Partnerships may be created without any formalities, such as a written contract. However, the partners may, if they wish, formalize their partnership with a written agreement. This is the wisest course of action because it memorializes their agreed terms of doing business together. Along with the statute, this partnership contract is supreme in regulating the rights and obligations of the partners.
Statutory Definition of Partnership
Section 5(1) Partnership Act 1958 (Vic) defines partnership as follows.
A partnership is the relation which subsists between persons carrying on business in common with a view of profit and includes an incorporated limited partnership within the meaning of Part 5.
In Boolean terms, this definition may be restated as follows.
A partnership is (the relation) AND (which subsists) AND ((between persons) AND ((carrying on business) AND (in common) AND (with a view of profit))).
Readers may compare this Boolean analysis to that of Sir Frederick Pollock's definition of Consideration.
The Simplified Elements of Partnership
A detailed argument in court would agitate all the above elements, such as subsistence, and the detailed legal meaning of “in common” as it might relate to a tenancy in common. However, for simplified business law purposes, the statutory definition may be split into the following three (3) elements.
- The carrying on of a business
- In common
- With a view of profit.
Business was defined as something including regular and repetitious activities for profit in Ferguson v Federal Commissioner of Taxation (1979) 79 ATC 4261.
The mutuality of rights as being in common determined a partnership in Re: Ruddock (1879) 5 VLR 51.
Partners’ Duties of Good Faith
Sections 32, 33 and 34 of the Partnership Act provide duties of good faith between the partners. These duties are similar to the fiduciary duties between principal and agent.
Partner’s Authority
As in the law of Agency, partners may bind each other as an agent of the partnership, while acting within authority. Ostensible authority was fully discussed in Freeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) and Another [1964] 1 All ER 630, as follows.
K who carried on business as a property developer, entered into a contract to purchase an estate. He had not enough money to pay for it and obtained financial assistance from H. They formed a limited company with a share capital of £70,000, subscribed equally by K and H, to buy the estate with a view to selling it for development. K and H, with a nominee of each, comprised the board. The quorum of directors was, by the articles of association, four. H was at all material times abroad. There was power under the articles to appoint a managing director, but the board did not in fact do so. K to the knowledge of the board acted as if he were managing director of the company in relation to finding a purchaser for the estate and, again without express authority of the board, employed on behalf of the company a firm of architects and surveyors for the submission of an application for planning permission, preparing an appeal against a refusal of permission, preparing plans and defining estate boundaries. The firm claimed from the company their fees for work done.
Held – The company was liable for the fees claimed because—
(i) K throughout acted as managing director to the knowledge of the company and thus was held out by the company as being managing director, and the ostensible authority thus conferred could bind the company since its articles of association in fact provided for there being a managing director of the company, and
(ii) K's act in employing the plaintiffs was within the ordinary ambit of the authority of such a managing director, and
(iii) the fact that the plaintiffs had not examined the company's articles of association and had not enquired whether K was properly appointed managing director did not prevent their establishing their claim against the company based on their reliance on K's ostensible .
Per Diplock LJ: to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no authority to do so four conditions must be fulfilled, viz,—(a) a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced must have been made to the contractor; (b) the representation must have been made by a person or persons who had “actual” authority to manage the business of the company either generally or in respect of those matters to which the contract related; (c) the contractor must have been induced by the representation to enter into the contract; and (d) the company must not have been deprived, under its memorandum or articles of association, of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to the agent to enter into a contract of that kind.
Readers may review how this applies, with the indoor management rule, in the case of a director holding himself/herself out as an agent of a company.
In Summary
A partnership is not a partnership in law, unless it conforms to the statutory definition. In exam questions, the definition must be used carefully and illustrated by cases in which the court has interpreted each part of the definition. Partner fiduciary duties guide the duties of the partners to each other, and partners authority must be considered when deciding whether or not a third party may sue the partnership.
Sources:
Partnership Act 1958 (Vic).
Ferguson v Federal Commissioner of Taxation (1979) 79 ATC 4261.
Re: Ruddock (1879) 5 VLR 51.
Freeman and Lockyer (a firm) v Buckhurst Park Properties (Mangal) and Another [1964] 1 All ER 630.
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