The Partnership Agreement

Question 1

What is the primary focus of Section 24 of the Partnership Act 1890, and what does it imply?

Answer 1

Section 24 Focus:
Implications in Absence of Express Provisions:
Concerns provisions implied into a partnership agreement.
Takes effect when there are no express provisions.
Aims to ensure equal treatment among partners.

Question 2

What are the limitations of Section 24, and how does it address partners’ equality?

Answer 2

Section 24 Limitations:
Scope Limitation:
Limited in addressing modern business practices.
Equality:
Treats all partners equally despite limitations.

Question 3

What factors influence the length and content of a partnership agreement?

Answer 3

Partnership Agreement Factors:
Imagination and Thoroughness:
Length depends on partners’ imagination and thoroughness.
Comprehensive Range:
Allows a comprehensive range of topics and provisions.
Additional Provisions:
Provides scope for additional provisions beyond the Act’s terms.

Question 4

What should be included in a Partnership Agreement?

Answer 4

Commencement date, Name, Financial Input, Shares in incomes profits/losses, drawings, shares in increase/decrease in asset values, place and nature of business, ownership of assets, work input, roles decision making, duration, retirement, expulsion, restraint of trade following departure, arbitration.

Question 5

COMMENCEMENT DATE

Answer 5

Partnership begins when the statutory definition in s 1 of the PA 1890 is met. While the specified date in the agreement may not be accurate, it’s recommended to designate a date for mutual rights and responsibilities to commence.

Question 6

NAME

Answer 6

Partnership name must be specified in the agreement, ensuring its stability. The firm name might differ from the business name; both should be indicated in the agreement. This prevents unilateral changes and is enforceable as a contractual right

Question 7

FINANCIAL INPUT

Answer 7

Partners contribute capital for business finance, either from personal resources or borrowing. The agreement specifies each partner’s initial capital and may address future contribution increases if anticipated

Question 8

SHARES IN INCOME PROFITS/LOSSES

Answer 8

By default, partners share income profits and losses equally per PA 1890. The agreement can establish a different basis for profit division, offering flexibility.

Question 9

SALARY (under shares in income profit/losses)

Answer 9

Partners may receive different fixed salaries, reflecting factors like time commitment and experience. Particularly useful for part-time or sleeping partners.

Question 10

INTEREST ON CAPITAL (under shares in income profits/losses)

Answer 10

Partners’ capital contributions may earn interest at a specified rate. A way to reward partners proportionally for their financing contributions

Question 11

PROFIT-SHARING RATIO (under shares in income profits/losses)

Answer 11

Partnership agreements can specify a ratio for dividing profits after salaries and interest. May be equal or consider factors like seniority. Address loss scenarios in the agreement.

Question 12

DRAWINGS

Answer 12

Partners may disagree on the frequency and amount of money withdrawn as their share of profits. Partnership agreements often set monthly withdrawal limits, subject to review. Consequences for exceeding limits are typically outlined. Joint venture agreements between companies also address profit/loss distribution.

Question 13

SHARES IN INCREASES/DECREASES IN ASSET VALUES

Answer 13

Partners need to decide how increases or decreases in the value of fixed assets, like premises, are shared. The default under PA 1890 implies equal sharing unless agreed otherwise. Disparities in capital contributions may lead to a negotiated ‘asset-surplus sharing ratio.’ The agreement should address how changes in asset values affect each partner’s share in the business

Question 14

PLACE AND NATURE OF BUSINESS

Answer 14

The partnership agreement may specify the business’s location, operational area, and nature. Changes to these aspects typically require unanimous consent from all partners once agreed upon.

Question 15

What is a partnership asset?

Answer 15

A partnership asset is an asset where beneficial ownership rests with all the partners, although not necessarily in equal shares

Question 16

What may lead to disputes over partnership assets?

Answer 16

Disputes may arise over assets already owned by a partner entering the business or those acquired during the partnership.

Question 17

How can disputes over ownership be avoided?

Answer 17

The partnership agreement should specify ownership to avoid disputes, especially during dissolution, profit events, or tax liabilities related to specific assets.

Question 18

Can you provide an example of a dispute over partnership property?

Answer 18

In the case of Don King Productions Inc v Warren (No 1) [2000] Ch 291, an unusual problem arose over partnership property related to boxing contracts.

Question 19

What does the PA 1890 imply regarding the management of a partnership business?

Answer 19

The PA 1890 implies that, in the absence of contrary agreement, all partners are entitled to participate in the management of the business without an obligation to devote full-time attention

Question 20

How does the agreement usually specify the commitment level of each partner?

Answer 20

The agreement may express commitment in general terms, such as a full-time working partner devoting their whole time and attention to the business.

Question 21

Is it common to specify fixed hours of work for full-time partners?

Answer 21

Expressing work commitment in fixed hours may be inappropriate, especially for full-time partners, so agreements often use more general terms.

Question 22

What reinforcement might be added to the obligation of full-time partners?

Answer 22

Agreements may include provisions preventing full-time partners from engaging in any other business during the partnership, enforceable without violating restraint of trade issues.

Question 23

Are there qualifications to the general statement about the amount of work required?

Answer 23

Yes, qualifications should address holiday entitlement, sickness, and reasons for absence, providing specifics not covered by the PA 1890.

Question 24

What should a partnership agreement describe besides the amount of work input?

Answer 24

The agreement should also describe each partner’s function within the partnership, specifying roles and responsibilities.

Question 25

How might the role of a sleeping partner be defined?

Answer 25

A sleeping partner’s role could be limited to attending meetings, with the agreement explicitly stating they have no authority to enter into contracts on behalf of the partnership.

Question 26

Can a partner’s authority to make contracts be limited in the agreement?

Answer 26

Yes, the agreement may specify limits on a partner’s authority to make contracts, particularly for partners with limited experience, partially defining their role.

Question 27

Is what is agreed upon roles binding between partners?

Answer 27

Yes, whatever is agreed upon regarding roles is binding between partners, and a partner ignoring such restrictions would be in breach of the contract.

Question 28

How are partnership decisions typically made in the absence of contrary agreement?

Answer 28

Partnership decisions are typically made based on a simple majority, where each partner has one vote, unless the agreement specifies otherwise.

Question 29

What decisions require unanimity according to the default rules?

Answer 29

Decisions on changing the nature of the business or introducing a new partner require unanimity according to default rules, unless the agreement states otherwise.

Question 30

Can the agreement specify certain decisions that a partner can make individually?

Answer 30

Yes, the agreement can be more detailed, specifying decisions that any partner can make individually, such as routine sales and purchases of stock.

Question 31

Can the type of business be altered without the consent of all partners?

Answer 31

No, anything contained in the agreement, such as the type of business, is a term of the contract and cannot be altered without the consent of all partners.

Question 32

What may be built into the contract to allow changes in terms?

Answer 32

The agreement might contain provisions for altering its terms, for example, allowing changes in the type of business if agreed upon by a majority of the partners.

Question 33

What decision-making mechanism should be included in a joint venture between companies?

Answer 33

In a joint venture between companies, the agreement should include a decision-making mechanism to address specific decision-making processes.

Question 34

How can a partnership be dissolved if there is no provision in the agreement?

Answer 34

A partnership can be dissolved at any time by any partner giving notice to the others, creating a partnership at will

Question 35

What is a partnership at will, and what is its advantage and disadvantage?

Answer 35

A partnership at will allows any partner to dissolve the partnership at any time for any reason. Its advantage is freedom for partners, but its disadvantage is insecurity and instability for the firm

Question 36

What does Section 32 of the PA 1890 define regarding the dissolution of partnerships?

Answer 36

Section 32 defines the basis on which partnerships of any type are to be dissolved, subject to alternative agreement between the partners

Question 37

What are some possible provisions to restrict the right of partners to dissolve the partnership?

Answer 37

Possible provisions include requiring a minimum notice period for dissolution, agreeing on a fixed term, or stipulating that the partnership continues as long as there are at least two remaining partners.

Question 38

How does death or bankruptcy affect a partnership under Section 33 of the PA 1890?

Answer 38

Unless there is a contrary agreement, the death or bankruptcy of a partner automatically causes dissolution of the entire partnership.

Question 39

How can a fixed-term agreement be made flexible regarding continuation after expiry?

Answer 39

A fixed-term agreement can continue automatically after the fixed term, terminable by notice, providing flexibility for partners

Question 40

What provision can be added to address financial concerns when a partner leaves?

Answer 40

A provision can state that the partnership continues as long as there are at least two remaining partners, allowing for stability and security while providing flexibility for individuals to leave. Ancillary provisions may delay payment to the outgoing partner.

Question 41

In what situations can a court order dissolution, and why is it necessary?

Answer 41

Section 35 of the PA 1890 allows a court to order dissolution if certain grounds are met, providing an escape for a partner locked into an agreement without being liable for breach of contract.

Question 42

What does ‘retirement’ mean in the context of partnership law?

Answer 42

It refers to leaving the partnership, often to pursue other business opportunities

Question 43

Under the PA 1890, how is retirement addressed in a partnership at will?

Answer 43

Retirement in a partnership at will is achieved by dissolving the partnership under section 26.

Question 44

Can a partner retire at will without any contractual provisions?

Answer 44

Strictly speaking, a partner’s exit route is by dissolving the entire partnership by giving notice

Question 45

Why might a partner face challenges in retiring without dissolution?

Answer 45

The agreement may contain provisions on duration, preventing retirement without breaching contract

Question 46

What is the usual desirable approach to address partner retirement in an agreement?

Answer 46

It is desirable to have express provisions specifying when a partner can retire without dissolving the partnership and detailing payment for the departing partner’s share

Question 47

Does the PA 1890 provide for the expulsion of a partner without their consent?

Answer 47

No, the PA 1890 does not provide for the expulsion of a partner without their consent.

Question 48

Why is expulsion considered an important sanction in a partnership?

Answer 48

Expulsion serves as a significant sanction for breach of the partnership agreement or other stipulated forms of misconduct

Question 49

What should a partnership agreement include regarding expulsion?

Answer 49

The agreement should specify the grounds for expulsion, the manner of exercising this right (e.g., unanimous decision), and address the payment for the outgoing partner’s share

Question 50

How is the expulsion clause similar to a retirement clause in a partnership agreement?

Answer 50

Similar to a retirement clause, an expulsion clause should address the question of payment for the departing partner’s share

Question 51

What do the remaining partners have to do when a partner leaves due to retirement, expulsion, death, or bankruptcy?

Answer 51

They need to pay for the leaving partner’s share in the business

Question 52

What happens if the partnership agreement doesn’t say how the leaving partner gets paid?

Answer 52

If it doesn’t say and they can’t agree, there’s a rule (Section 42 of the PA 1890) that lets the leaving partner get interest or a share of profits during the delay in getting paid.

Question 53

What should the partnership agreement talk about regarding the leaving partner’s share?

Answer 53

(a) Whether the partners must buy the leaving partner’s share (obligation) or if they can choose to buy (option).
(b) How they decide how much the leaving partner’s share is worth.
(c) If they can’t agree, they might need a professional to decide (valuation).
(d) When they have to pay (due date).
(e) If the leaving partner’s share includes debts, the agreement should say who covers that (indemnity)

Question 54

Why might it be better to have a choice to buy instead of a must-buy rule for partners?

Answer 54

For tax reasons, especially if they want a tax break called “business property relief.”

Question 55

What does the leaving partner or their family get if they have to wait for their money?

Answer 55

They can get interest on what they’re owed or a share of the profits made using their share until they get paid.

Question 56

Can an outgoing partner automatically be stopped from competing with the partnership or joining a rival business?

Answer 56

No, there’s no automatic stop. A specific provision is needed to limit the outgoing partner’s freedom to compete, protecting the business connections of the remaining firm

Question 57

Why is drafting restraint of trade clauses important?

Answer 57

If a restraint of trade clause is deemed unreasonable, it can be void. Courts are more likely to uphold it when protecting a business purchaser than restricting an individual partner

Question 58

What should be considered when drafting a non-competition clause?

Answer 58

(a) Identify the legitimate interest the clause is protecting (like business connections, employees, or confidential info).
(b) Check if the clause is reasonable in its geographical area and duration. It shouldn’t be broader than necessary

Question 59

What are other forms of restraint of trade clauses?

Answer 59

(a) A ‘non-dealing clause’ prevents a former partner from entering contracts with customers or ex-customers.
(b) A ‘non-solicitation clause’ stops them from soliciting contracts from customers or employees. These are less restrictive and more likely to be enforceable

Question 60

Why might a partnership agreement include arbitration provisions?

Answer 60

To prevent the high costs, delays, and negative publicity associated with litigation between partners. Typically, these provisions focus on disputes related to the interpretation or application of the agreement rather than day-to-day business issues