LAW OF AGENCY AND PARTNERSHIP

1.0 AGENCY AND PARTNERSHIP

1 AGENCY

1.1 SOURCES OF AGENCY LAW

The law of agency in Kenya is based on the common law rules which have been developed by the English courts and the Factory’s Act 1989.  The decisions of English courts are the primary reference material for Kenyan courts, and law teachers in Kenya, regarding the principles and rules which constitute the law of agency in Kenya.

1.2 DEFINITION OF AGENCY

There is no statutory definition of agency.  However, "agency" may be described as the legal relationship that arises when a person, called agent, is appointed or entitled to represent another, called the principal, in a transaction with some other person(s).  According to I Halsbury's Laws of England, 3rd Edition, "an agent primarily means a person employed for the purpose of placing the principal in contractual or other relations with a third party and it is essential to an agency of this character that a third party should be in existence or contemplated".

Agency has been defined as a legal relationship that exists between two persons where one called the agent is considered in law to represent the other called the principal in such a way as to affect the principals legal position in relation to their parties.

In the Canadian case of Timmins (Town) v Brewers' Warehousing Co. Ltd (1962) Schroeder, J.A. stated, inter alia, that "the outstanding feature of an agent's employment in a legal sense is that he is employed primarily to bring about business relations between the principal and third persons, and this characteristic is perhaps the most distinctive mark of the agent as contrasted with others not agents who act in representative capacities".

The agent acts in such a way that a contract is created between the principal and the third party who is usually a buyer or seller.

1.3 The law of agency prescribes the legal rules for determining-

(a) How a person may become an agent;

(b) The rights and duties between the agent and the principal;

(c) The relations between the agent and the third party; and

(d) The manner in which the relationship between the agent and the principal may be brought to an end.

It should be noted that the relations between the principal and the third party are governed by the ordinary principles of the law of contract.

1.4 FORMATION OF AGENCY:

An agency may arise in the following ways:

1.        Appointment (Contract)  or agreement

This can be done in any way: orally, in writing or partly orally and partly in writing.

Characteristics of Agency

1. The agent performs a service for the principal

2. He represents the principal

3. Acts of the agent affect the legal position of the principal

Exception

An agent with authority to execute a deed on behalf of the principal must be appointed by a deed called POWER OF ATTORNEY.

Note

A deed is usually required for transactions relating to sale or lease of land.

b. Estoppel

The basis of estoppel was explained by the court in Spiro v. Lintern as follows:

"Where a man is under a duty - that is, a legal duty - to disclose some fact to another and he does not do so the other is entitled to assume the non-existence of the fact".  In the context of the law of agency, a person who is under a legal duty to inform a third party that the person purporting to act for him as his agent is in fact not his agent but fails to do so may be "stopped" from denying that the apparent agent is actually his agent, as in Spiro v. Lintern.

Elements of estoppel

Presentation needed to be acted on reliance upon the presentation

Change in the legal position as a result of the reliance

It would be inequitable to a 3rd party if the agency is not presumed.

Another example of agency by estoppel is the liability of a partner for the debts incurred by the firm after leaving the firm if the parties who knew him to be a partner dealt with the firm without being made aware that he had left it.

100. Ratification

This is the adoption or confirmation by a person of a contract previously entered into                              by another.  

"Ratification" is the legal term which denotes the agency which arises if a person adopts a transaction which someone had concluded for him as his agent but without his express authority.  The person who adopts the transaction becomes a principal as if he had initially authorised it (i.e. the ratification is said to be retrospective) P:  Bolton Partners v. Lambert.

Agency by ratification can only arise if;-

1. The agent purported to act for a principal

2. The alleged principal was in existence at the time the contract was formed:  Natal Land Co. Ltd.  v.  Pauline Colliery Syndicate in which it was held that the purported ratification was ineffective since the company "ratifying" had not been incorporated at the time the contract was formed.

3. The principal had capacity to enter into the contract.

4. The contract to be ratified is lawful.  For example, a company cannot ratify a contract which is beyond the objects in its memorandum of association: Ashbury Rail Co. Ltd. v. Riche  (orbiter dictum by Lord Cairns).

5. The person whose act is to be ratified professed to be the agent of the person seeking to adopt the contract.  In other words, an undisclosed principal cannot ratify a contract:

6. The alleged principal must have been made aware of all the material facts of    the relevant transaction before he decided to adopt the contract.  An apparent ratification which is induced by a partial disclosure of relevant facts is of no legal effect.

7. The contract must be ratified within a reasonable time

d. Necessity

An agency of necessity may be either commercial or domestic:

(i) Commercial Agency of Necessity:

At common law, a person who is entrusted with "perishable"  goods of another is entitled, in certain circumstances, to do certain things in relation to the goods as if he had been expressly authorised to do so by the owner.  This will be so if:

(a) A genuine emergency arises and the goods are in danger of perishing or being destroyed completely unless the contemplated action is taken.

Examples

In Couturier v. Hastie

The captain of the ship had to sell the corn which had become over-heated while the ship was in transit.  The corn would have been destroyed or become commercially useless if not sold immediately.

In G.N. Railway v. Swaffield

The horse might have died from hunger or exposure to extremely cold weather at night if the railway company did not make arrangements for stabling it for the night.

Accordingly, no "necessity" arises if there is no emergency.

In Prager v. Blatspiel Ltd. the defendants were held liable for conversion because there was no "emergency" to warrant the sale of the skins.  Skins do not get destroyed if well kept.

(b)       Impossible to communicate with the owner of the goods.

In Springer v. G. W. Railway the defendants were liable for conversion by selling the tomatoes without the owner's instructions.  The railway company could have communicated with the owner of the tomatoes ad informed him of what was happening so as to obtain instructions on what was to be done, but they did not do so.  No "agency of necessity" therefore arose.

(c) Good faith 

It was actually necessary to do what was done and the action taken was prompted by a desire to prevent the owner of the goods from incurring a financial loss as a consequence of an imminent perishing of deterioration of the goods.

(ii) Domestic Agency of Necessity

A married woman who has been constructively or actually deserted by her husband has authority at common law to take necessities on credit for her personal use but as her husband's agent.  The husband will have to pay for the goods as if he had expressly told her to take them on credit.  

She also has authority in equity to borrow money for the purchase of necessaries.  Her husband will be ordered to pay the loan.  However, she can only take necessaries on credit or borrow money for that purpose if she does not have adequate means of her own.

TYPES OF AGENTS

Broadly agents are either general or special depending on the scope of their authority.  An agent engaged to perform a task in the ordinary course of his business as an agent is deemed general.  An agent is special if engaged to perform a task outside his ordinary course of business as an agent.  However specific agents include:

• Factors

• Brokers

• Auctioneers

• Del credere agent

• Advocates

• Ship captain or master

e. Presumed Agency or from Cohabitation

A woman who is living with a man is deemed to be his agent for purposes of obtaining necessaries for the family; marriage is not essential.

"Necessaries" will depend on the standard of living set by the husband and not on the family's actual income.  An example is Nanyuki General Stores v. Mrs Peterson in which the plaintiffs failed to recover the price of the goods they had sold to the defendant.  They thought that she was contracting with them personally but the court held that she was, in law, contracting for her husband even though she did not tell them so expressly.  They should have implied this from the fact that she was a "Mrs".

Requirements 

Rehabilitation domestic establishment necessaries

This authority is also possessed by a woman who is living with a man ostensible as his wife but is in fact his mistress, because it is practically impossible for the businessman to differentiate a wife from a mistress - that being largely a legal question.

The authority will cease if:

(i) The husband has forbidden the wife to take goods on credit.  It does not matter that the seller was not aware of the prohibition.

(ii) The husband had expressly told the supplier not to supply goods on credit to the wife.

(iii) The wife had been given adequate allowance for necessaries or clothing.  An example is Miss Gray Ltd. v. Cathcart.

(iv) The goods fall outside the technical definition of "necessaries" and are legally regarded as luxuries.

DUTIES BETWEEN PRINCIPAL AND AGENT

1.5 OBLIGATIONS OF THE AGENT

The duties of an agent to the principal are:

(a) Care and skill

.To exercise due diligence in the performance of his duties and to apply any special skill which he professes to have.

"Diligence' primarily means that the agent, when working for the principal, must exert the same effort, or show the same enthusiasm, as he would have exerted or shown when acting in his own affairs.

An agent appointed to sell must endeavour to obtain the highest price possible, while an agent appointed to buy must endeavour to buy at the lowest price possible.  For an illustration, read:  Kepple v. Wheeler.

(b). Account 

To render an account when required in those cases where the agency entails keeping of an account by the agent.

(c). Estoppel/respect for principals’ title

Not to become principal as against his employer or principal.  In particular, an agent appointed to buy property must not sell his own property to the principal and an agent appointed to sell must not buy the property:  Armstrong v. Jackson.

(d). Obedience  

(e). Bonafide

(f). Separate accounts

(g) Keep the principal informed

A breach of the duty renders the contract voidable at the option of the principal.

(h). Not to make any secret profit :If he does:

(i) The principal may recover the amount of the secret profit from him.

(ii) The principal may refuse to pay him the agreed commission e.g. Andrews v. Ramsay & Co.

(iii) The principal may dismiss him without notice, if notice is required to terminate his agency.

(iv) The principal may sue the agent receiving and the third party giving the secret payment for damages suffered.

(v) The principal may repudiate the contract, whether or not the secret payment had effect on the agent.

i. Personal performance of non-delegation

Not to delegate his authority, unless the delegation is in the ordinary way of business or is authorised by the principal. This rule is expressed in the Latin maxim "delegatus non potest delegare".

j Confidentiality

k. Not to disclose any confidential information or document entrusted to him by the principal.

Performance

1.6 DUTIES OF THE PRINCIPAL:

The duties of the principal to the agent are:

a Remuneration 

To pay the agreed commission when it becomes due, strictly in accordance with the terms of the contract of agency.  (An agent in possession of the principal's goods may retain the goods as security for payment of outstanding commission.  This is called a lien (general or particular) but it does not confer power of sale of the goods in question).

b Indemnity

To indemnify the agent by refunding to him any out of pocket expenses personally incurred in the bona fide execution of his mandate. e.g. Great Northern Railway v. Swafield.

CONCEPT OF AUTHORITY

This is the oral or written permission conferred upon a person by another to do a particular thin.  It is a factual concept and may create power.  Power on the other hand is the ability of the agent to affect the legal position of the principal in relation 3rd parties.  It is a legal concept and exists independent of authority.  However, in agency law, the terms ‘authority’ and ‘power’ are sometimes used synonymously particularly with regard to the scope of the agency relationship.

There are three types of authority namely;

1. Real or factual

This is the authority, which in fact is given to the agent by the principal.  It may be by word of mouth or in written.  This authority may be:

1. express  

2. implied

3. customary or usual

2. Obstensible or apparent

This is the authority which in fact the agent has not been given by the principal but which he appears to have by reason of the principal’s conduct.  It is based on the conditions of the principal such that conduct determines scope.  It is the authority exercised by an agent create by estoppel.

3. Resumed authority

This is the authority which the law deems the agent to have.  It is conferred upon the agent by law.  It is not given by the principal nor is it based on the principals’ conduct.  It is the authority exercised by agents of necessity and from cohabitation.

1.7 Relations between agent and the third party.

The legal effects of agency depend on whether or not the agent acted for a "disclosed principal".

1. If the agent acted for a disclosed principal by informing the third party that he was an agent acting for a principal (whether named or unnamed) the general rule is that he drops out of the transaction as soon as his offer has been accepted or conversely, he has accepted the third party's offer.

He is not personally liable under the contract and cannot personally enforce it in the event of its breach.  Only the principal can sue or be sued thereunder.

Exceptions

An agent would be personally liable if:

(a) He executes a deed in his own name: Appleton v. Binks (1804)

principal does not exist or has no capacity.

(b) He signs a bill of exchange in his own name without indicating that he is acting as an agent.

(c) He contracts as agent but is in fact a principal.

(d) If the custom of particular trade makes him liable.

If an agent lacks authority or exceeds his authority (express or implied) he will be liable to the third party for "breach of warranty of authority": Yonge v. Toynbee (1910).

2. If the agent acted for an undisclosed principal (i.e. a principal whose existence the third party was unaware of because the agent did not say that he was contracting as agent):

(a) If the third party fails to perform the contract he may be sued by either the agent or the principal (but not both).

(b) If the contract is breached by the principal the third party may:

(i) sue the principal, or  

(ii) sue the agent.  He cannot sue both, and cannot abandon proceedings against one in order to sue the other.

1.8 Termination of agency

An agency relationship may come to an end by:

1. Mutual agreement, or consent

2. withdrawal of consent

3. Performance,

4. Bankrupcy of the principal

5. Frustration

6. Death of the principal (it being irrelevant that the agent was unaware of the death): Kennedy v. Thomassen.

7. Insanity of the principal: Yonge v. Toynbee.

8. Lapse of time

2 PARTNERSHIP LAW

Section 3(1) of the Partnership Act defines partnership as:

"The relation which subsists between persons carrying on a business in common with a view to profit".

Elements of the definition

1. It is an association of persons

2. There must be a "business" carried on.  The term "business" has a wide meaning and is not confined to commerce, but covers solicitors, accountants, estate agents, etc. as well.

3. The business must be carried on "in common".  The partners should jointly participate in the running of the business though a person may be a sleeping partner.  For this purpose, a partner is regarded as an agent of the other partners.

4. The business must be carried on "with a view to profit".  It is not necessary that a profit actually be made, but that the business be run with the object of making one.  This provision excludes charitable organisations.

2. Rules for Determining whether a Partnership exists

The sharing of profits is prima facie evidence of partnership, but this evidence can be refuted and the Court will not readily hold a person to be a partner on this evidence alone.  Not only must he share in the profits, but he must act as a partner, or the business of the firm must be carried out on his behalf or on his instructions.

In the case of Cox v. Hickman, a debtor assigned his business to trustees for the benefit of his creditors.  The business was carried on by the trustees in order to pay off the creditors out of the profits of the business.

It was held that "the real test of partnership liability is not participation in the profits, whether trade is carried on by persons acting as the agents of the persons sought to be made liable, and that the creditors were not partners in the business."

In all cases, the ultimate test will be the intentions of the parties, and whether or not they intend to have the rights of partners "inter se".  If they do, they will be partners, and liable as such, even if the agreement expressly stipulates that they are not partners.

Section 2 of the Partnership Act lays down the chief rules for determining whether or not a partnership really exists. These rules are as follows:

(a) Joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership, irrespective of whether the tenants or owners share any profits made by them.  This is because no business if carried on.

(b) The sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right of interest in any property from which the returns are derived.  Technically, "gross returns" are not profits.

(c) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business; but the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him a partner in the business, and in particular:

(i) The receipt by a person of a debt or other liquidated amount by instalments, or otherwise , out of the accruing profits of a business does not of itself make him a partner in the business or liable as such.  This is so because he is a creditor.

(ii) A contract for the renumeration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such.  This is because the person is an employee.

(iii) A person, being the widow or child of a deceased partner and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such.

(iv) The advance of money by way of a loan to a person engaged or about to engage in any business, or a contract with that person that the lender shall receive a rate of interest varying with the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying out the business or liable as such.  Provided that the contract is in writing, and signed by or on behalf of all the parties to it.  This is so because he is a creditor.

(v) A person receiving by way of annuity or otherwise a portion of the profits of a business, in consideration of the sale by him of the goodwill of the business, is not by reason only of such receipt a partner in the business or liable as such.  This is so because be is a seller of goodwill.

2.2 FORMATION AND THE PARTNERS

The Partnership Act does not prescribe rules for the formation of a partnership.  Consequently, a partnership may be formed :

(a) Orally; or

(b) Simply by the actions of the persons concerned, if the y are acting as if they were partners; or

(c) By simple agreement in writing; or

(d) By a deed i.e. an agreement under seal, signed by the persons who agree to become partners.

2.3 Capacity to Become a Partner

Capacity to enter into partnership is co-extensive with capacity to contract.  An infant may enter into a contract either before or within a reasonable time of reaching the age of 18:  Partnership Act, S.13

A corporation may enter into a contract of partnership provided such act is within the powers if its Memorandum of Association, and such a partnership may be with an individual or with another corporation.

2.4 Illegal Partnerships; Number of Partners

A partnership will be illegal in the following circumstances:

(a) If it is formed for an illegal purpose, such as a purpose which is contrary to public policy.

(b) Where it consists of more than 20 members.

By virtue of Section 389 of the Companies Act, no association consisting of more than twenty persons shall be formed for the purpose of carrying on a business with a view to profit unless it is registered as a company under the Act, or is formed in pursuance of some other Act of Parliament or of letters patent. For the effects of a breach of this provision, read Fort Hall Bakery Supply Co. v. Wangoe.

2.5 The Firm Name

Legally, the firm name is merely a convenient way of alluding to the existing partners.  An authority to lend to a firm does not authorize a loan to that firm, when the partners have changed.  But copyright can be registered in a firm name; the firm name will be protected; partners can sue or be sued in the firm name, though they must appear in person.

Every firm having a name which does not disclose the true surnames of all partners, must be registered under the Registration of Business Names Act.  In the case of such firms, the full names of all partners must be printed on every catalogue, show card, circular and business letter sent out by the firm.  Also, if any partner is not a Kenyan, his nationality must be shown.  If he has been naturalized, his original nationality must be shown.

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 principal place of business.

(d) The present Christian name and surname and any former name and surname of each partner, and their usual residence.

(e) The nationality of each partner.

(f) Any other business occupation of the partners.

(g) The date of the commencement of business.

2.6 RELATIONSHIP OF PARTNERS INTER SE

1. Various terms are in use to denote the different kinds of partners.  The most important of these terms are as follows:

(a) A General Partner

One who not only actively participates in the business, but who also can be held liable for the total debts of the firm.  He is a partner in the fullest possible sense of the word.

(b) A Limited Partner

One whose liability is limited to the amount of capital he has invested in the firm.  He takes no part in the management of the business, and if he does, will lose his "limited liability" in respect of that transaction.

(c) An Active Partner

One who takes an active part in the affairs of the partnership.

(d) A Sleeping Partner

One who does not take any active part in the affairs of the firm.  He will have capital invested in the business, but always remains in the background himself.  Such a partner is also known as a dormant partner.

2.7 The Articles of Partnership

Although a partnership need not be formed by written agreement, it is usual for `Articles of Partnership' to be drawn up, signed by all the partners.  Such Articles will govern the relationship of the partners "inter se" and will constitute a contract between them.

The Articles of Partnership will generally contain the following eleven clauses:

(a) The nature of the business.

(b) The capital and property of the firm, and the respective capitals of each partner.

(c) The sharing of profits and losses.

(d) The rules as to interest on capital, or drawings.

(e) The provision for proper accounts, and the auditing thereof.

(f) The powers of each partner.

(g) The grounds for dissolution.

(h) The method of determining the value of goodwill on retirement or death.

(i) The method of computing the amount payable to an outgoing or deceased partner.

(j) The power of expulsion.

(k) The arbitration clause.

2.8 Statutory Provisions in Applicable in the absence of a deed

It has been stated that the rights and relations of partners to one another are governed by the contents of the Articles of Partnership."  If any point is not dealt with in these Articles, then the Partnership Act applies.  Section 28 of the Act deals with the chief items, and contains the following rules:

(a) Partners are entitled to share equally in the profits and capital of the business.  They must also contribute equally toward the losses, whether these are capital losses or otherwise.

(b) 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.  This is a partner's right as an agent of the firm.  

(c) Where a partner advances money to the firm, for business purposes, over and above the amount of his agreed capital, is entitled to interest on the capital he has subscribed.

(d) A partner is not entitled, before the ascertainment of profits, to interest on the capital he has subscribed.

(e) Every partner can take part in the management of the firm's business, but no partner is entitled to remuneration for such services.  Where, however, extra work has been caused by the actions or conduct of a certain partner, then, as a general rule, other partners are entitled to some remuneration in respect of this extra work.

(f) No new partner may be introduced without the consent and agreement of all the existing partners.

(g) Any difference in connection with ordinary matters in the partnership may be decided by a majority of the partners.  No change may be made in the nature of the partnership unless all the partners consent.

8. The books of the partnership are to be kept at the principal place of business of the partnership and every partner is to have access to them for the purpose if inspecting them, or of taking copies.

UTMOST GOOD FAITH

A partnership is a contract of the utmost good faith.  Each partner is entitled to utmost gaviness rom his co-partners. This equitable principle is manifested in the following ways.

1. A partner must mot without the other partners engage in any business in direct competition with the firm’s business.

2. A partner can only be expelled from the firm in good faith

3. Any secret profit made must be accounted to the firm

4. A partner must disclose any personal interest in contracts entered into on behalf of the firm.

2.9 Assignment of Share in Partnership 

As has been stated, no new partner may be introduced without the consent of all other partners, and accordingly no partner can assign to another person his position as partner in the firm.  He may, however, unless the Articles of Partnership contain a clause to the contrary, assign the right to receive his share of the profits of the business.

Such assignment may be absolute or by way of redeemable charge or mortgage to a third party.  The assignee however, takes the partnership share subject to the rights of other partners and of the partnership creditors of the assigning partner.

The assignee may take no part in the management of the firm and is not entitled to inspect the books or accounts of the partnership.  He is merely entitled to receive that share of the profits which would otherwise have gone to the assigning partner.  As to how this share is arrived at, the assignee must accept the accounts as prepared by the continuing partners.  In the event of winding-up of the firm, the assignee is entitled to receive that share of the assets which otherwise would have gone to the assigning partner.

Note that the assignment, by a partner, of his share in the partnership is not, of itself, a reason for dissolving the partnership.  This, of course, is subject to any clause to the the contrary which may be contained in the Articles of Partnership.  In the event of a partner allowing his share to be charged, under a Court Order, for his private debts (i.e. a compulsory charge), the other partners may terminate the partnership.

2.10 PARTNERSHIP PROPERTY

Partnership property comprises all property originally brought into the partnership or acquired for the purposes of the firm's businesses.  Not all property used by the firm is necessarily partnership property but may be the private property of one of the partners; prima facie, however, property bought with money belonging to the firm will be deemed to be partnership agreement.

Although the partner may claim a 'share' in the partnership property (prima facie, an equal share), the property is indivisible and must be regarded as held on trust for sale, the partners' entitlement being to share in the proceeds of sale.

Partnership property cannot be made the subject of a writ of execution issued against an individual partner in respect of his private debts (though it may be charged on a writ of execution made against the firm).  The Court can, however, make an order whereby an individual's interest in the firm can be charged for the benefit of his creditors, which will operate as a compulsory assignment of that partner's share as described above.

2.11 AUTHORITY OF PARTNERS

1. Articles of Partnership

The relations of partners to one another are governed by the Articles of Partnership.  As third parties are not permitted to inspect these Articles, the Court does not presume that third parties know the contents of the Articles.  (Contrast this with the Articles of Association of a limited company, which can be inspected by anyone).  For that reason every partner is deemed to be the agent of the firm  and of the other partners in the firm.  This, is the rule no matter what the Articles of Partnership may state with regard to the relation of partners to one another.

2. Exceptions:

The rule just stated is a general rule, of course, and there are a few exceptions to it.  The chief of these exceptions are as follows:

(a) If a contract is made by a partner with a third person and that third person is unaware of the existence of the partnership, then the other partners cannot be bound, provided they have forbidden the contracting partner to act for them.

(b) If a partner executes a deed, neither the firm nor the other partners will be bound unless the contracting partner was himself given authority by a deed (i.e. a power of attorney).  This is in accordance with the Law of Agency.

(c) If the authority of a partner has been canceled by the other partners, 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.

(d) If a partner, without special authority, gives a guarantee or signs a bill of exchange, makes or endorses a promissory note, borrows money, or pledges goods - in the name 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.  Remember that this applies to trading firms only, i.e. firms whose business is the buying and selling of goods.

Higgins v. Beauchamp: Beauchamp and X carried on a partnership business as owners and managers of cinemas.  The articles of partnership forbade the partners to borrow money on the firm's behalf.  X borrowed money from Higgins on the firm's behalf.  The firm was held not liable, as it was not a trading firm; X had therefore no implied authority to borrow on the firm's behalf. 

3. Ostensible Authority

A distinction is something drawn between the actual and ostensible authority of a partner.  Actual or express authority is that conferred upon a partner by the terms of a partnership agreement.  Ostensible or apparent authority is that with which a partner is vested by virtue of his status as a partner.  Apart from any express authority, the law assumes that a partner has an ostensible authority to carry out all acts necessary for transacting the business of the firm in the usual manner employed by businesses of the same nature as that of his particular firm.

2.12 LIABILITY OF PARTNERS

1. General

The liability of a general partner extends to the whole of the debts of the partnership.  He is jointly with the other partners.  For this reason a creditor can pursue one of two courses.

Firstly, he can proceed against the partners jointly i.e. in the firm name.  If he obtains judgement against the firm, the debt must be satisfied out of the assets of the firm.  If, however, the assets of the firm are insufficient, then the creditor can look to the private assets of the partners in order to satisfy his debt.

Secondly, the creditor can proceed against any individual partner.  If he obtains judgement against a certain partner and this judgement cannot be satisfied out of the private property of that partner, then the creditor cannot proceed against the remaining partners.

The creditor must pursue either one course or the other.  If he pursues the second course described above, the partner against whom the judgement is obtained will be liable to pay the full amount.  He has a right to call upon the other partners, however, to  contribute the shares which they should bear.

2. Liability of Incoming and Outgoing Partners

(a) Incoming Partners

Unless a new partner makes a special agreement to the effect that he will take over the liability in respect of the firm's debts at the time of his joining the firm, them 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 became a partner in the firm: Section 21(1).

(b) Retiring Partner

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 of the partnership is being continued by the remaining partner of partners with or without the addition of a new partner or partners, then a retiring partner will be liable in respect of debts incurred after his retirement, unless notice of his retirement is given.  Considering (a) and (b) together, it is important that you should know that an agreement may be made between the creditors and the firm whereby the former agree to discharge a retiring partner from all liability: S.2 (iii).  However, there must be valuable consideration to support such an agreement. The mere agreement of the remaining partners to be held liable for all debts is not sufficient for this purpose, as they are already liable.  Where a new partner is introduced, however, and he agrees to be held liable for all the firm's debts (including the debts incurred before his introduction) then this will be considered as a valuable consideration.  Remember, however, that these rules apply only to express agreements with creditors.  Such an agreement is almost impracticable except in cases where the number of creditors is small.

Death of a Partner

On the 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 remain unpaid.

Liability in Tort

Where a partner commits a tortious act, the remaining partners are jointly and severally liable with him, provided they authorised the act either expressly, or by implication, where the act was done within the ordinary course of the firm's business: S. 14.

For instance, in the case of Hamlyn v. Houston & Co. a partner in a firm bribed the agent of another firm for the purpose of obtaining useful information for the partnership.  It was held that his co-partners were jointly and severally liable, since the obtaining of useful information was in the ordinary course of business.

Liability by Estoppel

Anyone who represents himself or allows himself to be represented, whether by words, writing or conduct, as the partner of another person (or persons), will be liable as a partner with such person (or persons).

Where, however, after a partner's death, the partnership business is continued in the old firm-name, which include the deceased partner's name, it will not of itself make the deceased partner's estate liable for any debts contracted after his death.

2.13 TERMINATION OF PARTNERSHIP

The Articles of Partnership will contain, as a general rule, the regulations with regard to the termination of the partnership.  In the absence of, or subject to, these regulations, the partnership terminates in the following ways:

(a) lapse or effluxion of time

When the fixed time (if any) stated in the Articles of Partnership, or partnership agreement, has expired.

(b) Performance

If the partnership was entered into for one adventure, transaction or undertaking, by the completion of that adventure, transaction or undertaking.

(c) At will

If the partnership is a partnership "at will" (i.e. for no fixed period), by one partner giving notice to the remaining partner or partners, of his intention to terminate the partnership.

(d) Consent 

By the mutual consent of all the partners.

(e) Bankruptcy

By the bankruptcy or death of any partner.

(f) Changing of a partner

If a partner allows his share to be charged under a Court Order for his private debts.

(g) Illegality

If any event occurs which makes the business of the partnership illegal.  This rule applies, irrespective of the contents of the partnership agreement which is "frustrated".

2. Dissolution by the Court

Section 39 of the Act prescribes the circumstances which the court will decree the compulsory dissolution of a partnership.  They are:

(a) Lunacy or unsoundness of mind

If a partner becomes a lunatic or of permanently unsound mind.

(b) Permanent incapacitation

If a partner becomes permanently incapable of performing his partnership duties.

(c) Prejudicial acts of a partner

Where a partner has acted in a manner which is prejudicial to the carrying on of the firm's business, and his continued association with the firm would bring the firm's name into disrepute.

(d) Wilful and continuous breach

Where a partner is guilty of a wilful breach of the partnership contract.

(e) Losses

When the firm's business can carried on only at a loss.

(f) Just and equitable

When any circumstances arise which render it fair and equitable that the partnership is dissolved.  In Re Yenidge Tobacco Co., the partners refused to speak to each other; one partner petitioned the Court for a dissolution, which was granted.  A state of mutual hostility is incompatible with partnership.

3. Recovery of Premium: S. 44

Where one partner has paid a premium to another on entering into a partnership for a fixed term, and the partnership is dissolved  before the expiry of the term, otherwise than by the death of a partner, the Court may order the repayment of such part of the premium as it thinks just.  The Court will have regard to the terms of the partnership contract and the length of time during which the partnership has continued.  In the absence of special circumstances, the proportionate part to be returned is that amount which bears the same ratio to the original premium as the unexpired term bears to the original term.

The partner has no claim to repayment:

(a) If the dissolution is, in the opinion of the Court, due wholly or chiefly to his misconduct; or

(b) If the partnership is dissolved by an agreement containing no provision for a return of any part of the premium.

4. Distribution of Assets 

As a general rule the Articles of Partnership contain full regulations as to the rights of partners in an dissolution.  In the absence of such provisions, however, the following will apply:

The assets or property of the firm must be applied in paying off the creditors of the firm.  The assets remaining are to be applied in paying off the partners the amounts which are due to them, as partners (Section 39).  The assets of the partnership, together with any amounts contributed by partners to make up a deficiency, are to be distributed as follows:

(a) In paying off all creditors of the firm who are not partners.

(b) In paying off rateably any loans made by partners to the firm - such loans being distinguished from capital.

(c) In paying rateably to the partners the amounts due to them in respect of capital.

(d) If any surplus remains it is to be shared among the partners in the proportion in which they share profits (Section 48).

The rule in Garner v. Murray: Three partners, G, M and W, agreed to contribute in unequal proportions to the partnership capital and to share profits equally.  There was a loss on realisation, and, on the dissolution of the partnership, W, being insolvent, could not make good the deficiency on his capital account.  It was held that G and M, before being paid rateably what was due to them in respect of capital, must each contribute an amount to make good the deficiency of W, in proportion to the last agreed balance on their capital accounts.

2.14 LIMITED PARTNERSHIPS

By virtue of the Limited Partnerships Act, the liability of certain partners may be limited to a certain extent.  The chief provisions of the Act are as follows:

(a) The number of partners in a limited partnership is restricted to twenty.

(b) In a limited partnership there must be one, or more, general partners who are liable for all the debts and other liabilities of the firm.

(c) In addition to the general partner or partners, there will be one or more limited partners.  Limited partners are persons who, at the property taken at a certain value, as capital, and are not liable for the debts and other liabilities of the firm beyond the amount of this contribution.  This form of "limited liability" has a different meaning from that which prevails in registered companies.

(d) Concerning the Capital of the partnership, a limited partner cannot, during the lifetime of the firm withdraw or receive back from the firm his contribution or any part of it.

(e) The death or bankruptcy of a limited partner does not cause the dissolution of a limited partnership.

(f) Similarly, the lunacy of a limited partner is not a cause of dissolving a limited partnership, unless the share of that partner cannot be separated from the assets of the firm by any other method.

(g) A limited partner has no right to participate in the firm's management.  If he does, he will be deemed to be a "general partner" with the consequent "unlimited liability" - in respect of transactions that he engaged in.

The Partnership Act and the general rules of partnership law apply to limited partnership, except where these do not agree with the Limited Partnership Act, in which case the rules laid down in the latter Act over-ride those laid down in the former.