Contract Law Review: Understanding Partnerships and Liabilities, Exams of Contract Law

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CONTRACT LAW REVIEW NOTES PARTNERSHIP When business is conducted in or through ownership is normally owned by 2-20 persons Partnership Act defines partnership as: The relation which subsists between persons carrying on a business in common with a view to profit FORMATION OF A PARTNERSHIP The partnership Act does not prescribe rules for the formation of a partnership, consequently, a partnership may be formed a) Orally b) Simply by the action of the persons concerned if they are active as they were pertners c) By simple agreement in writing d) By a deed; i.e. an agreement under seal, signed by the persons who agree to become partners THE FIRMS NAME Legally, the firm’s name is merely a convenient way of alluding to the existing partners Under the registration of Business Names Act, the registrar must be furnished with the following particulars a) The business name b) The general nature of the business c) The principle place of business d) The present Christian name and the surname and any former name and surname of each partner and their residence e) The nationality of each partner f) Any other business occupation of the partner g) The date of the commencement of business RELATIONSHIP OF PARTNERS INTERSE A) GENERAL PARTNER Section 28 of the Act deals with the main items, and contains the following rules; 1. Partners are entitled to share equally in the profits and capital of the business. They must also contribute equally towards the losses, whether these are capital losses or otherwise 2. Every partner must be indemnified by the firm in respect of personal liabilities incurred and payments made by him in the ordinary course of the firm’s business or in respect of anything necessarily done for the preservation of the business or property of the firm 3. Where a partner advances money to the firm, for business purposes, over and above the amount of agreed capital , is entitled to interest on the capital he has subscribed 4. A partner is not entitled, before the ascertainment of profit so interest on the capital he has subscribed 5. Every partner can take part in the management of the firm’s business but no partner is entitled to renumeration of such services 6. No new partne may be introduced without the consent and agreement of all the existing partner 7. Any difference in connection with ordinary matters in the partnership maybe decided by a majority of partners. No chage maybe made in the nature of thye partnership unless all partners consent 8. The books of the partners are to be kept at the principals place of business of the partners and every partner is to have access to them for the purpose if inspecting them or of taking copies LIABILITY OF INVOMMING AND OUTGOING PARTNERS a) INCOMMING PARTNERS Unless a new partner makes a special agreement to the effect that he will take over the liability in respect of firm’s debt at the time of his joining the firm, then he cannot be held liable for such debts. In the absence of such a special agreement the new partner can be held liable only in respect of debts incurred after he become a partner in the firm b) RETIRING PARTNERS Unless there is a special agreement to the contrary, a retiring partner can be held liable only in respect of debts incurred before his retirement. If, however, the business partnership is being continue by the remaining partner of the partnership with or without the addition of a new partner(s), then a retiring partner will be liable in the respect of debts incurred after his retirement, unless notice of his retirement is given. c) DEATH OF A PARTNER On death of a partner, where the partnership is terminated by the event, the private property of the deceased partner is available to the creditors of the firm. First, however, the claims of the private creditors must be met out of the private property. Any surplus remaining goes to satisfy the debts of the partnership which remains unpaid d) LIABILITY OF TORT Where a partner commits a tortuous act, the remaining partners are jointly and severally liable with him, provided they authorize the act either expressly, or by implication where the Act was done within the ordinary cost of the firm’s business: S-14 of the partners Act. e) LIABILITY OF ESTOPPEL Anyone who represent himself or allows himself to be represented, whether by words, writing or conduct, as the partner of another person (a persons), will be liable as a partner with such person (or persons) TERMINATION OR PARTNERSHIPSHIP The articles of partnership will contain a general rule the regulations will regard to the termination of the partnership. In the absence of, subject to, these regulations, the partnership terminates in the following ways: 1. Lapse or effluxion of time When the fixed time (if any) stated in the articles of partnership, or partnership agreement has expired. 2. Performance If the partnership was entered into for one adventure, transaction, or undertaking, by the completion of that adventure, transaction, or When any circumstance arise which render it fair and equitable that the partnership is dissolved. In Re yenidge tobacco co; the partner refuses to speak to each other one partner petitioned the court for a dissolution while was granted. A state of mutual hostility is incompatible with partnership. Authority of partnership The relationship of parters to one another are governed by the Articles of partnership. The partner are not permitted to inspect these articles,the court does not presume that third parties know the content of the articles. Contrast this with the Articles of Associationof a limited company, which can be inspected by anyone. For that reason every partner is deemed to the agent of the firm and of the other partners in the firm. Exceptions 1. If a contract is made by a partner with a third person and that third party is unware of the existence of the partnership, then the other partners cannot be bound, provided they have forbidden the contrasting partner to act for them. 2. If a partner executes a dead, neither the firm nor the other partners will be bound unless the contrasting partner was himself given authority by deed i.e a power of attoney). This is in accordance with law of agency. 3. If the authority of a partner has been cancelled by the other partner, and that particular partner purports to contract with a third party, then the third party concerned cannot hold the firm liable if he knew of the cancellation of authority then the firm can be held liable. 4. If a partner, without special authority, gives a guarantee or signs a bill of exchange, makes or endorses a promissory notes, borrows money or pledges goods in the nature of the firm then the firm will not be bound as these acts are not in the usual course of the business of the firm. With a trading firm, however any partner may bind the firm on bills of exchange, promissory notes, or on a contract to borrow money on behalf of the firm. NB: This applies to trading firms only, i.e firms whose business is the buying and selling of goods. LIMITED PARTNERSHIP By virture of limited partnership Act, the liability of certain partners may be limited to a certain extent. The chief provisions of the Act as follows: a. The numbers of partners in limited partnership is restricted to twenty. b. In a limited partnership there must be one or more general partners who are liable for all debts and other liabilities of the firm. A limited partner is excluded from running the partnership business since he has no right to participate in the management of the firm’s business and if he does he is deemed a’general partner’ in respect of that transaction. A limited partner may ot during the existence of the firm withdraw from the firm his capital contribution. Limited partners consent is not sought when admitting a new partner into partnership. A limited partner does not have the authority to bid the firm as an agent. As such where he transaction behalf of the firm, the unlimited partner attracts personal liability John mule was admitted as a partner to a law firm of two advocates- Adrew mati and Harun Mapeni, three months ago. A ndrew Mati and Harun Mapeni had taken a bank loan of ksh 500 before John Muke joined the firm. The loan repayment is now in areas and the bank has served a demand notice to all the partners and partnership. Explain the legal principles in this case and advice John Mule (10mks) The case relates to the liability or an incoming partner An incoming partner in a partnership is only liable for such debts as are incurred from the date he joined the partnership onwards unless there is a special agreement under which the incoming partner consents to be liable for debts incurred before he joined the partnership. John Mule is therefore not liable for the firm’s debt to the bank since such debt was incurred before he became a partner in the firm of Adrew Mati and Harun Mapesa and there is a special agreement by which he consents to be liable for the debts of the partnership incurred before he joined. Thomas and odadiah intend to a run a business venture jointly. They are however yet to to agree on whether to run the business venture as a partnership or as a private company. Explain the advantages of running the business venture as a partnership rather than as a private limited company (10mks). Formation of partnership is not subject to formalities like private companies Partnership business is run by the owners of the business unlike in private companies which is run by directors Partnerships are not bound into specific business ventures like companies are bound by their object clause. Partnership are cheaper to run sincethey have fewer formalities to coply with unlike private companies Property in a partnership is held jointyly by the partners while a private company property is held by6 the company.