Partnership law (Partnership Act 1890)

BLP.08 — Partnership Law (Partnership Act 1890)

Definition (s.1 PA 1890). A partnership is "the relation which subsists between persons carrying on a business in common with a view of profit." All three limbs must be met. No formalities, no registration, no written agreement required — a partnership can arise unintentionally. (Contrast: an LLP needs registration at Companies House; a company needs incorporation.)

Is there a partnership? (s.2 rules). Co-ownership of property does not of itself create a partnership, even where the co-owners share profits made from using the property (s.2(1)). Sharing gross returns is not itself a partnership. Sharing net profits is prima facie evidence of partnership (rebuttable). Receiving a share of profits, or a payment that varies with profits, "does not of itself" make someone a partner (s.2(3)). The Act gives examples that do not by themselves make the recipient a partner: (a) receiving a debt or other liquidated amount by instalments out of profits; (b) an employee or agent paid by a share of profits; (c) a deceased partner's widow, widower, surviving civil partner or child receiving an annuity out of profits; (d) a lender whose interest varies with profits, or who receives a share of profits, but only if the loan contract is in writing and signed by or on behalf of all the parties; (e) a seller of goodwill paid by a share of profits. These are not automatic exclusions: the court still decides on all the facts whether the s.1 test is met. If the borrower or buyer of goodwill becomes bankrupt or dies insolvent, a lender under (d) or a seller under (e) is postponed until the other creditors are paid (s.3).

Relations between partners (default terms — only apply absent contrary agreement):

• s.24(1) — subject to agreement, partners share profits equally and contribute equally to losses, including capital losses, even where they contributed unequal capital. Capital contributions are treated differently on a final settlement: each partner is first repaid what is due to him in respect of capital (s.44(b)(3)), and only the ultimate residue, which includes any growth in asset values, is divided in profit-sharing proportions (s.44(b)(4)). See Popat v Shonchhatra [1997] 1 WLR 1367 (CA).
• s.24(5) — every partner may take part in management.
• s.24(6) — no partner is entitled to a salary.
• s.24(7) — no new partner may be introduced without unanimous consent.
• s.24(8) — ordinary decisions by majority; but s.24(8) also requires unanimity to change the nature of the business.
• s.19 — any term can be varied by unanimous consent (including conduct/course of dealing).

Liability to outsiders (an agreement made only between the partners does not reduce outsiders' rights):

• s.5 — each partner is an agent of the firm; the firm is bound by acts "carrying on in the usual way business of the kind" carried on by the firm, unless the partner lacked authority and the third party knew that or didn't know/believe them to be a partner.
• s.9 — every partner is jointly liable with the other partners for all debts and obligations of the firm incurred while he is a partner. The liability is personal and unlimited: a creditor may recover the whole debt from any one partner, and judgment against one partner does not bar an action against another (Civil Liability (Contribution) Act 1978 s.3). A partner who pays a firm debt incurred in the ordinary and proper conduct of the business is entitled to an indemnity from the firm (s.24(2)), so the loss is borne in the agreed or default proportions (s.24(1)).
• s.10–s.12 — for loss or injury to a person who is not a partner, the firm is liable under s.10 for a partner's wrongful act or omission if he was acting in the ordinary course of the firm's business or with the authority of his co-partners (s.10), and for money or property of a third person misapplied as described in s.11. Each partner is then liable jointly and severally for what the firm becomes liable for while he is a partner (s.12).
• s.14 — holding out: a person who represents (or knowingly allows themselves to be represented) as a partner is liable to anyone who gives credit on that basis.
• s.17 — an incoming partner does not, by joining, become liable for debts incurred before he joined (s.17(1)). A retiring partner remains liable for firm debts incurred while he was a partner before retirement (s.17(2)) unless he is released by a novation agreement between himself, the newly constituted firm and the creditor, which may be express or inferred from the course of dealing (s.17(3)). An indemnity from the continuing partners does not release him as against the creditor. For debts incurred after retirement, s.36 applies. A person dealing with the firm may treat apparent members of the old firm as still members until he has notice of the change (s.36(1)). Existing customers therefore need actual notice; a London Gazette advertisement is notice to people who had no dealings with the firm before the change (s.36(2)); and a retired partner who was not known to the person dealing with the firm to be a partner is not liable for debts contracted after retirement at all (s.36(3)). Separately, a retired partner who knowingly allows himself to be represented as still a partner may be liable by holding out (s.14).

Dissolution (default position):

• s.32 — subject to any agreement, a partnership is dissolved on expiry of a fixed term (s.32(a)) or on termination of the single adventure or undertaking (s.32(b)). If the partners carry on the business after a fixed term expires without a new agreement or a winding up, the partnership is presumed to continue as a partnership at will on the old terms, so far as consistent (s.27).
• s.32(c) — a partnership at will (one of undefined duration) is dissolved by any partner giving notice; subject to any contrary agreement, dissolution takes effect from the date stated in the notice or, if none is stated, from the date the notice is communicated; no reason is needed. A notice under s.26(1) is equally correct authority: where no fixed term has been agreed, any partner may "determine the partnership" at any time by notice to all the other partners, and if the partnership was constituted by deed, a written notice signed by that partner is sufficient (s.26(2)). Section 32(c) fixes when the dissolution takes effect. Section 26 is headed "Retirement from partnership at will", but its operative words are "determine the partnership". In Procter v Procter [2024] EWCA Civ 324, [63], the Court of Appeal said, without deciding the point, that a partner in a partnership at will would seem able to retire by notice under s.26(1), while noting that "determine" suggests a general dissolution and that s.26 overlaps with s.32(c). Where s.26 does not apply, for example in a partnership for a fixed term, a partner can retire unilaterally only if the partnership agreement gives that right; otherwise he may retire with the other partners' consent, or by dissolving the firm if he is in a position to dissolve it, and cannot otherwise retire (Lindley's rules, applied in Procter at [64]).
• s.33 — death or bankruptcy of a partner dissolves the whole firm (default — often disapplied by agreement).
• s.35 — on a partner's application the court may dissolve the partnership where another partner becomes permanently incapable of performing his part (s.35(b)); another partner's conduct is calculated to prejudicially affect the business (s.35(c)); another partner wilfully or persistently breaches the partnership agreement, or behaves so that it is not reasonably practicable to carry on in partnership with him (s.35(d)); the business can only be carried on at a loss (s.35(e)); or dissolution is just and equitable (s.35(f)).
• s.44 — order of distribution on winding up: pay outside creditors first, then partners' advances/loans, then return of capital, then any surplus shared as profits.

Common traps:

• Losses are shared equally by default even if capital contributions differ.
• A partnership exists on the substance (s.1 test), not on labels — calling it "not a partnership" doesn't help if the three limbs are met.
• A partnership at will can be ended by any partner's notice (ss.26(1) and 32(c)). Where s.26 does not apply, as in a fixed-term partnership, a partner has no unilateral right to retire unless the agreement gives one; otherwise he needs the other partners' consent or a right to dissolve the firm (Procter v Procter [2024] EWCA Civ 324, [64]).
• s.24 and s.32–33 are defaults that the partnership agreement can displace. An agreement made only between the partners does not reduce outsiders' rights under s.5, s.9, s.14, s.17 or s.36. Two important qualifications are: a restriction on a partner's authority binds a third party who has notice of it (s.8), and a retiring partner is released from existing debts by a novation agreement to which the creditor is a party (s.17(3)).
• Debts after retirement: test three groups. Existing customers need actual notice (s.36(1)); others who knew him as a partner are given notice by a Gazette advertisement (s.36(2)); people who never knew he was a partner cannot hold him liable (s.36(3)). Debts before retirement: he stays liable unless released by novation (s.17(3)).

Authority, property and duties

• Actual authority may be express or implied. An authorised person, whether a partner or not, can bind the firm by an act or instrument relating to its business made in the firm name or otherwise showing an intention to bind it (s.6, preserving the rules for deeds and negotiable instruments). A partner pledging the firm's credit for an apparently unrelated purpose needs special authority (s.7). A restriction agreed by the partners affects a third party with notice of it (s.8).
• Partnership property is held for the firm's purposes and under the partnership agreement (s.20). Property bought with firm money is presumed to have been bought for the firm unless a contrary intention appears (s.21). Ownership of a particular asset is distinct from each partner's entitlement on the final accounts.
• Partners must provide true accounts and full information to each other (s.28). Without the others' consent they must account for benefits obtained from partnership transactions or use of its property, name or business connection (s.29), and for profits from a competing business of the same nature (s.30).
• The s.24 defaults also include an indemnity for proper business liabilities, 5% interest on advances beyond agreed capital, no interest on capital before profits are ascertained, and access to the partnership books. No majority can expel a partner without an express agreed power (s.25).

Drafting the partnership agreement

Address duration, capital contributions and repayment, profit and loss shares, drawings and remuneration, management and reserved decisions, restrictions on authority, admission, expulsion, retirement and notice. Provide for death or bankruptcy, valuation and purchase of an outgoing share, restrictive covenants and dispute resolution. These terms can displace defaults within the law; a private indemnity does not release a partner against a creditor.

Completing the dissolution

• If a partner allows his share of the partnership property to be charged for his separate debt under the Act's charging-order procedure (s.23), the other partners may opt to dissolve the partnership (s.33(2)). Illegality dissolves the partnership under s.34. After dissolution, authority continues only as necessary to wind up and complete unfinished transactions; s.38 excludes authority of a bankrupt partner.
• Subject to agreement, the amount due for an outgoing or deceased partner's share is a debt accruing at dissolution or death (s.43). If the continuing partners use that share of the assets without final settlement, s.42 normally gives the outgoing partner or estate a choice of profits attributable to that use or 5% annual interest on the share. A purchase option duly exercised under the partnership agreement displaces that further entitlement; material non-compliance with the option leaves the continuing partners accountable.
• A firm using a business name rather than the partners' names with permitted additions must comply with the applicable business-name disclosures, including names and service addresses on specified documents (CA 2006 ss.1200–1202). Tax registration and returns are separate obligations; see BLP.18.

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