Partnerships Law

 ESSENTIALS OF A PARTNERSHIP

It is a question of fact depending on whether a partnership is or is not established. In order to determine whether all people who are involved in a partnership are actually partners, we must ascertain the necessities of a partnership.  The two essential ingredients to determine this fact are the rules governing a partnership and the circumstances.
It is sufficient to note that a partnership can arise by implying an agreement from an association of events as well as from an express contractual agreement and the question of whether or not a partnership has been established can crop up in such varied areas such as property law, employment law, taxation, insolvency, the statutory powers of corporations, as well as making a person liable for the debts incurred by another.
In a partnership, all general partners share all profits equally, as well as the losses if any are suffered. The partners may agree among themselves to a different distribution, but each remains fully liable without limit to outside creditors for debts owed by the firm.
The agreement of the partners need not be in writing unless it is required by law. For example, it may be required by law if two persons agree at the time they form a partnership that it is to last for longer than one year, their agreement must be in writing and signed by both the persons to be enforceable by both. If the persons do not agree on a specific length of time for their partnership to continue, their agreement need not be in writing. After all, the contract could be performed within one year, even though it could last for many years. The time, resources and detail, involved make it highly desirable to reduce every partnership agreement to a signed writing, preferably with the assistance of a lawyer. This encourages thoughtful review of the many potential problems of the new business. It also helps to avoid future costly controversies by spelling out rights and duties of partners in advance. The resulting document is known as the partnership agreement.
A partnership combines the capital, labor, skill and knowledge of two or more persons. Often the resulting combination serves to multiply the strength of the parties: one plus one equals three or more in talent and productivity. Unique abilities can be developed and utilized through specialization; bigger projects become manageable.
Because of their close relationship and ability to bind each other legally in contracts and torts involving third parties, partners should be selected with painstaking care. If possible, one should choose as partners only persons who are socially compatible, financially responsible, ethical and morally trustworthy, professionally competent, physically fit and willing to work hard.
In simpler words, the rules for determining the existence of a partnership must be looked at when there is a dispute over the existence of a partnership, the main test is the application of the definition.
Thus we must first look at the definition of a partnership and the rules of a determining the existence as highlighted in Section 4 of the Partnership Act, Cap 29.
Section 3 (1) of the Partnership Act, Cap 29 provides the following:-
“The relation which subsists between persons carrying on a business in common with a view of profit.”
This definition highlights that a partnership exists only if:
A) There is a business.
B) Carrying on business ‘  in common’.
C) A profit motive.
These three are most important ingredients for making a partnership, without which a partnership cannot exist as highlighted in Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd.
It must be important to point out that all partners share all losses and all the profits equally. Even though, the partners may agree among themselves to a different distribution, but each remains fully liable without limit to outside creditors for debts owed by the firm as highlighted in the Baird’s Case.
Sharing of gross revenues or net profits may not necessary make one to be a partner in the firm as this may only be a method of paying one rent or salary.
Section 4 of the Partnership Act (Cap 29)  provides that 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 or interest in any property from which the returns are derived. Technically, ‘gross returns’ are not profits.
A) THERE IS A BUSINESS.
It is not every occupation which can be called a business. Unlike companies, partnerships cannot be formed for benevolent or artistic purposes.  In simple words, this term is limited to what are recognized among business men as commercial and professional business i.e. callings in which men hold themselves out as willing to sell to all consumers, goods or skilled assistance or other service.
 For instance, a landowner does not carry on a business, although the management of his estate and the collection of his rents may be his only serious occupation, and may cause him to be an extremely busy man. So two joint owners of an estate, or even of a chattel, such as a ship, are not (as such) partners, although they may use their best endeavours to develop the land and let or use the joint property for their mutual profit, unless they go further and carry on a business with respect to it.
In simpler words, in order to ascertain whether there a partnership actually exists and nit a business,  it is essential to see whether all the alleged partners have control over the property or ultimate management control.  For example in the case of Saywell v Pope highlighted below none of the two had these.
On similar principles, the members of a society formed to purchase investments for the common benefit of the members ( sometimes called trust companies) are not partners, because as pointed out by James, L.J., in Smith v Anderson ( 1880) 15 C. D. 247 nothing to be done by such societies “ comes within the ordinary meaning of ‘business’, and more than what is done by the trustees of a marriage settlement, who have large properties vested in them, and who have very extensive powers of doing things such as disposing the investments.
If however, the owners of a ship not only let it, but use it in the business of carriers of goods and passengers, they become partners, at all events, qua that business. And so, if a society were formed to speculate in investments, with a view to make profits by buying and selling again securities whenever, in the opinion of the management, the turn of the market should make it advisable to do so, then, no doubt, a partnership would exist, because that would be a business-a buying and selling of property with a view of profit as distinguished from joint or common ownership.
B) CARRYING ON BUSINESS ‘  IN COMMON’.
Let us now proceed to the consideration of the second essential to partnership, that the business must be one which is carried on “ with a view to profit.” By profit is meant net profit- that is to say the difference between the gross returns and the outgoings of the business. In simpler words, profits calculated after accounting for the expenses incurred in making them. Thus where a publisher agrees to pay the author one-third of the gross sales of the book, that is not such a sharing of profits as would even prima facie raise a presumption of partnership and the same remark applies to the letting of a theatre upon the terms of the owner receiving half the amount paid by the audience for the seats as highlighted in the case of Lyon v. Knowles, (1863) 3 B. S. 556 As highlighted by Section 4 of the Partnership Act ( Cap 29) “ 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 interest in any property form which the returns are derived.”
Another important case to note here is Strathearn Gorden Associates Ltd v Commisioners Of Customs & Excise, (1985) VATTR97. In that case, the company acted as a management consultant and was paid fees plus a share of the profits of seven separate developments. It argued that these were receipts of a partnership carrying out various developments and the company was not supplying services for the purposes of VAT. The VAT Tribunal rejected this argument. The parties had not made any agreement to carry on a business together. What the company actually agreed to do was to supervise the carrying out of the work and in essence that was an agreement for the provision of services. The mere fact that the consideration was measured by reference to a share in the profits was not enough to convert it into a partnership. In other words they were not involved in the business; they simply provided services for the business.
A franchise agreement would also not amount to a partnership as highlighted in Longhorn Group (Pty) Ltd v Fedics Group (Pty) Ltd 1995 SA 836 (W).
Another example can be found in the case of Cox v Coulson (1916) 2 KB 177, CA. Mr. Coulson was a theatre manager who agreed with Mr. Mill to provide his theatre for one of Mill’s productions. Mr. Coulson was to pay for the lighting and the posters etc., Mr. Mill to provide the company and the scenery. Under the agreement Mr. Coulson was to receive 60 percent of the gross takings and Mr. Mills the other 40 %. The play must have been heady stuff since the plaintiff in the case was shot by one of the actors during the performance. She sought to make Mr. Coulson Liable on the basis that he and Mr. Mill were partners and so responsible for the outrage. The Court of Appeal had little difficulty in rejecting any claim based on partnership as it was clear that the sharing of gross returns did not create such a partnership.
Although, sometimes even if net profits are given it does not necessarily mean that the parties are in a partnership. This has been highlighted in Walker v Hirsch ( 1884) 27 Ch D460. Walker was employed as a clerk by two partners and he agreed with them that in return for his advancing of 1,500 pounds to the firm he was to be paid a fixed salary for his work in the business and to be entitled to one-eight of the net profits and be liable for one- eight of any losses. The agreement could be determined by four months’ notice on either side. Walker continued to work as he had done before the agreement and was never represented to the customers as a partner. The partners determined the agreement and excluded him from the premises. He now asked for a dissolution of the firm on the basis that he was a partner. The Court of Appeal decided by reference to the agreement and those famous surrounding circumstances that this was not a partnership agreement but simply a contract of loan repayable where he left the firm’s employment.
PARTICIPATION IN THE BUSINESS
If there is no joint participation in the common business, there can be no partnership as highlighted in Saywell v Pope (1979) 53 TC 40.
In that case, Mr. Saywell and Mr. Prentice were partners in a firm dealing in and repairing agricultural machinery. In January, 1973 the firm obtained a marketing franchise from Fiat which expanded the work of the firm. Until that time, Mrs. Saywell and Mrs. Prentice had been employed by the firm  to do a small amount of work but they then began to take a more active part in the business. At the suggestion of the firm’s accountant, the firm four drew up a written partnership agreement but this was not signed until June 1975. The bank mandate in force before 1973 enabling Mr Saywell and Mr Prentice to sign checks was however, unchanged, and no notice of change in the firm was given to the bank or the creditors or customers of the firm. Neither of the wives introduced any capital into the business and had no drawing facilities from the partnership bank account. A share of profits was credited to them in 1973, and 1974 but they never drew on them.
In April 1973 the wives had been informed that if they became partners they would become liable for the debts of the firm and they had not objected. The Inland Revenue refused to accept that the wives had become partners before 1975.
Slade J agreed with the Revenue. The written agreement could only apply from the date it was signed and even though it contained a statement that the partnership had actually begun earlier that could not make them partners during that period unless that was the true position. There was no evidence that in 1973, the parties had contemplated such an agreement and neither the partnership agreement not the discussion of liability could be taken as creating an immediate partnership.  There was no evidence that during the relevant time they did anything in the capacity of partners. Even though there was a business, and a ‘ sharing’ of profits no partnership existed since in effect the wives had never been integrated into the firm.
NOTE
Although, if there is a participation in a business those involved will be partners even though they have drawn up the formal agreement to that effect. Thus in Kriziac v Ravinder Rohini Pty Ltd, (1990) 102 FLR 8, an agreement to redevelop a hotel site with a formal agreement to be executed in due course was held by the Australian Court to establish a partnership prior to that agreement ( which never happened) because of the evidence of participation in a business such as creation of a joint bank account, the joint engagement of an architect, and the joint application for planning permission.
REFINING THE QUESTION
Sometimes the difficulties of ascertaining whether a partnership exists become easier if the question asked is:- if they are not partners, what are they? The answer will usually be either a debtor or a creditor or employer or employee.
SELF- EMPLOYMENT AND EMPLOYEES
The concepts of partnership and employment are mutually exclusive. Because a partnership is simply the relationship between partners no partner can be employed in the business since he cannot employ himself.
Partners are by definition self-employed. An employee is not a trader and thus cannot be a partner and the distinction is the common one between a contract of service and a contract for services as highlighted in the case of E Rennison below.
This contrasts with the position of a ‘ one man’ company where it is possible for a sole director as the authorized agent to employ himself in the company’s business in some capacity or other. Please look at Lee v Lee’s Air Farming Ltd (1961) AC 12, PC.
Of course, it is perfectly possible, and very common, for a partnership to employ people. All the partners have the authority to make contracts in the course of partnership business and employing people is clearly such a contract.
In simpler words, the most important thing to bear in mind is that a partner cannot employ himself- a person involved in the work of a business is either a partner ( and so self- employed and taxed as such) or an employee ( and taxed as such).
In order to distinquish between an employee and a partner- it can be noted that an employee would have no apparent or implied authority to bind the firm with his acts.
The concepts of trade and profession are well known to income tax lawyers and two difficulties arise which have arisen in the context in partnership law, to the distinction between the self-employeed trader or professional man and an employee, and the status of a single commercial venture.
CASE- E Rennison & Son v Minister of Social Security (1970) 10 KIR 65
A firm of solicitors employed various clerical staff. In 1966 the staff entered into contracts with the firm which described them as self-employed, being paid at hourly rates and having the right to hire out their services elsewhere. In 1967, the staff entered into a ‘written partnership’ agreement, the partnership business to be carried out at the office or elsewhere, the profits and losses to be divided among them on the terms agreed, and with provision for other items such as the keeping of accounts and retirement. In fact the staff continued to work exactly as before at the same rate of hourly pay- payment being made in a weekly sum to one of the staff who then divided it out. The question arose as to whether the staff were employees for national insurance purposes, or in legal terms, whether they were employed under a contract of service. Bridge J, decided that the staff had never changed their original roles. The 1966 contracts were found to be contracts of service and the partnership agreement did not affect them. The method of paying a lump sum to the ‘ partnership’ was not more than an agreement about the method of paying the amounts earned under the contract of service.
The judge did not therefore have to  decide whether a contract of two partnerships could be a contract of service or in other words, whether one partnership can employ another partnership. Because partnerships can only exist to carry on a business the answer ‘yes’ would have to imply an employment could be contracted in the course of carrying on the business of an employee partnership. There is some support for that proposition in the tax case of Fall v. Hitchen (1973) 1 WLR 286, and it is accepted that, for example, a firm of accountants who act as auditors of companies are theoretically to be taxed on the receipts of such offices as office holders and not as part of their business.
In Firthgrow Ltd v Descombes, 19 January 2004, EAT- it was accepted that once a partnership was accepted as being genuine, its members could not be employees.
Another example is a South African Case- Purdon v Miller (1961) 2 SA 211- The parties entered into an agreement concerning the cultivation of a farm owned by Purdon as a pineapple plantation. Muller was to carry out the cultivation and reside on the farm. Following a dispute between the parties it became necessary to decide whether they were partners or employer/employee. It was held that a partnership had been established because the parties were to share equally the profits and Muller was expressed to have an interest in the pineapples. The fact that until  the farm made a profit Muller was to be paid a monthly sum by Purdon was held not to negative this, since given that there would be a delay before any profits could be made and that Purdon, unlike Muller, was a man of means, this was simply a part of the arrangement that Purdon would provide the finance for the business and Muller the work.
By way of Contrast the Hong Kong Court of Appeal in Sae – Lee Srikanya v Chung Yat Ming ( 2009) 3 HKLRD 152 rejected an argument that one of the group of four scaffolders was a partner with the leader of the group rather than an employee. He had been paid wages in advance and took no financial risk in relation to the work, and all the equipment etc involved reverted to the leader on the cessation of the work.
STATUTORY PROVISION
Section 4 )( C)  of the Partnership Act ( Cap 29) provides that 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. However, the receipt of such a share, or of a payment contingent on or varying with the profits of a business, does not itself make a person a partner in the business.
This is because a person receiving a payment out of the profits of a business, whether as a gift or legacy, or in return for services rendered e.g. interest on loan, debt repayment etc, cannot be said to be a partner. Other examples are included below:-
contract for the remuneration 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. ( Section 4 (c)(ii))
This provision is quiet self-evident, for as we have seen the relationship of the employer and employee is inconsistent with partnership, and that of an independent agent ( e.g. an estate agent engaged to sell the partnership offices) is clear distinguishable on the basis that there is no involvement in the basis.
The mere fact that he is paid out of the net profits of the business will not make him a partner.
C) A PROFIT MOTIVE.
Most of the problems concerning the existence of a partnership revolve around the concept of profit motive and profit- sharing. It is impossible to establish a partnership if there is no intended financial return from the business- it would hardly be a business if no financial return was contemplated. Far more problems arise in practice in the reverse situation- i.e. when a financial return from a business is argued not to constitute the recipient a partner, because for example, it is really a wage paid to an employee, or interest paid to a creditor, or a contractual return for the supply of goods and services rendered.
It is important to note that there must be communication of profit between partners in order to satisfy the third essential agreement as highlighted in Coope v Eyre (1788) 1 HBL 37. In that case, Mr, Eyre purchased some oil on behalf of a syndicate, dividing it up after purchase. He failed to pay the seller and the seller sought to recover the money from the other members. It was held by Gould J, that as there was no communication to the other members as to profits and losses it could not be held to be a partnership.
The mere receipt of profits does not constitute a recipient a partner as highlighted in Cox v Hickman (1804) 8 HL Cas 268.
Other cases which also highlighted this are Strathmore Gorden Associates Ltd v Commissioners of Customs & Excise (1985) VATTR 79. In that case, it was highlighted that “ the mere fact that this consideration was measured by reference of a share of the net profit does not in our judgment convert the agreement into a partnership.” An agreement was only made for the supply of services and nothing else. In Britton v Commissioner Of Customs & Excise (1986) VATTR 204, it was held that even though a wife took a share of the profits of her husband’s business, this was domestic as distinct from a commercial arrangement. The profits had been paid into their joint bank account which continued as both a domestic and a business account. ‘ The profit was Mr. Briton’s and Mrs. Britton as his wife had access to it.’ Sharing profits did not amount to partnership.
WHAT ARE DUTIES OF A PARTNERSHIP?
Partnership is a relationship based on mutual trust which can have far- reaching consequences as respects the partner’s liabilities to outsiders. For precisely that reason it has long been established that partners owe each other a duty of good faith, i.e. to act honestly and for the benefit of the partnership as a whole. Thus in Const v Harris (1824) Turn & R 496 Lord Eldon could say:- ‘ in all partnerships, whether it is expressed in the deed or not, the partners are bound to be true and faithful to each other.’ The foundation of partnership is mutual faith and trust in each other and ever since the development of equity in the 19th Century partners have always been regarded as being subject to the equitable duties, sometimes expressed in terms as the ‘ good faith’ principle.
As a result, partners owe specific fiduciary duties to each other,  due to the fact that they are in a fiduciary relationship, such as disclosure and of not making any unauthorized profit from the firm’s business ( the so called ‘ no profit rule’) .
The Partnership Act ( Cap 29) provides for three specific fiduciary duties which reflect the three main aspects of such liability but it is clear that these duties are applicable in a wider context of modern situations.
By Law or agreement each partner has a duty to do the following:
Adhere to the Partnership Agreement and Decisions.
Use Reasonable Care.
Act with integrity and Good Faith.
Refrain from Participating in a Competing Business.
Keep Accurate Records.

1. ADHERE TO THE PARTNERSHIP AGREEMENT AND DECISIONS.
Each partner must comply with the partnership agreement, including later provisions properly added and related decisions properly made.
2. USE REASONABLE CARE
In performing partnership duties, each partner must use reasonable care. However, he or she is not personally liable for the full loss caused by errors in judgement, mistakes and imcompetance. Any resulting financial burden rests on the firm and is shared by all its members. The harsh reality affirms the importance of selecting competent persons as partners.
3. ACT WITH INTEGRITY AND GOOD FAITH
A partnership is regarded as a principle, for which each partner may act as an agent for the firm and the other partners in the following ways:-
 Making contracts in the firm’s name.
Every partner, as a co-owner of the business, has an equal right to participate in the management.
Acting alone, a partner may buy, hire, fire and make other routine decisions in carrying on the ordinary day-to day activities of the firm.
In respect to such enormous powers, which involves both capital and property under their control, they may also hold a position as a quasi trustee. The reason why we cannot call them as trustees is due to the fact that they are not holding the capital and property for a beneficiary as such.
Due to such enormous powers, it can be said that a partnership is a fiduciary relationship. A fiduciary relationship is one of utmost trust and confidence. Each partner is legally bound to act with the highest integrity and good faith in dealing with the other partner (s). No partner may be personally retain any profit or benefit unless the other partners are informed and consent. All profits or benefits flowing from business of the firm belong to the firm, to be shared by all partners equally or otherwise agreed.
4. REFRAIN FROM PARTICIPATING IN A COMPETING BUSINESS.
Unless there is a contrary agreement, a partner may not do any business that competes with the partnership or prevents performance of duties to the firm. A partner may, however, attend to personal affairs for profit, as long as the firm’s business is not sacrificed. A partner who withdraws from the firm may compete with it unless validly prohibited by the partnership agreement.
5.KEEP ACCURATE RECORDS
A partner should keep accurate records for all business done for the firm and give the firm all the money belonging to it. Moreover, every partner should disclose to the other partner (s) all important information that concerns the firm’s business.
DUTIES OF PARTNERS
The relationship between partners is one of utmost good faith. This means that each partner must make full disclosure of all his activities within the partnership. Every partner must use his knowledge and skill for the benefit of the firm. The fundamental duties of the partners are contained in Section 32, 33 and 34.
TO RENDER TRUE ACCOUNT- ( Section 32)
Every partner is bound “to render true accounts and full information of all things affecting the partnership to any partner of his legal representatives”. He must permit other partners to inspect such accounts, and he must also provide full information of all other things affecting the partnership. For example, where a partner is buying another partners interest in the firm, the buying partner is under a duty to disclose all information relating to the partnership assets which is within his knowledge but known by the selling partner.
A partnership is one of uberrimae fidei ( utmost trust) and it is quite clear that each partner must deal with his fellow partners honestly and disclose any relevant fact when dealing with them. A failure to disclose will suffice for a breach of the duty-there need be no proof of common law fraud or negligence. This strict duty applies to ‘ all things affecting the partnership’.
In Law v Law (1905) 1 Ch 140- The two Laws, William and James, were partners in a wollen manufacturer’s business in Halifax, Yorkshire. William Lived in London and took little part in the running of the business. James bought William’s share for 21,000 pounds. Later William, discovered that the business was worth considerably more and that various assets unknown to him had not been disclosed. The Court of Appeal held that in principle this would allow William to set the contract aside.
In Hoger Estates Ltd v Shebron Holdings Ltd -  Hoger and Shebron were partners in a joint land development scheme. Shebron offered to purchase Hogar’s interest, stating that the land was not capable of development since planning permission had been refused by the authorities. When that statement was made it was true but Shebron then found out that an important obstacle to the granting of planning permission was likely to be overcome. Shebron did not pass this information on to Hogar and the purchase went ahead. Hogar was granted its request to have the agreement set aside. Shebron’s duty to disclose all material facts extended to correcting an earlier true statement when it was discovered that it was no longer accurate. Again there was no actual misrepresentation and no proof of dishonesty but the fiduciary obligation required neither of these.
The duties of disclosure and not to mislead in partnership dealings are limited to precisely that. If those obligations are complied with then the other partners cannot complain if they do not receive ‘ full value’ as highlighted in Trinkler V Beale (2009) NSWCA 30. There is probably no remedy in damages for simple non-disclosure but if there is evidence of fraud of dishonesty then damages will be available as highlighted in Conlon v Simms (2006) EWHC 401.
But this absolute duty of disclosure is potentially wider and on one level can be seen to subsume the other duties in Section 33 and 34. This premise is based on the idea that where a partner is making an unauthorized profit ( Section 33), his failure to disclose that fact will also be a breach of the duty of disclosure. Thus in Rochwerd v Truster (2002) 212 DLR 498, The Ontario Court of Appeal held that where a partner had taken advantage of his position as such to obtain benefits from certain directorships, he was under a duty under Section 32 and Section 33 to disclose all information about the directorships and the associated benefits, irrespective of any breach in Section 33.
Please look at these other English cases.
Bhuller v Bhuller ( 2003) 2 BCLC 241, CA; Crown Dilmun v Sutton (2004) 1 BCLC 468; Fassihi v Item Software (2004) BCC 994, CA.
2.SECRET PROFIT- (Section 33)
Secondly, every partner “must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership or from any use by him of the partnership property, name or business connection.” In simpler words, every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership, or from any use by him of the partnership property. For instance, no partner can take an interest as a purchaser or part-purchaser in a sale of the partnership property; nor can he make a profit from a sale of property to the firm.
It has long been established that since a trustee must never put himself in a position where his duty to the beneficiaries and his personal interest might conflict, he must not profit from his trust and this concept has broadly been applied to fiduciaries such as partners.
This duty is commonly divided into two: the ‘ no- conflict rule’ and the ‘ no- profit’ rule. The no-conflict rule is also often divided into what are known as transactional conflicts ( an interest in a partnership transaction) and situational conflict ( a situation where a partner would have a potential conflict of interest between his or her personal interests and those of the partnership). If the fiduciary concerned makes no profits from such conflicts then the remedies might lie in damages, rescission, or an injunction. But if any unauthorized benefit or gain made by the fiduciary out of his or her position must be accounted for.
For partnership law purposes, we must only look at the ‘no profit’ rule.
The duty of account owed by one partner to another applies to any benefit or gain ‘ which was obtained or received by use or be reason of his fiduciary position or of the opportunity or knowledge resulting from it.’
Please refer to the following cases on a duty to account:
Chan v Zacharia (1984) 154 CLR 178
Don King Productions Inc v Warren (1999) 2 All ER 218, CA.
John Taylors V Masons (2001) EWCA Civ 2106.
DIRECT PROFIT FROM PARTNERSHIP TRANSACTION
The clearest example of liability under this section is a secret profit, i.e. where one partner makes a personal profit out of acting on behalf of the partnership e.g. in negotiating a contract. Thus in Bentley V Craven (1853) 18 Beav 75- Bentley, Craven and two others were partners in a sugar refinery at Southampton. Craven was the firm’s buyer and as such he was able to buy the sugar at a discounted price he then sold it to the firm at  market price. The other partners discovered later that he had been buying and selling the sugar to them on his own behalf. The firm now successfully claimed Craven’s profits from these dealings. It would have made no difference if the other partners could not have obtained a discount so that they in fact suffered no loss since they would have had to pay the market price anyway- the point is that Craven made a profit out of a partnership transaction and he had to account for it. This can be deduced from a similar situation involving a company director in Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 Ch D 339 where even though the company could not have obtained the discount the director had to account for it as a secret profit.
The liability also clearly extend to simply misappropriating partnership receipts, e.g. services invoiced on partnership invoices. In such a situation the fact that the services were illegal since they were provided without a licence is no defence as highlighted in Tughoba v Adelagun (1974) 1 ALR 99  and Sharp v Taylor ( 1849) 2 Ph 801.
3.NOT TO COMPETE- (Section 34).
Thirdly, every partner is under a duty not to compete with the firm, if a partner without the consent of the other partners carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business In simpler words, if a partner, without the consent of the other partners, carries on any business competing with the business of other partners, carries on any business competing with the business of the firm, he must account to the firm for all profits so made. In the absence of such arrangements, partners are free to carry on non-competing business which does not involve the use of the firm’s property.
ERRANT PARTNER’S SHARE OF BENEFIT
One thing which Section 34 does not make it clear is whether, assuming that a partner has to account to his co-partners under that Section, he is entitled to keep his shares of the benefit or whether it belongs to the other partners alone. This question does not arise in the straightforward trustee- beneficiary relationship since all benefits belong to the beneficiary. Similarly a company director must account for the whole amount of the company as the beneficiary. But in the absence of legal personality a partner is both a trustee and a beneficiary. The question arose before the Ontario Court of Appeal  in Olson v Gullo (1994) 113 DLR (4th) 42 and Rochwerg v Truster (2002) 212 DLR (4th 498. In the Olson case, one of two equal partners sold part of the partnership land at a profit to himself of some 2.5 million dollors. ( There was also some evidence that he had sought to have his co-partner killed, although by the time of the action he himself was dead.) Mr. Olson now sued Mr. Gullo’s estate for recovery of that money and the trial judge had awarded him the full amount. This was reversed on appeal, however, so that Mr Olson was awarded  only half that amount under Section 33. The profit was a partnership profit and so belonging to the partners equally. This decision was based on the principles of restitution, ie. to restore the innocent partner to  the position he would have been in had the breach not occurred, rather than on principles of constructive trust. Modern ACJO, giving the judgment of the court expressed the issue as follows:-
“ I have no doubt that stripping the wrongdoing partner of the whole of the profit, including his or her own share in it, is a strong disincentive to conduct which breaches the fiduciary obligation. Further, as a host of equity decisions have shown for at least two centuries, the fact that this would result in a windful gain to the plaintiff cannot, in itself be a valid object to it.”
“ I do not, however, think that it can accurately be said that the defaulting partner does profit from the wrong whne he receives his pre-ordained share of the profit. With respect to his share, the partner’s conduct in the impugned transaction does not involve any breach of duty.”
The court did however, express its disapproval of the defendant’s conduct ( whether for the alleged crime or not is not clear) by making a penal order in costs against him.
4. SHARE LOSSES
Finally, every partner is liable to contribute to the firm’s losses and other liabilities.
WHAT ARE THE RIGHTS OF PARTNERS IN A PARTNERSHIP FIRM?
In the absence of contrary agreement, legal rights of partners are shared equally. Partners, may however, agree as to who shall have particular rights and duties. The principle rights are the following:-
RIGHT TO PARTICIPATE IN MANAGEMENT
RIGHT TO PROFITS
RIGHT IN PARTNERSHIP PROPERTY
RIGHT TO EXTRA COMPENSATION
RIGHT TO PARTICIPATE IN MANAGEMENT
Every partner, as a co-owner of the business, has an equal right to participate in the management. Acting alone, a partner may buy, hire, fire and make other routine decisions in carrying on the ordinary day-to day activities of the firm. In effect, each partner acts as an agent for the firm and for the other partners.  All are bound, unless the partner lacked the necessary authority, and the person with whom the contract was made knew this. If a contract is made by a partner who has an apparent authority, the partnership is bound.
In addition to routine decisions, each partner may do the things normally done by managers in similar firms. This includes the right to inspect the partnership books at all times, unless otherwise agreed.
When a difference of opinion arises as to the ordinary matters connected with the business, a majority vote of the partners decides the issue. Unless otherwise agreed, each partner has one vote regardless of the amount of capital contributed. If there is an even number of partners, and they split equally on a question, no action can be taken. A pattern of such deadlocks can eventually lead to dissolution. To forestall such an outcome, it is often helpful to provide in the partnership agreement that deadlocks over specified matters shall be settled by arbitration.
Unanimous agreement of all the partners is required to make any change in the written partnership agreement, however minor it may be. All partners must also agree to any fundamental change that affects the very nature of the business (e.g. changing its principle activity or location). Unanimous agreement may be required for decisions to:
Assign property to creditors.
Confess judgment (i.e. to allow a plaintiff to obtain a judgement against the firm without a trial)
Submit a partnership claim of liability to arbitration, and
Do any act that would make it impossible to carry on the business.
The preceding rules governing the use of managerial authority may be changed by agreement. Often, the agreement, certain partners have exclusive control over specific activities such as selling, purchasing, or accounting and finance. By specializing according to talents and interests, work is divided and efficiency and productivity are increased.
2. RIGHT TO PROFITS
Partners are entitled to all profits earned. In the absence of contrary agreement, both profits and losses are shared equally regardless of different amounts of capital contributed or time spent. However, the partners may agree to divide the profits, and/ or the losses in any percentages desired. Often, as in the problem, profits are shared equally, but a partner with a large amount of outside income may agree, for tax purposes, to take all the losses. Outsiders however, are not bound by such internal agreements and may hold any or all general partners liable without limit for all the partnership debts.
RIGHT TO PARTNERSHIP PROPERTY
Partnership property consists of cash and other property originally contributed by the partners as well as property later acquired by the firm. The property is held in a special form of co-ownership called tenancy in partnership. In tenancy in partnership, each partner is the co-owner of the entire partnership property and is not the sole owner of any part of it. For example, if a firm of two partners owns two identical trucks, neither partner may claim exclusive ownership for either vehicle. Therefore, a partner has so salable or assignable interest in any particular item of the property belonging to the partnership. However, the interest of a partner in the firm may be sold or assigned to another party. The buyer or assignee is not a partner but is entitled to that partner’s share of the profits, and all the assets upon dissolution.
Each partner has an equal right to use firm property for partnership purposes, but no partner may use the firm property for personal uses unless all other partners consent.
RIGHT TO EXTRA COMPENSATION
A partner who invests more capital, brings in more business, or works harder than any of his associates is not entitled to extra pay or a larger share of the profits- unless all the partners agree. Common sense and fairness often dictate that a partner who gives more should receive more, but this must be agreed by all.
WHAT AUTHORITY DOES A PARTNER HAVE?
Unless otherwise agreed, each partner has an equal right to participate in the management and to act as an agent of the firm. Generally the law implies to each member the authority necessary to carry on the business. This includes the right to do the following:-
MAKE BINDING CONTRACTS FOR THE FIRM
RECEIVE MONEY OWED TO THE FIRM AND SETTLE CLAIMS AGAINST THE FIRM
BORROW MONEY IN THE FIRM’S NAME
SELL
BUY
DRAW AND CASH CHECKS AND DRAFTS
HIRE AND FIRE EMPLOYEES AND AGENTS
RECEIVE NOTICE OF MATTERS AFFECTING THE PARTNERSHIP
MAKE BINDING CONTRACTS FOR THE FIRM

Acting within the scope of the particular business, each partner can make binding contracts deemed necessary or desirable, regardless of the possible folly of the deals. Any internal agreement limited powers of a partner is binding on all the partners, but not on third parties who do not know about the limitation. However, a partner who violates such internal agreement is liable to the other partners for the resulting loss. No partner can bind the firm in contracts that are beyond the scope of the firm’s business as publicly disclosed. Partners engaged in an aerial photography business, for example, would not be bound by a contract by one of the partners to use the plane for air ambulance service. Even if the partner has acted beyond authority in making a contract, the other partners may choose to ratify the act. If they do, the partnership is bound as a principle would be in ordinary agency.
RECEIVE MONEY OWED TO THE FIRM AND SETTLE CLAIMS AGAINST THE FIRM
In the eyes of the law, all partners are assumed to have received any payments of the firm even if the partner who actually received the money absconds. Also, each partner may adjust debts of the firms by agreement with creditors. Each may compromise firm claims against debtors, settling for less than, is due. Understandably, however, a partner may not discharge a personal debt by agreeing to offset it against a debt owed to the partnership.
BORROW MONEY IN THE FIRM’S NAME
In a trading partnership, any partner can borrow for partnership purposes. In such borrowing, the partner may execute promissory notes biding the firm and can pledge or mortgage partnership property as security. Partners in a non trading partnership generally do not have such power.
SELL
A partner can sell in the regular course of business any of the firm’s goods and give customary warranties. Acting alone, however, a partner may not sell the entire inventory in a bulk transfer because this could end the business.
BUY
Any partner can buy for cash or credit any property within the scope of the business.
DRAW AND CASH CHECKS AND DRAFTS
A partner can buy for cash or credit any property within the scope of the business.
HIRE AND FIRE EMPLOYEES AND AGENTS
Each partner has the authority to hire and fire employees, agents and independent contractors to carry on the business.
RECEIVE NOTICE OF MATTERS AFFECTING THE PARTNERSHIP
When one partner is served with summons and complaint against the firm, all are deemed to have received the notice, even if they are not informed. Likewise, one partner’s declarations and admissions in carrying on the business bind all partners even when contrary to the best interests of the firm.
WHAT ARE A PARTNER’S LIABILITIES?
When determining a partner’s liability it is important to determine what kind of partner he/ she is:-
There are five types of partners as highlighted below:-
A) Active or working partner.
B) Dormant or sleeping partner.
C) Nominal partner.
D) Quasi Partner.
E) Partners under the age of 18.
A partner who is under the age of 18, would be entitled to all the profits but he cannot be held liable for any losses for any losses. This is due to the fact that he may pledge minority as a defense.
It is also important to determine, what kind of partnership exists between the partners. This is due to the fact that the liability differs.
In the general partnership, all the partners have unlimited liability, while in the limited partnership there must be at least one general partner with unlimited liabilities.
The differences between unlimited liability and limited liability are highlighted below:-
) Limited Liability: This means the shareholders or partners are only liable for the debts of the firm up to the extent of the capital which they have contributed to the firm. In the event of the business failing, the creditors do not have any claim to the personal assets of the partners.
ii) Unlimited Partnership: This means that there is no limit to the liability of the partners if the business fails. The creditors of the company have a claim even against the personal belongings of the partners.
Between or among themselves, partners make any agreements they choose regarding authority to run the business. Outsiders, however, may not be aware of such secret internal agreements. When this is the case, the partnership firm and all of its members/partners are liable without limit for all obligations of the firm that arise out of contracts made by any partner within the scope of the firm’s business to the last cent of his fortune. This means that the firm and partners may be bound by the actions of their co-partners in certain actions.
The partnership and all the partners are liable when any partner commits a tort (e.g. negligence or fraud) while acting within the ordinary course of business. The wrongdoer would be obliged to indemnify the partnership for any damages it had to pay to the injured party. If the other partners had authorized or participated in the tort, all would share the blame and no indemnity would be payable.
Liability for certain crimes committed in the course of the business, such as selling alcoholic drinks to minors, is also imposed on the partnership and all the partners. Generally, however, if the business of the firm does not require the criminal activity, neither the partnership nor the partners who do not authorize or take part in the crime are held criminally liable. Thus, a partner who kills a pedestrian while negligently driving a company car on the firm business will alone be criminally liable. However, the wrongdoer as well as the firm and the other partners are civilly liable for damages.
When a judgment is obtained against a partnership, and the partnership assets are exhausted, the individually owned property of the general partners may be legally seized and sold to pay the debt. Creditors of the respective individuals, however, have first claim to such property. Any partner who pays an obligation of the firm with personal assets is legally entitled to recover a proportionate share of the firm with personal assets is legally entitled to recover a proportionate share from each of the other partners.
A partner cannot escape responsibility for firm debts by withdrawing from the partnership. One who withdraws remains liable for the debts incurred while a member. A new partner who joins the firm is liable for both existing and new debts of the business. However, creditors with claims that arose before the new partner joined the firm are limited, with respect to the new partner, to action against only the new partner’s share of partnership property.


LIABILITY FOR BREACH OF CONTRACT
The partners are jointly liable for the breach of the firm’s contract. It means that in an action where there is more than one defendant, the liability is shared by all the defendants. The plaintiff can only bring one action and if, for any reason, he sues only some of the partners and obtains a judgment against them, he cannot bring a fresh action against all or the rest of them in case the judgment remains unsatisfied.
EXAMPLE
For example, a firm consisting of four partners A, B, C and D has failed to pay a contractual debt of Ksh.100,000 to X who decides to sue C and D for the full debt and obtains a judgment for the full amount. After the judgment has been pronounced, X discovers that C and D cannot pay more than 50,000 shillings. He cannot bring a fresh action against the remaining partners for the part of the judgment which is still unsatisfied. Thus, it is always advisable to bring an action for the breach of contract in the name of the firm and this will include all the partners in the suit.
CASE- Kendall v Hamilton  (1879) 4 App Cas 504, HL
A creditor sued all the obvious members of a firm and was awarded judgement against them. He failed to recover the debt in full, however, and when he subsequently discovered a wealthy dormant partner he sought to sue him for the balance of the debt. The House of Lords decided that since the debt was a joint one only, by suing the apparent partners the creditor had elected to sue only them and could not now commence fresh proceedings against the other partners. He had exhausted the cause of action. No such restriction applies to liability under Section 16 for there the liability is several as well as joint so that each partner can be sued in turn for all together until the full amount is recovered- the complainant is never put to his election.
LIABILITY OF THE FIRM FOR TORTS
A firm is liable for any loss or injury caused to a third person by the wrongful act or omission of a partner if they were done by him while acting in the ordinary course of the firm’s business, or with the authority of his co-partner.
In partnership law, every partner is liable in tort jointly with his co-partners for all liabilities of the firm and he is also liable severally i.e. each individual partner is liable and the plaintiff can sue each partner successively. In case of joint and several liabilities, the plaintiff has several causes of action. He can sue all the partners together, or he can sue them separately as long as his claim under tort remains unsatisfied.
EXAMPLE
For example, while negligently driving the firm’s van on the farm’s business, A injures X. The latter has a right to sue A or any one of his partners or the firm. If he sues A for the tort of negligence, he is not prevented from suing the remaining partners if the judgment awarded by the court against A remains unsatisfied.
THUS…
It follows from what has been stated in the previous slides, that the firm’s liability, arising out of contracts, differs from the liability arising under tort. The firm is jointly and severally liable for the breach of contract i.e. the plaintiff can only sue once, but for the tort committed by a partner in the course of doing the firm’s business the firm’s liability is joint and several i.e. the plaintiff has more than one course of action.
CASES
Proceedings Commissioner v Ali Hatem (1999) 1 NZLR 305, CA ( A New Zealand Court of Appeal Case)
In this case one of the two partners was primarily responsible for staffing matters and he was found to have committed the statutory tort of sexual harassment against two female employees. The other partner was found to be vicariously liable on the basis that, although sexual harassment was not part of the ordinary business of the firm, the perpetrator, when acting as he did, was acting within the ordinary course of the firm’s business, i.e. dealing with staff members in the work environment, and in doing that he committed a tort. The court therefore concluded that he thereby did tortuously something which he was generally authorized to do’ and the other partner was liable accordingly. That is the class doctrine of vicarious liability.
PLEASE LOOK AT THE NOTES ON LIABILITIES OF INCOMING PARTNERS, OUTGOING PARTNERS AND LIABILITIES OF MINOR PARTNERS
NATURE OF THE LIABILITY
JOINT AND SEVERAL LIABILITY
The partnership Act ( Cap 29) makes a clear distinction between the nature of liability of partners for debts and obligations on the one hand and for torts, crimes and wrongs on the other.  Section 11 provides that every partner in a firm is liable jointly with the other partners for the debts and obligations of the firm incurred while he is a partner- this in effect creates the unlimited liability of a partner which gave rise to the demands of the limited liability partnership. Section 16, on the other hand, provides that the liability under Section 14 and 15 of the Act every partner is liable jointly with his co-partners and also severally for everything for which the firm becomes liable whilst he is a partner.
The distinction in the Act, is therefore between joint liability for contracts and joint and several liability for torts etc.
What is the distinction between joint liability and several liability?
The difference is that if liability is only joint the plaintiff has only one cause of action against all the partners in respect of each debt of contract as highlighted in Kendall v Hamilton  (1879) 4 App Cas 504, HL. ( facts highlighted under Liability for breach of contract).
STATUTORY PROVISIONS - Section 11 of the Partnership Act-  Every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner, but a person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything one before he became a partner; and after his death his estate is also severally liable in the due course of administration for those debts and obligations, so far as they remain unsatisfied, but subject to the prior payment of his separate debts.
Section 12- A person who is under the age of majority according to the law to which he is subject may be admitted to the benefits of partnership, but cannot be made personally liable for any obligation of the firm; but the share of the minor in the property of the firm is liable for the obligations of the firm.
Section 13- A person who has been admitted to the benefits of partnership under the age of majority becomes, on attaining that age, liable for all obligations incurred by the partnership since he was so admitted, unless he gives public notice within a reasonable time of his repudiation of the partnership.
Section 14-   Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to the same extent as the partner so acting or omitting to act.
Section 16 -   Every partner is liable jointly with his co-partners and also severally for everything for which the firm, while he is a partner therein, becomes liable under section 14 or 15.
HOW IS A PARTNERSHIP ENDED?
When any partner ceases to be associated in the ordinary carrying on of the business, dissolution of the partnership occurs. Dissolution is normally, followed by a winding-up period, which concludes with the actual termination or ending of the partnership. During the winding- up period, all partnership business of the business is satisfied if possible, and each partner’s share is accounted for and distributed. When the winding- up process is completed, termination of the legal existence of the partnership actually occurs.
Dissolution of the partnership may be caused by any of the following
Action of One or more of the partners
Operation of the law
Court Decree

ACTION OF ONE OR MORE OF THE PARTNERS
A partnership may be dissolved by agreement by the parties. For example, if the original agreement is for one year, the partnership concludes at the end of that year. Sometimes a firm is organized for specific purposes such as the development of a large tract of farm land into a subdivision for houses. Sale of the last lost and house would end the partnership. Also, as in the contract, the parties may unanimously agree at any time to terminate their relationship.
Withdrawal of a partner for any reason dissolves the partnership. The partnership agreement may permit such withdrawal without penalty, preferably after a reasonable advance notice. In such a case,the withdrawing partner, would not be liable to the remaining partner (s) for any drop in the profits that might result. However, if the withdrawal violates their agreement, the withdrawing partner would be liable in damages for any injury resulting from the breach of the contract. If the organization is a partnership at will, a partner may normally may withdraw at any time without liability to associates. Under unusual circumstances, the withdrawing partner could be liable for resulting losses if the sudden withdrawal was unreasonable.
OPERATION OF THE LAW
Death of any partner dissolves the partnership. This is a serious disadvantage of the partnership form of organization. Prudent partners simply anticipate the event and specify what action shall be taken when it happens. For example, they may agree that the surviving partner (s) will continue with a new firm and pay for the decedent’s share over a period of years. Bankruptcy, a kind of financial death, also automatically dissolves the partnership. This is true whether the bankruptcy is suffered by any of the partners or by the firm itself. Although, uncommon, subsequent illegality also dissolves the partnership. For example, a professional partnership of doctors would be dissolved if any member lost the license to practice.
COURT DECREE
Partners, if living usually arrange for dissolution privately. If necessary, however, one partner may petition a court to order dissolution if another partner has become insane, is otherwise incapacitated, or is guilty of a serious misconduct affecting the business. Also a court may act if continuation is impracticable or if the firm is continuously losing money and there is little or no prospect of success. This could happen, for example, when there are irreconcilable differences between the partners. For example, irreconcilable differences could result of decisions to add or drop a major line of merchandise or to move a factory to another location to reduce labor costs.
HOLDING OUT – KNOWINGLY BEING REPRESENTED AS A PARTNER
A nominal partner is not a partner. However, such persons hold themselves out as partners, or let other do so. For example, Parents sometimes become nominal partners to assist children who have taken over the family business. Consequently, if a partnership liability arises, they are liable as partners. A third party, acting in good faith, may rely on the reputation of the nominal partner and therefore extend credit to the firm. If so, all partners, who consented to the misrepresentation are fully liable. If all members consent, the firm is liable.
SECTION 18 of the Partnership Act provides that:-  Any person who, by words spoken or written or by conduct, represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm is liable as a partner to anyone who has, on the faith of any such representation, given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made:
Provided that where, after a partner’s death, the partnership business is continued in the old firm-name, the continued use of that name or of the deceased partner’s name as part thereof shall not of itself make his executors or administrators, estate or effects liable for any partnership debts contracted after his death.
Problems are much more likely to arise, however over the liability of someone who does not actually make the representation himself but is represented by another as being a partner. In such cases, the section requires that he has knowingly suffered himself to be so represented. Three separate factual situations can arise here:-
One where the person concerned knows of the representation before it is made and knows that it is going to be made; another where he has no actual knowledge of the representation but a reasonable person would have known of it; and yet another where he or she has failed to take steps to correct a representation which he has since discovered. The first case produces no problems except of fact, but what is the position with regard to negligence in either of the other two? Does negligently failing to realize that a representation is being made, or negligently failing to correct a representation once known, amount to ‘knowingly’ suffering the representation for the purpose of Section 14 (1)?
Please refer to the case of Tower Cabinet Co Ltd v Ingram (1949) 2 KB 397.
Negligently allowing a misrepresentation is not therefore the same as knowingly allowing it. It has been said that it is a far step from saying that X ought to have realized that the impression that he was a partner might have been given, to saying that therefore he ‘ knowingly’ created that impression as provided by in Elite Business Systems UK Ltd v Price (2005) EWCA Civ 920.  It is unlikely that simply because X’s name is so disclosed, without his or her knowledge there would be holding out. ( Dao Heng Bank Ltd v Hui Kwai- wing (1977) HKLR 122;Lon Eagle Industrial Ltd v Realy Trading Co (1999) 4 HKC 675.
But if a partner on retirement fails to destroy all the notepaper what would happen? There may well be a distinction between negligence and recklessness in such a case, i.e. the difference between not realizing the consequences and realizing but not caring about the consequences. It is possible to argue that the latter does not amount to an implied authorization to use his name. There is no authority as to the failure to correct an unauthorized misrepresentation once known but again the distinction between negligence and recklessness in such failures. It is a question of achieving a balance between the so represented and the person being misled.
STATUTORY PROVISIONS
Section 18-  Any person who, by words spoken or written or by conduct, represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm is liable as a partner to anyone who has, on the faith of any such representation, given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made:
Provided that where, after a partner’s death, the partnership business is continued in the old firm-name, the continued use of that name or of the deceased partner’s name as part thereof shall not of itself make his executors or administrators, estate or effects liable for any partnership debts contracted after his death.
NEED FOR RELIANCE
The person misled must have acted on the strength of the representation and implicit in that, of course, is that he or she must believe it to be true. But that is all the person misled need show- he or she does not have to prove that he or she would not have given credit if she or he had known it to be untrue as illustrated in Lynch v Stiff (1944) 68 CLR,428 (an Australian Case).
Mr. Lynch was employed as a solicitor in practice. Although his name appeared as a partner in the heading of the firm’s notepaper, he remained at all times an employee of the firm. He had previously been employed by the employee’s father and had always been Mr. Stiff’s solicitor, handling his business on behalf of the firm. When the son took over the business he assured Mr. Stiff that his affairs would continue to be handled by Mr. Lynch and it was clear that Mr. Stiff kept his business there at least partly because of that statement on the new notepaper that Mr. Lynch was now a partner. Mr. Stiff gave the firm money for investment which the son appropriated and Mr. Stiff now sued Mr. Lynch under a provision identical to Section 18. One point that arose was whether it made any difference that Mr. Stiff had entrusted his affairs to the firm because of his confidence in Mr. Lynch prior to the representation being made in the notepaper and thus may well have done so even if no such representation had been made.  The court held that so long as Mr. Stiff could prove reliance and belief he need show no more.
But reliance is necessary and without it there can be no liability under the doctrine of holding out. An unusual example of this arose in the case of Hudgell Yeates & Co v Watson (1978) 2 ALL ER 363, CA. In January 1973, Mr. Watson instructed one of the parties in the plaintiff firm of solicitors, a Mr James, to act for him in a case. This work was passed to another partner, Miss Griffiths, who together with a managing clerk ( who appears to have done most of  the actual work) acted for Mr. Watson in 1973.  There was a third partner, a Mr. Smith, who worked in a different office and took no part at all in Mr. Watson’s case. Mr. Smith forgot to renew his solicitor’s practicing certificate for 1973 until 2 May and was so disqualified from acting as a solicitor from 1st January to 2nd May 1973. When Mr. Watson was sued for failure to pay for his bill for legal costs he argued that since for part of that time Mr. Smith had been disqualified from acting as a solicitor the whole firm was precluded from acting as such, since work done by one partner was done as an agent for the others. Accordingly the charges for work done during that period could not be enforced.
The Court of Appeal by a majority dismissed this argument, finding that on Mr Smith’s disqualification the partnership between himself and the other two partners was automatically dissolved and reconstituted as between the two qualified partners who could thus sue for the money used. For present purposes however, the important point is that this was not affected by the doctrine of holding out since at no time did Mr. Watson give any credit on the basis that Mr. Smith was at any time a partner in the firm. Put another way there was holding out of Mr. Smith as a partner, but no estoppel arose since Mr. Watson had at all times thought that he was only dealing with Mr. James.
WRITTEN NOTICE OF BEING A PARTNER
But in the absence of such a clear finding of fact, will the use of headed notepaper representing a defendant, who is not a partner but merely an employee or association are, as being a partner, as distinct from a former partner who has left the firm, suffice to establish both a holding out and reliance so as to give rise to estoppel? In Nationwide Building Society v Lewis (1997) 3 ALL ER 498, (1998) Ch 482, CA, The Nationwide instructed a firm of solicitors to act for it in a mortgage transaction. The matter was handled solely by Mr. Lewis and instructions were given to Bryan Lewis & Co, ‘ref Mr. B Lewis’. Two days later the firm accepted the instructions by letter enclosing the firm’s report on title. The firm’s notepaper showed there were two partners, Mr. Lewis and Mr. Williams. In fact Mr. Williams was not a partner but an employee. Mr. Williams sought to avoid liability on the transaction on the basis that although he had been held out as a partner the Nationwide had never placed any reliance on that fact, having in fact instructed only Mr. Lewis. This argument was rejected by the judge because the acceptance letter and enclosures sent to the Nationwide came apparently from a two-partner firm. The enclosed report ( the subject of the action) carried the implied imprimatur of both apparent partners and it was upon that report that the Nationwide had relied. But this argument was accepted by the Court of Appeal. The only person ever instructed to rely upon by the Nationwide to carry out the transaction was Mr. Lewis.
Although if the client had only ever dealt  with, and so has relied on, the apparent partner as being a member of the firm, Section 18 will apply: All Link International Ltd v Ha Kai Cheong ( 2005) 3 HKLRD 65.
Further, in Turner v Haworth Associates 8 March 1996, CA, the plaintiff had dealth with a firm where there was in fact a sole trader and a person held out as partner by having his name on the notepaper. The plaintiff had been sued unsuccessfully by the sole trader. In an action to recover his costs from the person so held out, the Court of Appeal refused his claim based on estoppels by representation when he said that it had made no difference to him whether he had been dealing with a partnership or a sole trader. An alternative claimed based on estoppels by convention also failed on the basis that this can only work if both parties believed the representee to have been a partner and the defendant clearly had no such belief.
Similarly in Dao Heng Bank Ltd v Hui Kwai- wing (1977) HKLR 122, where the bank, having dealth with X as the Sole proprietor of a ginseng business in Hong Kong, subsequently discovered that there were three others listed as partners in the Business Registration records. Since the Bank continued  to deal only with X and extended no additional credit whatsoever as a result of the additional three ‘ partners’ , it could not make them liable for the loan to the business. An alternative ground was that the bank had elected to deal only with X.
TRUE NATURE OF LIABILITY
These cases also show the clear distinction between liability on the holding out ground and the creation of a true partnership. In Lynch v Stiff and Nationwide Building Society v Lewis the defendants remained at all times employees, and in Hudgell Yeates & Co v Watson (1978) 2 All ER 363, CA., it was precisely because Mr. Smith was not at the relevant time a partner that there was no viability in Mr. Watson’s defence. It should be remembered that, if there is a holding out under Section 18, not only will the person be represented be liable for the consequences of making  that representation.
Thus in Bass Breweries Ltd v Applyby (1997) 2 BCLC 700, CA.,  where a sole trader and a partnership operated under a group association agreement using a common trade name and including all the members of the group in their brochures, the Court of Appeal had little difficulty in finding that the partnership had held the sole trader out as a partner. It is less clear, however, if A holds B out as being a partner of A and C, what the precise circumstances are in which C will be liable. Section 18 has no direct application and thus presumably the basic rules of estoppel will apply.
For the present, however the situation remains as expressed as expressed by Waller J in the Hudgell Yeates ( 1978) 2 All ER 363, CA:-
‘The doctrine of holding out only applies in favour of persons who have dealth with a firm on the faith that the person whom they seek to make liable is a member of it.’ The fact, if it be the fact, that Mr. Smith was held out as being a partner might well make the other partners liable for his actions in contract because they were holding out as a partner. Similarly, in so far as he was holding himself out as a partner he would be making himself liable for the debts of the firm. But in each case this would not be because he was a partner but because on the facts he was being held out. When the different question is asked, was there a partnership so that the acts of the others must have been the acts of Mr. Smith, my answer is no.