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BLP - Summary Business Law and Practice
Business Law and Practice (The University of Law)
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Partnerships
Partnership Act 1890 S1: a partnership is legally formed when two or more
persons carry on a business in common (share responsibility for the business
and for decisions which affect the business) with a view to making a profit. S2 PA: Details rules for determining partnerships existence Partners share the right to take part in making business decisions, share asset
ownership, share business profits, share unlimited liability for the debts Partnership are advantageous because of the informal nature of partnerships,
the commercial secrecy that is possible, and the ability for the partners to claim
tax relief for start-up losses. They are disadvantageous because of the unlimited
liability. It is possible for a limited liability partnership to be formed, but at least
one partner must have unlimited liability The partnership agreement should detail:
Name
Financial input
Share of profits/losses (in a suitable ratio, with salary considerations
for harder-working/sleeping partners
Monthly limit on how much each partner can withdraw, perhaps with
provision for periodic review and consequences of exceeding the
stated limit
Shares in increase/decrease in asset
values Place and nature of business
Specific agreements as to ownership of assets
Degree of commitment expected from each partner
Work input/hours, roles and functions of each
partner Limitations of each partner
Decision-making
Retirement (only provided for dissolution of entire partnership by PA)
Provision for expulsion, how it will take effect (not provided for by PA)
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S24(1) PA: Partners are entitled to equal share in profit/loss, unless otherwise
stated S24(2) PA: Partners must indemnify partners who bear more than they
are supposed to, financially, as agreed S26 PA: Where no fixed term has been agreed upon for the duration of the
partnership, any partner may end the partnership at any time on giving
notice of his intention so to do to all the other partners S32 PA: Partnership can be dissolved at the end of an agreed fixed term, or at
the end of undertaking it was entered for, by notice to other partners (S26)
S33 PA: Indefinite partnership until death or bankruptcy of a partner causes
automatic dissolution of the entire partnership (unless otherwise stated) S35 PA: allows court order for dissolution to prevent a partner being
“locked into” a partnership S42 PA: if a person ceases to be a partner and others continue in partnership
but there is delay in final payment of the former partner’s share, the former
partner or his estate is entitled to receive either interest at 5% on the
amount of his share or such share of the profits as is attributable to the use
of his share. No implied term under PA preventing partner who leaves from competing with
the partnership unless restraint of trade clauses is in place. To be valid, the
clause must protect a legitimate interest as well as be reasonable and limited
to its geographic area. ‘Non-dealing’ and ‘non-solicitation’ clauses are also
enforceable. SS28-30 PA: partners must act in utmost good faith, and divulge to one
another all relevant information connected with the business and their
relationship, be prepared to share with their fellow partners any profit or
benefit they receive that is connected with or derived from the partnership
without the consent of the other partners; and they must be prepared to
share with their fellow partners any profits they make from carrying on a
competing business without the consent of the other partners.
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Liability within a Partnership:
If a debt is entered during the course of the firm’s business, partners are
liable, under S5 PA. The action must be authorized, through partners jointly
making the contract, expressly instructing a partner to make the contract,
impliedly accepting the contract, or a partner who has apparent authority to
an outsider making a contract (where the transaction is one which relates to
the type of business in which the firm is apparently engaged, the transaction is
one for which a partner in such a firm would usually be expected to have the
authority to act, the other party to the transaction did not know that the
partner did not actually have authority to act; and the other party deals with a
person whom he knows or believes to be a partner) SS10 and 12 PA: A partner who acts without authority causes his partner(s)
to be jointly and severally liable Those who joined after the breach are not liable, unless they are found to
have been ‘holding out’, which means a creditor will have relied on
representation that a particular person was a partner in that firm. The
representation can be oral, in writing or by conduct S12(2) PA: Partners remain liable for debts incurred while they were partners
and therefore the terms of purchase of his share in the partnership should
include an indemnity clause for debts upon his exit.
Therefore, under S36 PA when a partner leaves, he must give notice of leaving
– this can be actual notice or an advertisement in the London Gazette. If
the reason for ceasing to be a partner is death or bankruptcy (rather than
retirement or expulsion), no notice of the event is required (S35(3))
A novation agreement is a tripartite contract involving the creditor of the
firm, the partners at the time the contract with the creditor was made and the
newly constituted partnership, under which it may be agreed that the creditor
will release the original partners from their liability under the contract and
instead the firm as newly constituted will take over this liability. A creditor can sue the firm as a group of persons or can sue individually any of
the persons who are liable as partners. If the creditor has obtained judgment
against a partner individually and that partner cannot pay, the creditor is then at
liberty to commence fresh proceedings in order to obtain judgment against the
firm. Even if the firm cannot pay out of its assets, either because it cannot raise
the cash to do so or because its assets in total are insufficient to meet its
liabilities in total, judgment against the firm can be enforced against the 3