of Roman law) must be created in writing and registered (Civil Code, art. 2800). In some States the English law as it stood before Cox v. Hickman is followed, and participation in profits is still regarded as the test of partnership, e.g., Leggett v. Hyde (58 New York Rep. 272). In some States nominal partners are not allowed. Thus in New York, where the words "and Company" or "and Co." are used, they must represent an actual partner or partners. A breach of this rule subjects offenders to penalties. In most States claims against the firm after the death of a partner must, in the first instance, be made to the survivors. The creditors cannot, as in England, proceed directly against the representatives of the deceased. The law as to the conversion of realty into personalty on the administration of the estate of a deceased partner in some States agrees with English law, in others does not. (See 3 Kent's Comm., lect. xliii. ; Story, On Partnership; Troubat, On Limited Partnership ; and Angell, On Private Corporations. ) (J. W†. )

The above article was written by: James Williams, M.A., B.C.L., Barrister at Law.

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