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					CM20278 Regulatory Framework for Business 2009 - 2010


                                        Lecture 8
                                     Partnership

1.   Definition
     A partnership is "the relation which subsists between persons carrying on a
     business in common with a view of profit" section 3 Partnership Ordinance (Cap.
     38)


     "Business" means any trade, occupation or profession.


     "Carrying on Business in Common" -- It used to be the rule that a partnership
     came into existence when the parties started actual trading but now a partnership
     will come into existence as soon as the parties start any preparatory work for the
     business Khan v Miah.



2.   Legal Status of a Partnership
     A partnership is not a legal entity. Partners and the firm are the same entity
     although legally the partners can sue or be sued in the name of the firm.


     The maximum number of partners in a partnership is 20. However, certain
     professional partnerships are exempt from this maximum limit e.g.
     accountants, solicitors, stockbrokers.



3.   Sources of Partnership Law
     Partnership Ordinance (PO), Common Law (e.g. contract law, equity, agency) and
     the partnership agreement, if any.

3.1. There are two types of provisions in the PO.

       i.   Mandatory Provisions (which govern the relationship between the
            partners and third parties) are those that must be followed and cannot be
            excluded by the partners.

      ii.   Default Provisions (which govern the rights and obligations of the

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               partners) are those that can be excluded by the partners. If the
               partnership agreement is silent, then the default provisions of the PO will
               be implied into the partnership agreement.


               Example
               No majority of the partners can expel any partner unless a power to do so
               has been conferred by express agreement between the partners.


               Express terms in the partnership agreement if different to the default
               provisions will take precedent.



4. Formation of a Partnership

4.1. Contract law applies if the partners enter into a partnership agreement. It is not
      necessary to have a written partnership agreement; in fact, people may be
      operating a business that the law regards as a partnership without realizing that
      this is so. However, in these cases it is much more difficult to determine
      whether a partnership exists.



4.2. There are two indicators that are generally associated with the existence of a
      partnership:

          i.      Co-ownership - if two or more persons co-own a property this can
                  be indicative of a partnership relationship, but does not of itself create
                  a partnership even if the parties share the profits section 4 PO.

         ii.      Sharing of profits - must be a sharing of net profits not gross
                  profits. Cox v Coulson (1916). However, in some situations the
                  sharing of net profits does not create a partnership.

                 The courts will look to the substance, not the form in deciding whether
                 there is a partnership relationship. The courts held in one case that the
                 true relationship between the parties was that of a partnership even
                 though the written agreement stated that there was not to be a
                 partnership. The courts looked at the substance of the agreement and
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                 concluded that a sharing of profits amongst other things constituted a
                 partnership. In another case it was held that the carrying on of a
                 business in common with a view to profit, but without sharing the
                 profits was not a partnership. In this particular case the two defendants
                 were merely carrying on business together with the plaintiff to gain
                 business experience from him.

5.       Relationship Between Partners

5.1      Action for Debt - a partner cannot sue or be sued by his firm, either before or
         after he ceases to be a partner. If one partner issues proceedings against one
         of his partners for money due in connection with the affairs of the firm, the
         only relief available to the former is an action for an account of the dealings
         and transactions of the partners.

5.2      Fiduciary Duties - partners owe each other a fiduciary duty. They must
         act honestly and in the best interest of the firm at all times.

         A fiduciary duty encompasses the following:
        i.    Duty to act in good faith and make full disclosure section 30 PO,
              Partners are bound to render true accounts and full information of all
              things affecting the partnership to any partner. A partner who enters into
              a contract with another partner and who withholds relevant information
              about the partnership business will render the contract invalid.


       ii.    Duty not to make secret profits section 31 PO. Every partner must
              account to the firm for any benefit derived by him from any transaction
              in connection with the business of the partnership. For example, if one
              of the partners is given a discount because of his past connections with a
              supplier he cannot then sell the goods to the partnership at the market
              price and make a private gain.


      iii.    Duty to avoid a conflict of interest section 32 PO. Where a partner
              without the consent of the other partner carries on a competing business
              with the firm, he must account for any profits he makes in the other
              business to the firm.

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            Example
            If Sunny formed a partnership with Meily to import cars and then set up a
            competing business with his wife, Sunny will be accountable to the
            partnership for any profits he makes unless he is carrying out such a
            business with the knowledge and consent of Meily.

5.3    Contractual Relationship and Duty - The relationship between partners
       is usually governed by contract, i.e. the partnership agreement. The partners
       can dispense with any of the provisions of the PO relating to the rights and
       obligations of the partners (default provisions) by agreement if they so choose.

       The contractual relationship between the partners relates to the following:

           i.   Management and Control - ss.26(f),(h) and (i) PO provides that
                every partner (except sleeping partners in a limited partnership) may
                take part in the management of the business. Differences between
                the partners relating to the partnership business may be decided by a
                majority of the partners. However, the partners can contract out of this
                provision if they want to exclude the junior partners in the decision
                making process but allow them to have access to the accounts and
                books of the business, ss 37(c) and (f) PO provides where any
                junior partner feels that the partners are abusing their powers they
                can sue them for a breach of contract or can apply for the dissolution
                of the partnership.

         ii.    Profit and Loss - section 26 (a) PO all partners share equally in
                the capital and profits of the business and contribute equally
                towards the losses made by the firm. However, the partners can
                state in the partnership agreement that the sharing of profits will
                correspond to the ratio of the capital contribution between the
                partners. Likewise the sharing of losses can be changed by the
                partnership agreement.

         iii.   Change of partners - section 26(g) PO this can happen when
                partners retire or new ones are admitted. The default provisions in
                the PO with regard to the admission of new partners is that no person
                may be admitted as a partner without the unanimous consent of all
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               existing partners unless the partnership agreement provides
               otherwise. Note the distinction between admitting a new partner and
               the assignment of the partnership interest.


               The constitution of the partnership can be affected by other factors. For
               example if a partner is in breach of his duties and the other partners
               want to get rid of him they can do so by dissolving the partnership or
               expel the guilty partners.


             Note
             The powers of expulsion (which must be exercised in good faith or the
             expelled partner can challenge the decision) by a majority can only be
             exercised if such power is expressly stated in the partnership agreement
             section 27 PO. If there is no such power of expulsion then the partners
             must dissolve the partnership.

6. Liability of Partners To Third Party

6.1. Joint and Several Liability - a partner has unlimited liability. A creditor can
      sue all the partners for the debts of the business or any one partner for the
      whole amount due. Every partner is liable for the whole amount of the debt
      despite that fact they only hold a small share in the partnership.


      Section 26(b) PO provides that the firm must indemnify every partner for any
      payments made or personal liabilities incurred by him in the ordinary and
      proper conduct of the business of the firm.

6.2. Civil     Liability    (Contribution)       Ordinance       allows    a partner to
      seek a contribution of the debt from other partners if he has satisfied the
      claims of a creditor by his own means.



6.3. Agents as Partners - all partners are agents of other partners and the firm.
      Each partner is also a principal Because the partners have unlimited joint
      and several liability the law limits the scope of this agency relationship. A
      partner is therefore only liable for the acts of his co-partners who act in the
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      ordinary course of business of the firm section 7 PO.


      Example
      If partners set up a partnership to carry on trading in garments and one of the
      partners orders a large quantity of dresses without informing the other partner
      and disappears with them without paying, the other partners will be liable as
      principal. This is because the act of the partner ordering dresses was within
      the ordinary course of business of the firm.

      On the other hand a partner in a firm of solicitors who orders a large quantity
      of dresses would be personally liable to the supplier as it would be beyond the
      ordinary course of business to order dresses in the name of the firm Chan Pat
      t/a Hop Kwan Garment Factory v Lin Wan Garment factory.

7.   Authority of Partners to bind the Firm
     A partner's authority to bind the firm can be classified as follows:

7.1. Actual authority
      This is where a partner is acting within his authority under the partnership
      agreement and can therefore bind the firm. A partner can bind the firm even if
      the contract with the third party is beyond the ordinary course of business of
      the firm, provided that the partner can prove to the third party that he does
      have such authority.

7.2. Implied authority
      Where a partner has acted beyond his actual authority in conducing
      partnership business, but the transaction was within the firm's ordinary course
      of business. If the third party is not aware that the partner has acted outside
      his authority and fails to perform the transaction, the firm will be liable.

      The third party cannot rely on implied authority if he knows that a partner has
      no authority to enter into the transaction section 7 PO.

      Note
      Sometimes partners impose restrictions in the partnership agreement. For
      example no partner can enter into any transaction on behalf of the firm in
      excess of $500,000 unless all the partners agree in writing. If a partner enters
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      into a transaction in excess of $500,000, the firm will only be bound if (1) the
      transaction is within the ordinary course of business of the firm and (2) the
      third party has no knowledge of the restriction imposed on the partner s.10 PO.

7.3. Apparent authority
      Where a partner appears to have no authority to enter into a transaction with the
      third party but other partners have represented to the third party that the partner
      has authority to bind the firm.


      Example
      If a partner in a garment manufacturing partnership orders six cars and the
      partner has neither actual nor implied authority to enter into such a contract but
      the other partners in the firm accept delivery and pay for the cars. If the partner
      then orders a further six cars, and the other partners refuse to accept the cars, the
      supplier can rely on the apparent authority of the partner and hold the other
      partners liable. This is because the partners had previously represented to the
      supplier that the partner had authority to enter into such a contact. The partners
      would be estopped from denying the partner's authority to order cars.

7.4. Holding Out
      The doctrine of holding out makes a person who is not a partner in a firm
      liable as if he was a partner of the firm.


       a)      Where a person, by words, spoken or written, or by conduct,
               represents himself as a partner in a firm, he is liable as a partner to any
               third party who, on the faith of such representation, makes a contract
               with the firm.

               Example
               If Andy (a sole trader), orders some goods on credit but the supplier
               does not wish to give the goods to Andy on credit as he doubts his
               financial standing but changes his mind when Billy who is a well
               known business man represents to the supplier that he is a partner of




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             the firm. Billy would be liable for the price of the goods if Andy fails
             to pay the supplier.


     b)      A person is liable even if he doesn't make the representation but
             allows a third party to make such a representation section 16 PO.

             If Amy (a sole trader) orders some goods on credit but the supplier
             does not wish to give the goods to Amy on credit as he doubts her
             financial standing but changes his mind when Amy represents to the
             supplier that Barbara a well known business woman is her partner. If
             Amy fails to pay for the goods Barbara will be liable for the price of
             the goods even though she is not a partner and the partnership did not
             exist. Barbara would be liable if she knew Amy was making an untrue
             statement and she allowed her to make such a statement.

            The third party must satisfy the court that there was a holding out and
            that he relied on such a holding out. For example, Anthony orders
            some goods on credit from Bobby and Bobby delivers the goods.
            Cedric then represents to Bobby that he is a partner of the firm. If
            Anthony fails to pay for the price of the goods Cedric will not be
            liable. Although there was a holding out by Cedric, Bobby did not rely
            on such holding out. The loss suffered by Bobby was not caused by
            Cedric's holding out Lon Eagle Industrial Ltd v Realty Trading Co
            (a firm) & Others.

8.   Tortious liability e.g. nuisance, negligence, trespass and defamation -
     section 12 PO

     Partners are vicariously liable:
     a)     When a partner does something wrong whilst acting in the firm's
            ordinary course of business and it causes loss/injury to third parties; for
            example misappropriation of client's money; and


     b)     When a partner although not acting in the firm's ordinary course of
            business but with the other partner's authority he does any wrongful
            act or omission which causes loss or injury to a third party
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9.   Retirement
     Every partner in a firm is liable jointly without limit with the other partners for
     all debts and obligations of the firm incurred while he is a partner. A partner
     is not liable for any debts or obligations before he joins the partnership or after
     he ceases to be a partner (section 11 PO).


     There are two exceptions where a retired partner will still be jointly and
     severally liable.

     i. Dealing with existing creditors - section 38(1) PO provides that
        where a person deals with a firm after a change in the partners he is
        entitled to treat all the retired partners of the firm as still being partners of
        the firm until he has notice of the change.

        If a partner retires from the firm and he hasn't given notice of his
        retirement to the existing creditors they can continue to treat the retried
        partner as an apparent member. Apparent partner = one who appears to be a
        partner in the firm. If his name appears on the letterhead or business
        record of the old firm it could be argued by the existing creditors that the
        retried partner is an apparent partner.

        Actual notice must be given to the existing creditors, mere deletion from
        the letterhead and business record is not enough.

     ii. Dealing with new creditors - to avoid liability to a new creditor of
        the firm after retirement, a retiring partner only needs to put an
        advertisement about his retirement in the Gazette. The retired partner will
        not then be liable to new creditors for any debt incurred by the firm after
        the advertisement. There is no need to serve actual notice s38 (2) PO.

        Note
        Even if a retired partner fails to place an advertisement in the Gazette and
        fails to remove his name from the letterhead or business record of the firm,
        he will not be liable under S.38 (1).

        Example


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       Goods are ordered on the firm's old letterhead, which still bears the retired
       partner's name. The supplier when he delivers the goods does not know
       that the retired partner has been a partner in the firm, the retired partner
       will not be liable due to the following reasons:

               the retired partner is not liable even though his name appears
                on the letterhead because the supplier does not appear to be treating
                the retired partner as an apparent partner of the old firm under S.38
                (1); and

               the supplier may not be able to treat the retired partner as an
                apparent member of the firm under S.38(l) because the supplier did
                not know the retired partner had been a partner of the firm when he
                delivered the goods.

       A retired partner will be liable to a new creditor if the retired partner holds
       himself out or allows himself to be held out as still a partner of the firm:

       Therefore, if a retired partner fails to place an advertisement in the
       Gazette and fails to remove his name from the letterhead or business record
       of the firm, he will be liable if he holds himself out or allows himself to be
       held out. For example, if a supplier before making delivery of the
       goods to the firm checks the business record of the firm and finds out that
       the name of Emily (a retired partner) is on the record before he delivers the
       goods. Here if the firm fails to make payment Emily may be liable under
       section 16 because she is holding herself out as a partner even though
       she has already retired from the partnership. Also the new creditor has
       relied on such "holding out" before he agreed to deliver the goods.

10. Dissolution of the partnership

       Subject to contrary provision in the partnership agreement, a partnership
       will be dissolved if a partner dies or retires or the firm is unable to continue
       its business due to mistrust amongst the partners.

       The PO sets out a number of reasons why a partnership can be dissolved:

           i.    The expiry of a fixed term stipulated in the partnership agreement
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            ii.   Illegality

           iii.   An order made by the court - such an order will only be granted
                  if the court is satisfied that such an order should be granted
                  due to the following reasons:
              ■   where the partner suffers mental illness,
              ■   a partner becomes permanently incapable of performing his part
                  of the partnership agreement, e.g. suffers a stroke,
              ■   where a partner is guilty of conduct prejudicial to the interest of
                  the firm, e.g. making personal gains out of the partnership,
              ■   where a partner wilfully or persistently commits a breach of the
                  partnership agreement,
              ■   where the business of a partnership can only be carried out at a
                  loss or where in the opinion of the court it is just and equitable to
                  do so.

      On dissolution, the partnership property should be applied in the following
      manner:
      a)     in paying debts to the outsiders
      b)     in paying to the partners any advancement made to the partnership
             beyond their capital contribution
      c)     in paying the capital contribution of the partners
      d)     any residue is divided among the partners in the profit-sharing ratio




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