PARTNERSHIP

Generally, a partnership is an association built on trust and confidence. When two or more people come together for an agreement, there exists certain rights and obligations which the law would step in to protect via the concept of sanctity of contract. Apparently, there is no way the law would force individuals to form partnerships. It is when the individuals have formed this association that the law would now step in to protect the rights in such agreement. When we look at the concept of partnership, we are concerned with the laws that protect the agreement in a partnership relationship.
Partnership is a mixture of, rules of common law, equity and the provisions in existing statutes. There is a fundamental difference between a company and a partnership. While a company has corporate personality, a partnership doesn’t. The implication of this is that though a firm is distinct from its partners, both are treated as one. Thus, an action against the firm is as good as an action against the partners. But notwithstanding that a partnership has no corporate personality, it is an entity created by law.

There is a particular feature of a partnership business; it is viewed as an agent relationship having special features. Unlike in a normal agency relationship where there exists a principal and an agent, in a partnership business though there exists a principal-agent relationship, all the partners are the principals and all the partners are the agents. A partner’s action binds himself and all other members of the partnership. The implication of this is that a partner acting for the business acts as an agent of the other partners. In the same vein, where the other partners are acting for the business, they are deemed agents of the other partner.

The Legal Framework
1.     The 1999 Constitution[1]
2.     CAMA 1990[2]
3.     State partnership laws[3]
4.     The rules of Common Law and Equity
5.     The UK Partnership Act 1890[4]
What is partnership? There are various definitions of partnership. There is no consensus as to what the word means but there are basic features inherent in all these definitions. At common law, partnership was described as a mutual participation which is devoid of a legal entity[5]. Here, emphasis is placed on trust and confidence. But there were no criteria for determining ‘mutual participation’. S. 1(1) of the U.K. Act defined ‘partnership’ as the relation which subsists between persons carrying on a business in common with a view of profit[6]. See S. 588(1) CAMA for the definition  of partnership[7].
By virtue of the above definition, there is a close relationship between a partnership and a company except for the requirement of corporate personality. When you look at the history of companies, it started as a partnership and then it graduated to what is known today as a company.
Let’s reflect on the definitions of partnership as provided under both the U.K. and the Lagos legislations. There are some key components of this definition.
·        Relationship between the partners
      Once two or more persons come together, we have a relationship. But please note that there can’t be a relationship where only one person is involved; there must be at least two persons.
·              Carrying on business
          What determines ‘carrying on business’? The debate has been as to whether the purpose for which the relationship was created is a single action which never repeated or an action which is repeated. When regard is had to the common law cases, we would see that the courts were also divided on this issue. A school of thought believes there must be continuity while the another school believes a single action suffices. In Smith v Anderson, the court noted that “the expression ‘carrying on’ implies a repetition of acts and excludes the case of an association formed for doing one particular act which is never repeated.” Therefore, the phrase excludes a case where the association was formed for doing one particular act which never repeated. However, there are situations where the intention of the parties would be paramount and one single venture may suffice for the purpose of determining ‘carrying on business’. Our point is if it is the intention of the parties that a single venture should constitute the phrase, then so be it. In Ford v Comber, the court admitted of the possibility that an agreement to share the costs of acquiring a single block of land and the profit on resale could constitute a partnership between the parties.  In essence, a single venture can constitute partnership. Thus, emphasis on continuity may be discarded if that would enable the courts determine the intention of the parties. This may also rear up some difficulties because some associations such joint ventures can also be constituted as partnership business.
·                    The business must be in common
This is where the special agent relationship comes in; each is a principal and an agent.  This means that the business must be carried on behalf of all the partners. But note that all the partners need not be involved in the management of the partnership. See Lang v. James Morrison & Co. Ltd , an action was brought by an English company, James Morrison & Co Ltd, against three defendants, J McFarland, T Lang and W Keates.  The plaintiffs carried on the business of receiving and disposing of frozen meat from abroad.  They alleged that the three defendants carried on business in Melbourne as partners under the names ‘T McFarland & Co’ and on occasions ‘McFarland, Lang and Keates’.  Before the action commenced, J McFarland and W Keates became insolvent and the action proceeded against their assignees and Lang.  At the trial, judgment was given for the plaintiff and Lang appealed to the High Court. On appeal, it was held that there was no partnership. The court noted:
... the real substance of the transaction was that the plaintiffs and Thomas McFarland agreed to enter into a joint venture.  They were not partners as against third parties, but each party had certain rights against each other.
Evidence for this finding was found in the fact that separate bank accounts were kept as it was apparent that neither Lang nor Keates operated on the account of T McFarland & Co. Further Lang and Keates took no part in the business of the new firm other than to sign two letters.  Griffith CJ saw this as decisive.  According to his Honour:
Now in order to establish that there was a partnership it is necessary to prove that JW McFarland carried on the business of Thomas McFarland & Co on behalf of himself, Lang and Keates, in this sense, that he was their agent in what he did under the contract with the plaintiffs.
          In the circumstances the court found that there was no such agency.
·                    With a view to profit
What is profit? Profit is not defined under the Act which means recourse must be had to common law. In Re Spanish Prospecting Co. Ltd, the court held that profit can be understood by using a balance sheet approach by looking at two periods of the company; at the time the company started and at the end of the business year. The difference between the two is the profit. This means that the gain must be monetary.
Please note that where the import of the agreement was not to make profit, then the business is no partnership. Also, note that at every point in time, the intention of the parties is paramount. In the well-known case of Stekel v Ellice, a sole practitioner accountant, E, entered into an agreement with S that S should join the practice as a 'salaried partner' on a fixed salary, with a view to becoming a 'full partner' later. E was to contribute all of the capital and bear any losses, and S was to have no rights in the capital or profits of the practice. S was nonetheless found to be a partner. The court noted that though a ‘salaried partner’ could not, as a matter of law, be said necessarily to be, or not to be, a partner in the true sense, on the facts, S’ salaried partnership was a partnership within the provision of the law.
A cursory look at the above requirements would reveal an uneasy task. In lieu of the above, there is now legislative intervention to assist the courts in determining whether a business entity is a partnership. The UK Act and the Lagos law still contain rules to guide the court in the determination of partnership relationship. See S. 2 UK Act and S. 4 Partnership Law of Lagos.

Rules for determining existence of partnership[8]
In determining whether a partnership does or does not exist regard shall be had to the following rules -
(a)   Joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself[9] create a partnership as to anything so held or owned whether the tenants or owners do or do not share any profits made by the use thereof[10].
(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 or interest in any property from which or from the use of which the returns are derived[11].
(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 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[12]; and in particular -
(i)       the receipt by a person of 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[13];
(ii)      a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profit of the business does not of itself make the servant or agent a partner in the business or liable as such;
(iii)    a person being a widow or child or 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 loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business or liable as such:
Provided that the contract is in writing and signed by or on behalf of all the parties thereto;
(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[14].
          It is important to note that the court may go out of these considerations in determining whether such relationship is a partnership.

Types of Partnership
          Basically, there are three main types of partnership; General Partnership, Limited Partnership and Limited Liability Partnership.

1.                 General Partnership (GP)
All the partners are jointly liable for all debts and obligations of the firm. This is where the issue of special agency keys in. Note that GP is registrable as a business name under CAMA.
2.                 Limited Partnership (LP)
A limited partnership consists of one or more persons (general partners), who are liable for all debts and obligations of the firm, and one or more persons (limited partners), who at the time of entering such partnership contributed thereto a sum or sums as capital or property valued at a stated amount and who are not liable for the debts of obligations of the firm, beyond the amount so contributed. A limited partnership shall not consist of more than twenty persons[15].
There are basic features of a Limited Partnership as stated above. First, a LP must not consist of more than twenty persons. Secondly, one or two partners must have the right not to participate in the management of the firm. Thirdly, the death of any of the partners or their going bankrupt can’t be a ground for the dissolution of the partnership.
There are also certain benefits provided for in the partnership deed. A major difference between GP and LP is that, under LP there must be at least one partner who undertakes the debts and liabilities of the firm. Also, the concept of corporate personality doesn’t apply. Note that LP must be registered with the registrar of limited partnerships[16]. The effect of non-registration of an LP would mean the firm is a GP and therefore not entitled to the rights and benefits provided under the state legislation.
3.                 Limited Liability Partnership (LP)
This is new in our jurisdiction but you can find it in Lagos. It was first introduced in the U.S. and subsequently introduced in Lagos in 2009. Essentially, it attempts to introduce the doctrine of corporate personality into partnership. In LLP, there must be appointed a class of partners called designated partners assigned to carry on administrative functions of the firm[17].
Note that it is mandatory for the partners to maintain professional or business liability insurance. The employees must also take insurance cover against stealing, fraud and dishonesty (affecting profit).
The distinction between LLP and a company is LLP enjoys tax advantage as they are not recognized as entities under Companies Income Tax Act (CITA). In essence, they are not recognized as firms that should pay tax.

Registration of Partnerships
This depends on the type of partnership. While a GP is required to be registered under CAMA, the LP is required to be registered with the registrar in Alausa. But as noted earlier that where a firm intended to operate as LP is not registered with the registrar, the effect is that such firm operates as a GP. Unlike companies who are required to fill the necessary forms and send to the CAC, in partnership, the firm is required to fill documents and send to the registrar.
Under LP, the documents must contain:
a.                  the name of the firm, the nature of the business,
b.                 the principal address of the business,
c.                  full name and addresses of all partners,
d.                 the partnership deed (if any),
e.                  there must be a statement to the effect that it is a limited partnership and the list of those parties who are limited,
f.                   a description of the sum contributed by each partner and whether the payment was in cash or in kind.
As regards registration of LLP, it is almost the same thing as you would find under the LP. But under S. 60 LSPL, there are key things (registration requirements) which must be present. In addition, there must be a declaration from a legal practitioner or any subscribed member that the requirement of the Lagos law has been complied with. Also, it must clearly show the designation of the partners. It is after the above process has been complied with that a certificate of registration is issued to the effect that all the provisions of the law have been complied with. The certificate of registration is the conclusive evidence that S. 60 LSPL has been complied with. But note that the registrar of LP is the same person that functions as the registrar of LLP. Once given certificate, acronyms must follow the name of the business for proper identification. For example, the business name of a limited partnership would be Vite Solutions LP. Perhaps the essence of this is to make the public aware of the type of partnership.  
S. 81 of the Lagos State Property Law provides:
Nothing in this Law shall be construed as precluding the registration of a registered Limited Liability Partnership as a business name under any existing law.”
The implication of the above provision is that an LLP may be registered both under the Lagos law and under any existing law (e.g. CAMA). One issue this point raises is whether a firm registered under both laws can operate outside the Lagos territory. Would the Lagos law operate outside its own territory?
In any case, note that all the information with the registry, once there is any change, you must within seven days post or deliver those changes to the registrar or the CAC[18]. The law however failed to state the effect of non-compliance with this rule.

Partnership Property                                                 
By S. 2 of the Lagos law, ‘partnership property’ means all property and rights and interests in property originally bought with the partnership stock or acquired whether by purchase or otherwise on account of the firm or for the purposes and in the course of the partnership business.
Read S. 22-25 LSPL. Once partnership property is determined, then the property must be sued exclusively for the partnership and not for personal interest. Some common law cases are to the effect that it is a question of fact… in terms of liabilities of partners, they are all liable.
          Where a wrong has been committed against a third party in the course of the business, the partner and the partnership are treated as one.

Dissolution or Termination of Partnerships
     S. 33 LSPL. It stipulates the instances a partnership may be brought to an end.
Why is LLP is so important? It serves two purposes. In partnership agreement, if partners have agreed to end it, it will prevail. But if there is no agreement to that effect, then S. 33 prevails.
S. 33 Dissolution by expiration or notice
(1) Subject to any agreement between the partners, a partnership is dissolved
(a)    if entered into for a fixed term, by the expiration of that term;
(b)    if entered into for a single venture or undertaking, by the termination of that venture or undertaking;
(c)     if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership.

2. Performance:
3. Death or bankruptcy.
4. Illegality of the partnership
5. Dissolution by court (similar to winding up). The difference is on the grounds which are provided for in S. 36 of the Partnership Law of Lagos.

Some of the grounds are:
a. where one of the partners is adjudged to be a lunatic.
b. permanent incapacity
c. breach of partnership deed (agreement)
d. where loss is being experienced.
e. just and equitable ground.



[1] Exclusive Legislative List, see item 17(b) and the exceptions to item 32 of the Exclusive Legislative List. These provisions empower the states to enact their own laws on partnership law unlike companies which are matters exclusively reserved for the federal legislature.
[2] S. 17 provides for a partnership of more than 20 persons must be registered under CAMA. This provision however doesn’t apply to partnerships of legal practitioners and accountants.
[3] While a number of states have enacted laws on partnership, there other states without a partnership legislation. These other states would have to fall back on the UK Act of 1890. We must commend Lagos State for taking proactive steps in the area of partnership. Lagos has the most recent legislation in this regard. Since Lagos has the most recent legislation in this regard, our focus would be both on the Lagos legislation and that of the UK. The current law on partnership in Lagos can be found in Cap P1 Laws of Lagos State of Nig. 2015.
[4] This is a statute of general application.
[5] Smith v Anderson (1880)
[6] See also S. 3(1) Partnership Law of Lagos. Please note that the definitions of ‘partnership’ in both legislations though similar, that of Lagos prevails.
[7] See the definition of a ‘firm’ under that section.
[8] S. 4 Partnership Law of Lagos. Similar provision is contained in S. 2 of the UK Act.
[9] ‘does not in itself’ With regard to this phrase, the law is not saying that joint tenancy…..shall not rather the law is saying if there is convincing evidence showing the contrary, then the court would hold that there is a partnership.
[10] This is about co-ownership, that is, whether a co-ownership is a partnership. As far as that section is concerned, the associations that come together under it are not prima facie partnerships whether or not the aim is to earn profit. `
[11] In Cribb v Korn, Korn was employed as a rural worker by a landowner.  The landowner entered into an agreement with Cribb under which the landowner had the exclusive use and occupation of a certain area of Cribb's land.  As part of the agreement, Cribb would provide machinery and stock and the landowner would pay Cribb half of the proceeds of sale of the produce of the land and stock, whenever this occurred. Korn was injured while working and claimed worker's compensation from Cribb on the basis that Cribb and the landowner were partners.  The High Court held that there was no partnership; it was a mere tenancy.  As the landowner had exclusive right to occupy the land and Cribb had no right to direct or control the landowner’s working of the land, there could be no partnership but merely a tenancy.  Further, the sharing of gross returns was not enough to establish a partnership, but merely constituted rent.
[12] The receipt is evidence of partnership but where the receipt is contingent on something else thereby making it conditional, then it is not prima facie proof or evidence of partnership. There must be compelling evidence showing the contrary. 
[13] In Cox v Hickman, B and J Smith traded in partnership under the name ‘Stanton Iron Company’ and encountered financial difficulties.  A deed of arrangement with creditors was entered into, whereby their business and partnership property was assigned to trustees.  The trustees were empowered to carry on the business under a new name and future income was to be divided rateably between all the creditors.  As part of the arrangement, it was provided that, if the creditors were paid off, the business was to be returned to the Smiths.  Cox and Wheatcroft were two of the creditors who were appointed as trustees; however, Cox never acted as a trustee, and Wheatcroft did so for a very short time.  After Wheatcroft had ceased to act, the remaining trustees incurred debts to Hickman, and they gave him certain bills of exchange drawn on the partnership.  Hickman sought to make both Cox and Hickman liable on these bills.  The court held that there had been no holding out of Cox and Wheatcroft as partners and Hickman had no knowledge of them or of the deed of arrangement.  Both Cox and Wheatcroft could deny liability notwithstanding that they, as creditors, were entitled to share rateably in the profits.  This was not enough to make them partners.
[14] Deferred creditors.
[15] S. 46(2) of the Lagos Partnership Law.
[16] In Lagos, the partnership must be registered at the registry in Alausa.
[17] Just like you have under companies where directors are appointed to manage the affairs of the company. See S. 69 of the Lagos Law.
[18] Remember the rules on posting as espoused in the case of Adams v Lindsell.

Comments

Popular posts from this blog

PROMOTERS AND PREINCORPORATION CONTRACTS

CORROBORATION

LAW AND REVOLUTION