Analysis of White & Co Law Cases Concerning Principles of Partnership - Case Study Example

The factual scenario raises various issues relating to partnership law and liability and we are not told whether this is a limited liability partnership. As such, I will advise on the legal position in accordance with established principles of partnership law under the Partnership Act 1890 (the PA). 1) Is the firm legally bound by the contract that Jane has entered into, on its behalf, with Mikes Garage? The English legal system provides for a variety of business ownership structures and section 1 of the PA defines partnership as “the relationship which subsists between persons carrying on a business in common with a view of profit”. Partnerships do not require incorporation or registration and require a minimum of two partners1. Unlike sole traders, partners share the business and control, decision making and profit and losses. All partners are jointly and severally liable for debts and “owe duty of good faith to each other2”. Section 28 of the PA further imposes a statutory duty to account and “partners are bound to render true accounts and full information on all things affecting the partnership to any partner or his representative3”. Moreover, as demonstrated in the case of Law v Law4, the effect of Section 29 of the PA is to prohibit secret profits and in the case of Pathirana v Pathirana it was asserted that “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 property, name or business connection5”. The PA governs liability of partners and their legal obligations and provides that each partner is equally liable for the business regardless of their share of the ownership. Section 12 of the PA states that “Every partner is liable jointly with his co-partners and also severally for everything which the firm while he is a partner therein becomes liable under either of the last two preceding sections”. Section 9 further states that “every partner is liable jointly with other partners…. And severally, also for all debts and obligations of the firm incurred while he is a partner”. Accordingly, White & Co is potentially bound by the contract that Jane has entered into. Furthermore, under Section 10 of the PA where one partner commits an act which is wrong in itself, as opposed to being outside his authority, the partnership will be liable for harm caused if the act comes within the ordinary course of business. With regard to liability towards Mike, section 5 of the PA provides that “every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for the carrying on in the usual way business of the kind carried on by the firm of which he is a member bind the firm and his partners”. The main way in which the partners will not be liable for Jane’s actions is if “the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner”6. I shall now consider the concept of “authority” under agency law principals for the purpose of determining the partnership’s liability. Prima facie, as Mike regularly deals with White & Co and Jane purported to purchase the car for the partnership’s business, it may come within activities in the ordinary course of the type of business carried out by the partnership.. As such, this would suggest that Jane’s conduct satisfies the definition of “holding out” under the PA and as such, Jane’s actions may be binding on the partnership under the applicable legal principles. Under the general rules of agency, a principal will be contractually bound by a third party on the grounds of either actual authority (express or implied) or apparent authority7. In addition to the principles of on the basis of partnership law, the agency law principles would indicate that Jane would be regarded as having authority on the basis of judicial rationale in the case of Panorama Developments (Guildford) Limited v Fidelis Furnishing Fabrics Limited8 . In this case, a company secretary fraudulently hired cars for his own use without the knowledge of the managing director. However, it was held that it was a routine part of a company secretary’s job to enter into contracts in the company’s name and has administrative responsibilities that would give apparent authority to hire cars. As such, the company was held to be liable as principal. If we apply this by analogy to the current position, if Jane notified Mike that she was a partner at White & Co, which he has dealt with regularly, then it will be strong grounds pointing towards having apparent authority to purchase the car in the name of the business. Furthermore, the case of Hely-Hutchinson v Brayhead Limited9provided that implied actual authority can also arise from the position which the individual holds. As such, Jane’s position as partner will also authorise her to do all such things as fall within the usual scope of his position10. Furthermore, in the case of Rama Corporation Limited v Proved Tin and General Investment 11it was asserted that the requirements for apparent authority are that there is a representation to the third party that the agent has authority and the third party relies on this. As such, the express and ostensible authority will under the principles of agency create a binding agreement. However, White & Co will not be liable if it can establish that Jane’s conduct was not within the scope of the partnership business or in the ordinary course of business. Alternatively, section 8 of the PA provides that “if it has been agreed between the partners that any restriction shall be placed on the power of any one or more of them to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement”. Accordingly, if Mike had notice that Jane did not have authority, then the firm will not be legally bound by the contract. In the event that the firm is bound by contract, they may be able to expel Jane from the partnership on grounds of breach of the partnership agreement and seek compensation from her to indemnify them for the sums paid to Mike under the contract for the car12. 2) Will the injury to Alan be likely to affect his membership of the firm in any way? With regard to Alan’s condition and prognosis regarding the likelihood that he will not be able to return to work, this will not legally impact his position as a partner per se13. Under section 33 of the PA it is only death that will automatically dissolve a partnership. Moreover, Alan will continue to receive his share of profits notwithstanding the illness. Alternatively, if they wait until the expiry of the fixed term partnership, section 32 of the PA provides that if a partnership is entered into for a fixed term it will automatically be dissolved upon expiration of that term. If however, the firm determines that Alan’s illness impacts the effective operation of the business, the partnership may wish to expel him. However whilst there is no legal obligation to formalise a partnership agreement in writing, failure to do so can lead to the downfall of the business14, which is will impact the legal position regarding expulsion. For example, section 25 of the PA provides that “no majority of partners can expel any partner unless a power to do so has been conferred by express agreement between the partners”. However, this can be circumvented by entering into a separate deed of partnership, which may include the liabilities, responsibilities and ownership share of the business15. Accordingly, the partnership’s rights to remove Alan as a result of his incapacity would be either by virtue of the express partnership agreement, or alternatively under section 34 of the PA. However, the section 34 grounds provide for termination only provide for expulsion on grounds that there has been breach of the partnership agreement, negligence and acts in excess of authority rendered the partnership illegal. However, this would result in the partnership itself being dissolved and is not applicable to Alan’s situation. Nevertheless in practice, partnership agreements often provide express provisions regarding the impact of long term illness on the partnership16. Whilst the PA provisions are silent on the impact of long term illness, the partnership agreement may itself provide White & Co with the right to terminate Alan’s role as partner. Alternatively, if there is no such express provision and the issue regarding Alan’s return to the business remains precarious, the other option would be to vary the partnership agreement to address the impact of Alan’s illness on the partnership. However, this would have to be done by consent as section 19 of the PA provides that “the mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by consent of all the partners, and such consent may be express or inferred from course of dealing”. 3) Does the quarrelling between Ian and the other partners amount to a serious matter? How could it be resolved? The quarrelling between the other partners and Ian clearly undermines the implied notion of trust and confidence, however whilst the other partners appear to be excluding Ian, there does not appear to be any breach as such. Aside from trying to resolve the situation, the other partners may as a majority attempt to expel Ian from the partnership on grounds that the constant fighting is detrimental to business operations. However, as stated above, section 25 of the PA provides that a partner cannot be expelled unless there is an express provision in the agreement. Case law has specified certain conditions which must be satisfied if an expulsion clause is to be considered valid. Firstly, as highlighted by the case of Snow v Milford17 an expulsion clause must cover the nature of the complaint being used as a basis for expulsion. In this case, the expulsion clause covered financial improprieties. However, the complaint which related to the expulsion related to the partner committing adultery as a married man and therefore the purported expulsion was held to be invalid. If we apply this by analogy to the current scenario, if there is an express expulsion clause, the clause would have to cover the factual scenario in order for any purported expulsion to be valid. Additionally, the partners must exercise the power to expel in good faith. For example, in the case of Blisset v Daniel18it was determined that an expulsion of a partner without explanation was not in good faith and therefore invalid. However, the issue as to what the exact procedural requirement is in giving notice remains uncertain. In the case of Green v Howell19 for example, the court upheld the expulsion of a partner who had not been given a chance to explain and it was determined that ultimately the decision regarding notice and explanations was ultimately dependent on the factual scenario of the case. BIBLIOGRAPHY N Bourne., (2007). Bourne on Company Law. Routledge-Cavendish. Keenan (2006). Law of Business. 13th edition Longman. Farrar (1999). Farrar’s Company Law. 4th Edition Butterworths. Brenda Hannigan (2003). Company law. 5th Revised Edition. Oxford University Press Dignam & Lowry (2006). Company Law. 4th edition Oxford University Press. G. Morse (2006). Partnership Law. 6th Edition Oxford University Press. L.Sealey., & S.Worthington., (2007). Cases and Materials in Company Law. 8th Edition Oxford University Press. Read More