How is liability for the firms debts governed?
Liability for a firm’s debts is governed by s 9 of the Act - provides that each partner is jointly and severally liability (why sometimes wives or husbands own the house in order to protect personal assets which could be used to meet partnership’s liabilities). This is in contrast to the Limited Liability Company (only companies assets are liable).
What does it mean when we say a partnership is a contract delectus personae?
A partnership is a contract which involves delectus personae - i.e. persons chosen for their special skill or talent. Because of this rule, every time a partner leaves or joins or dies, in theory the old partnership is destroyed and a new partnership is created. This obviously will have an impact on debts (debts of the ‘old’ partnership wouldn’t necessarily have an impact on the debts of the ‘new’ partnership). This would suggest that new partners are not liable for prior debts taken on by the partnership (but see below)
What is the liability for an incoming partner for prior acts of the firm?
⁃ Under s 17(1) of the Act, simply by joining a partnership you don’t become liable to the debts before coming a partner.
- However, you may become liable because of the whole facts and circumstances. The court applies a presumption that where the new partnership takes on the assets and stock and business of the old partnership, it also takes on its liabilities. This presumption works against the new partner. In effect a new partnership is formed - this is because of delectus personae in partnerships - when a person leaves it is the end of a prior partnership and start of a new one.
Can the debts of the old partnership be taken over by the new partnership?
This presumption can be defeated by evidence to the contrary. The following case demonstrates the operation of the presumption:
⁃ **Heddle’s Ex v Marwick & Hourston’s Tr (1888) (read case)
**Heddle’s Ex v Marwick & Hourston’s Tr (1888) (read case)
⁃ The manager was taken into a new business - the new partnership continued the old business and took over the stock prior to him becoming a partner.
- The presumption operates so that the new firm takes on the liabilities of the old firm and the partner of the new firm becomes liable for the debts of the old firm. The creditor of the old partnership could seek payment.
- One thing that is emphasised in this case is that the new partner contributed no capital - the court used this fact to support their view that in fact this was simply the old partnership continuing as before. The court argues that there was a presumption that where new partners contribute no capital etc., that the new partnership takes on debt - must look to the facts and circumstances of the case. Has presumption been rebutted by the evidence? The court said this could happen when the new partner did contribute capital [NB Lord Shand stated that if this new partner had contributed capital then things would have been different (see Thomson and Balfour.]
- Inner House held: when whole assets of a growing concern are taken over by a new partnerships, with the partnership contributing no capital and the business continuing as before. The presumption is that the liabilities are taken over with the stock. The new partnership undertook liability for all the trade debts of the old firm.
Thomson and Balfour v Boag 1936
⁃ In this case the new partner did contribute capital. The court used this fact to conclude that this was evidence that it was not the old firm continuing as before - rather there was a major change and therefore the presumption was overturned and thus the new partner was not liable. The new partner, by putting in capital, everyone is starting from scratch all having brought something to the table. So a new partner coming into a continuing business there is a presumption where capital is not contributed that the new partnership is liable as the old.
What is the liability of a retiring partner?
s 17(2): “A partner who retires from a firm does not thereby cease to be liable for partnership debts or obligations incurred before his retirement.”
Welsh v Knarston 1972
Solicitors firm is instructed to raise a personal injury case. The victim has three years from the injury to bring a claim. The solicitor’s firm does nothing and the action is time barred. The client sues the solicitors firm for negligence. Two of the partners tried to avoid liability because, although they were partners during the time they were instructed, they left before the 3 years had expired. The court disagreed - they held that they had a continuing obligation to rectify the omission. [So retiring might not necessarily save you from liability unless you enter into a discharge agreement (a contract with the remaining partners sorting out any remaining liabilities.]
What is the agency of partners?
Section 5 is a codification of the common law of agency in relation to partners (it contains an expression of apparent authority):
⁃ A partner may be limited by his partners as to the extent of his authority, but his action will be binding on the firm, unless:
⁃ a. the person dealing with the partner knows the partner lacks authority for the act in question; or
⁃ b. that person did not know or believe the partner is a partner
Do not use common law agency principles in this regard - always refer to the Act
What happens when a partner commits a delictual wrong?
This is dealt with in s 10 of the Act. Essentially if a partner causes a loss[ A partner can cause loss either 1) while acting in the ordinary course of business or 2) acting with the authority of his co-partners.] in the course of doing his business with the firm then the firm is going to be liable (some argue this is a form of vicarious liability).
⁃ NB s 10 only applies if someone outside the firm is injured by the actions of a partner - it does not apply if you injure another partner.
Two instances must be distinguished:
i. a partner acting in the ordinary course of business;
ii. a partner acting with the authority of his co-partners.
Mair v Wood 1948
One partner in a fishing partnership removed boards in the deck of a ship leaving a hole. The other partner walked over the deck and injured themselves. The question was whether the firm was liable for the negligent actions of one partner in injuring another partner. NO. Lord Keith held that partners act as agents towards the outside world (thus the firm is liable) but as principles between each other (thus the firm is not liable).
Ross, Harper & Murphy v Banks 2000 SC 500
concerns the misapplication of money [not covered in the lectures].
New Mining and Exploring Syndicate Ltd. v Chalmers and Hunter 1912 SC 126.