CHAPTER II.

CURRENT STATUS OF PARTNERS LIABILITY UNDER RWANDAN LAW

The study of the legal status of the partners liability under Rwandan law is essentially based on the premise that, in the absence of any legal text governing partnerships, the default form of partnership is only applicable and available. In fact, the general partnership is the default organization form where a business is carried out by two or more people in common without any formality1 and which can exist even where parties did not intend to form a partnership2 as discussed earlier in chapter one. The existence of any other form of partnership is subject to some clear requirements which are, in other jurisdictions, laid down in partnership legislation which is inexistent in Rwanda3. The status of affairs remains immaterial of the existence of a number of businesses, especially those of professionals like lawyers, accountants, doctors, etc.., carried on under the partnership structure. Check existing partnership in Kigali (Rwanda).

The liability of a partner is discussed in the relationship with copartners and the partnership (section I), the partnership with third parties (section II) as well as between partners and third persons (section III).

Section I. Liability of Partners to the Partnership and Copartners

The partner is expected to comply with some duties arising out of the relationship with fellow partners and must abide by the agreement of partnership. In case of breach or non compliance with the foregoing, the partners liability can be at stake. This section is intended to highlight a bit this matter.

P. CAMMARATA, op. cit., p. 952. P. RUBIN and J. LANGLOIS, op. cit., p. 7; J. W. LARSON, op. cit., p. 4 and J. H. MATHESON, op. cit., p. 8. 3 This was confirmed by the information provided on November 9 and 10, 2011 respectively by Me Richard MUGISHA, the Managing Partner of Trust Law Chambers and Yves SANGANO, The Deputy Registrar General at Rwanda Development Board (RDB).
2

1. Liability for Breach of Partners Duties to the Firm and Co-partners

Before delving into the details on the liability of partners for breach of their duties to the firm and their fellow partners, it is relevant to shed more light on those duties commonly known as fiduciary duties.

A. Partners Fiduciary Duties

Under Rwandan law, the contract of partnership, as any other non-nominated contract,4 may envisage some duties including fiduciary ones which parties to it (partners) must observe.5 The problem would arise where the partnership agreement is silent on this issue or where there is no partnership agreement at all. In the absence of the law governing partnerships in Rwanda the author deems it useful, from a comparative perspective, to fetch from some other jurisdictions where this business organizational form is regulated and draw on the writings of legal scholars which may be resorted to by the Rwandan judge in case he/she is requested to decide on this unregulated issue.6

As Don Alan EVANS points out, the partnership relationship is a fiduciary relationship and partners owe fiduciary duties to each other and to the firm.
7

In the same line of ideas J.M.

RICKERT argues that the mutual agency of partners means that they owe each other the duties of care and loyalty that an agent owes a principal8. This is also emphasized by the American

Those are contracts which are not specifically regulated by the law of contracts or any other law which are, nonetheless, subjected to general principles of the law of contracts (see F. ZIGIRINSHUTI, Private Specific Contracts, Students Manual, Butare, UNR, 2004, p.. and art. 7 CCB III). 5 The information provided on the 9th November 2011 by Me D. KAYIHURA, a Partner in Fountain Law Chambers, shows that partners have a duty to advance and promote the partnership objectives. Though this does not talk expressly of any fiduciary duties some of their components may be deduced there from. The promotion of partnership objectives requires for instance, in my understanding, the exercise of care while conducting its activities. 6 Where the judge is requested to adjudicate a case and he/she is faced with a lacuna in the law, the judge is required to adjudicate the case in accordance with rules of law he/she would enact if he/she were requested to do the work of the legislator with the inspiration of the case law, custom, general principles of law or doctrinal writings (See article 6 para. 1 of the Law No 18/2004 of 20/06/2004 relating to Civil, Commercial, Labor and Administrative Procedures as modified and completed to date, O. G., No special bis of 30/07/2004). 7 D. A. EVANS, Texas Business Law, 3rd Ed., Gretna, Pelican Publishing Company Inc., 1995, p. 530. 8 J. M. RICKERT, op. cit., p. 789.

revised uniform partnership act wherein the only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care.9

1. The Duty of Loyalty

In the case where there is no specific stipulation in the partnership agreement, the duty of loyalty may be analyzed basing on article 33 para. 2 CCB III, according to which conventions legally entered into must be performed with good faith. Good faith is, among others, understood as entailing a behavior of loyalty, an attitude of integrity and honesty in performance of an obligation.10

The duty of loyalty a partner owes to the partnership and copartners can be described to contain three parts. Primo, the partner must account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or from use of partnership property including the appropriation of a partnership opportunity.11 This implies that private benefits gained in such situations must be forked out to the partnership. Secondly, the partner must refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership.12Thirdly and lastly, the partner must refrain from competing with the partnership in the conduct of the partnership business before its dissolution.13 According to E. S. MILLER, the foregoing three elements embrace the typical areas traditionally encompassed by the duty of loyalty; viz self-dealing and conflicts of interest, usurpation of partnership opportunity, and competition.14

See RUPA, Section 404 (a). G. CORNU, Vocabulaire juridique, 3 Ed., Paris, Quadrige, 2002, p. 114 (authors translation). 11 See RUPA, Section 404 (b), (1); Section 31, Ugandan Partnerships Act (2010); Section 196 (a), Tanzanian Law of Contracts Act and Section 33, Kenya Partnership Act. 12 See RUPA, Section 404 (b), (2). 13 See Section 32, Ugandan Partnerships Act (2010); Section 34, Kenya Partnership Act and Section 196 (b) Tanzanian Law of Contracts Act and RUPA, Section 404 (b), (3). 14 E. S. MILLER, Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations, State Bar of Texas-Essentials of Business Law, Dallas, 2010, p. 12.
10

2. The Duty of Care

A partners duty of care to the partnership and the other partners in the conduct and winding up of the partnership business entails that she/he does not engage in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.15 The care in question, as argued by E. S. MILLER is that of an ordinarily prudent person under similar circumstances.16 By virtue of this duty partners are, therefore, expected to act with due diligence while conducting partnerships business or during its winding up.

In some jurisdictions, the partnership agreement cannot eliminate fiduciary duties of loyalty nor unreasonably reduce the duty of care.17 In other jurisdictions, however, like in Uganda for instance partners may, by the consent of all partners, vary any of their mutual rights and duties whether ascertained by the agreement or defined by the law.18

Thus, one may rightly wonder about what would happen under Rwandan law in the absence of any legal text on the matter. In my view, arguably what is not prohibited by the law is allowed and parties may draw up their partnership agreement as they think pleases and anyone must respect it as it has the force of law to those who are parties to it so long as it is consistent with the law19. The problem stays behind in instances where this issue is not dealt with in the partnership agreement. As I pointed out earlier, judges inspired among other by case law, general principles, doctrinal writings shall decide according to laws they would put in place if they were asked to legislate. Thus, the doctrinal discussions above should be resorted to.

In case of breach of the foregoing fiduciary duties partners incur liability to the partnership and their fellow partners.

15 16

See RUPA, Section 404 (c). E. S. MILLER, op. cit., p. 12. 17 See Section 67-404(2) (c) and (d) of Nebraska Uniform Partnership Act (1998); Section 103(b) (3) and (4) of RUPA. 18 See section 21 of Ugandan Partnerships Act (2010). 19 See art. 33 C.C.B. III.

B. Liability for Breach of Fiduciary Duties

In case a partner has acted in breach of fiduciary duties as described above she/he cannot go without being held liable for prejudice caused to the partnership or a copartner. It is in this regard that when partners breach their duties in a way that involves the firm in losses or liabilities, furthers their own interests at the expense of the business as well as their copartners, they become liable to indemnify the firm.20 They may thus be proceeded against at the firms instance or at the instance of any partner who deems herself/himself aggrieved.21More relevant is to note that, in so far as breach of the duty of care is concerned, partners are bound to avoid gross negligence and cannot be liable to the partnership for common mistakes.22

Nonetheless, it goes without saying that when a partner causes a loss to the firm by exercising a bad judgment she/he is not liable to the firm.23 Furthermore, the partner is presumed to have abided by the duty of care where she/he has acted on an informed basis, in good faith and in a manner that she/he reasonably believes to be in the interest of the partnership.24

2. Liability for Wrongful Dissociation

Under jurisdictions where partnerships are regulated, a partner is entitled to dissociate at any time. However, a partners dissociation is wrongful if it is in breach of an express provision of the partnership agreement or in case of a partnership for a definite term or particular undertaking when the partner withdraws before the expiration of the term or the completion of the undertaking under conditions and circumstances provided for by the law.25 When it is evidenced
20

See F. W. CLARK, A Treatise on the Law of Partnership and Joint-Stock Companies according to the Law of Scotland, Vol. I, London, Law Booksellers, 1866, p. 330 and D. A. EVANS, op. cit., p. 530. 21 Ibid. 22 K. E. OLSON, op. cit., p. 492. 23 D. A. EVANS, op. cit., p. 530. 24 E. S. MILLER, op. cit., p. 12. 25 See RUPA, Section 602 wherein a partners dissociation is wrongful, in case of partnership for definite term or particular undertaking and before the term or completion of the undertaking, if the partner withdraws by express will, unless the withdrawal follows within 90 days after another partners dissociation by death or otherwise, the partner is expelled by judicial determination for misconduct (see Sect. 601 (5), a partner is dissociated by becoming a debtor in bankruptcy or in the case of a partner who is not an individual, trust other than a business trust, or estate, the partner is expelled or otherwise dissociated because it willfully dissolved or terminated. See other acts!!

that the partners dissociation is wrongful she/he is liable to the firm and to the other partners for damages caused by the dissociation.26

In the noted absence of the legal text on partnerships in Rwanda, the partnership agreement should be looked at. However, the information provided by some professionals practicing as partners shows that their partnership agreements only talks of dissolution and are silent on the issue of wrongful dissociation.27 Info from TLC is pending.

In my view, general rules and principles on breach of contract provided for by the civil code28 shall apply since the partnership agreement is a contract like any other and there no special rules applicable the former so that they can prevail over general contract rules.

Apart from the firm and fellow partners that can be prejudiced by a partners acts and omissions, third parties also can suffer prejudice resulting from acts or omissions attributable to the partnership. In this case the latter can be held liable.

Section II. Liability of the Partnership to Third Parties

The partnership may be held liable for obligations ensuing from wrongful acts or omission of any partner in the ordinary course of its business as well as breach of trust by a partner. The discussion below deals with the foregoing partnerships liability in details.

1. Liability of the Partnership for Wrongful Acts of a Partner

It is worthy to remind at first sight the absence any legal text governing partnerships in Rwanda and a fortiori liability for wrongful acts of a partner.

26

See RUPA, Section 602 (c) and R. L. MILLER and F. B. CROSS, The Legal Environment Today: Business in Its Ethical, Regulatory, E-commerce &Global Setting, Mason, South-Western Cengage Learning, 2010, p. 463. 27 The information provided on the 9th November 2011 by Me D. KAYIHURA, a Partner in Fountain Law Chambers. 28 See arts. 44 to 53 CCB III.

Several foreign laws and scholars, notwithstanding, recognize the liability of the firm for wrongs committed by a partner in the ordinary course of the business of the partnership or with the authority of the other partners. It is in this perspective that the partnership is liable for loss or injury caused to any person not being a partner in the firm or any penalty is incurred, as a result of a wrongful act, omission or any other actionable conduct of any partner acting in the ordinary course of the business of the partnership (firm) or with the authority of her/ his copartners (or the partnership).29

As argued by some scholars, both actual and apparent authorities are covered within the ambit of authority.30 On one side, actual authority may be express or implied. It is express when it is specifically set forth in the partnership agreement (original or additional) and may be written or oral.31 Actual authority is implied when it is neither expressly granted nor expressly denied; but is reasonably deduced from the nature of the partnership or the relations between partners.32 For instance the partner has implied authority to hire or fire an employee whose services are necessary for the business of the partnership.

On the other side, apparent authority is, according to L. Y. SMITH, G. G. ROBERSON, R. A. MANN and B. S. ROBERTS, the one that may, in view of circumstances and the conduct of the parties, be reasonably considered to exist by a third person who does not know or is not notified of lack of actual authority.33 An example is needed.

Furthermore, it is worthy stressing that actual authority terminates upon dissolution of the partnership except to the extent necessary for winding up of partnerships affairs34 like in case of completion of existing contracts. The apparent authority, on the contrary, persists and binds the

29

See RUPA, Section 305 (a) ; UK Partnerships Act 1890, Section 10; Tanzanian Law of Contract Act (3rd March 1961), Section 204 (a); Uganda Partnerships Act (2010), Section 12; Kenya Partnership Act (Revised edition 2010), section 14. 30 L. Y. SMITH et al., Business Law, 7th ed., St. Paul, New York, Los Angeles, San Francisco, West Publishing Company, 1988, p. 697. 31 Ibid. 32 Id., p. 698. 33 Ibid. 34 A. SCHNEEMAN, op. cit., p. 91. See also Kenya Partnership Act (revised edition 2010), Section 42; Ugandan Partnership Act, Section 40.

partnership for acts within the ambit of its business unless third parties are notified of the partnership dissolution.35

It is relevant to note that the addition of actionable conduct is only found in RUPA purportedly to cover no-fault torts.36Moreover, contrary to other partnership acts, RUPA does not required that the injured person should not be a partner to allow partners to sue the partnership too.37

I am of the opinion that the RUPA approach should be welcomed for two grounds. Primo, it is broad so that third parties are entitled to compensation not only in case of wrongful acts or omissions; but also in case of another actionable conduct not covered by the former two cases. Secondly, by the deletion of the expression a person not being a partner found in some texts, partners are given possibility to sue in case they are injured by the wrongs of their fellow partner.

To conclude this paragraph, it is important to highlight that the partner who commits the tort must indemnify the partnership for any damages it pays to third parties.38

2. Liability of the Partnership for Breach of Trust

The partnership is liable and bound to make good the loss suffered by a third person in two cases. Firstly, when one partner, acting within the scope of her/his apparent authority receives the money or property from a third person and misapplies it.39 Secondly, when the partnership in the course of its business receives money or property of a third person and the money so received is misapplied by one or more of the partners while it is in the custody of the firm.40 If such

L. Y. SMITH et al., op. cit., p. 711. See Comment of section 305 (a) of RUPA. 37 Ibid. 38 L. Y. SMITH et al., op. cit., p. 699 and R. L. MILLER and F. B. CROSS, op. cit., p. 462. 39 See Section 15 (a) of the Kenyan Partnership Act (revised edition 2010); Section 305 (b) American Uniform Partnership Act (1997), Section 14 (a) of the Uganda Partnerships Act (2010); Section 204 (b) of the Tanzanian Law of Contracts Act (1961); Section 11 (a) of the UK Partnership Act 1890. 40 Section 15 (b) of the Kenyan Partnership Act (revised edition 2010); Section 305 (b) American Uniform Partnership Act (1997); Section 11 (b) of the UK Partnership Act 1890; Section 204 (c) of the Tanzanian Law of Contracts Act (1961); Section 14 (b) Uganda Partnerships Act (2010).
36

35

instances eventually happen in Rwanda, the power to decide is left to the judge. I am of the view that the partnership should be liable as in the above situations.

However, it will be difficult, indeed, for the injured to sue for the partnerships liability since he/she will have also to adduce evidence for the existence of a partnership. Moreover, there is an inconvenience of uncertainty as what would be the outcome since the judge is empowered to decide according to what he/she would establish as a law. On the contrary, it would be easier to sue against the author of the breach because the latter may have been criminally convicted of the crime and criminal liability is personal. The latter scenario also has got some shortcomings since the author of the breach cannot have sufficient means to repair the loss while there may other partners (or all of them collectively) who would be likely to pay.

Section III. Liability of Partners to Third Parties

Partners are liable for debts and obligations of the partnership resulting from both contracts and torts. In fact, where the partnership is bound all partners are liable.41 They are either jointly liable or jointly and severally liable for the partnerships obligations.

1. Joint Liability of Partners

As I repeatedly highlighted supra42 there is no specific legal text governing partnerships in Rwanda and a fortiori partners liability. However, there are sparse legal provisions and rules regulating some specific issues like tax liability and liability of lawyers that deserve being discussed.

For tax purposes, Article 5 paragraph 3 of the Commissioner General Rules states that with regard to tax liability all partners are jointly and personally responsible. From this article, it is

41 42

L. Y. SMITH et al., op. cit., pp. 696 and 699. Passim.

deduced that the partners liability for taxes has two characteristics: joint liability and personal liability

Primo, joint responsibility or joint liability implies that a third party (a creditor) has to sue all of the partners as a group and where a third party sues a partner on partnerships debt the latter is entitled to the right to request that other partners be sued with him or her.43 The suing creditor is bound to join all the partners as defendants 44and where he/she does not do so, the assets of the partnership cannot be used to satisfy the judgment.45 This is quite understandable since the partnership has no legal entity separate from that of its partners; all the partners must thus be sued whilst lodging a case against the firm.

As a result of joint liability, a judgment based on a joint obligation must be against all of the obligors (partners is this case) or none and a release of one obligor releases all unless the obligee has reserved his/her rights against the latter. 46

Moreover, some scholars assert that the use of the term joint implies that partners are together liable to the full claim of the creditors47. However, this has been criticized by other scholars whose view I share- for considering substantive issues of liability while the term joint originally referred only to a procedural device that allowed defendants to be joined in a single lawsuit.48 See the commercial code of Ethiopia.

R. L. MILLER and F. B. CROSS, op. cit., p. 462. F. M. BURDICK, Joint and Several Liability of Partners [Feb. 1911], Columbia Law Review, Vol. 11, No 2, p. 101. 45 R. L. MILLER and F. B. CROSS, op. cit., p. 462. 46 L. Y. SMITH et al., op. cit., pp. 696-697and article 177 of the Dcret du 30 Juillet 1888 sur Les contrats ou des obligations conventionnelles, B.O., 1888, p. 109 (hereinafter CCB III ). 47 N. TADESSE, Major Problems Associated with Private Limited Companies in Ethiopia: The Law and the Practice, Masters Thesis, Addis Ababa, Addis Ababa University, 2009, p. 78 available at < http://etd.aau.edu.et/dspace/bitstream/123456789/2637/1/NIGUSIE_%20TADESSE.pdf>, accessed on November 5, 2011. 48 R. S. PECK, The Development of the Law of Joint and Several Liability, Center for Constitutional Litigation PC, Washington D.C., 2004 Annual Meeting, p. 1.
44

43

Secondly, personal responsibility or liability implies that a partner can be compelled to pay partnerships liability from his/her own personal property49. It is obvious, therefore, that partners own assets are at risk since they can be attached for tax debts of the partnership50.

It should be reminded that this joint and personal liability is regulated only in as far as taxes for informal partnerships are concerned. One can rightly wonder what would be the fate of other liabilities of the partnership.

Also, article 47 1 of the law on the bar association which states that a lawyer who is a member of an association retains personal responsibility for the legal affairs of his clients51 is of limited scope. Per this provision, there is no joint liability of lawyers in an association (contemplated partnership in my view) and every lawyer is personally liable to his/her client in as far as legal affairs of the later are concerned.52

From the above discussion, it should be noted that, apart from the tax liability of partnerships and lawyers (in case of lawyers practicing in association) liability in as far as legal affairs of his/her clients are concerned, matters pertaining to partnership in general and partners liability specifically (contracts of the law firm with its employees, purchase of property necessary for the firm as well as other acts performed by any partner on behalf of the law firm) are not regulated by any legal text in Rwanda.

In presence of the lacuna in Rwandan legislation, it is important to discuss the joint liability of partner in light of foreign laws and scholars writings.

In this perspective the Kenyan and Ontario Partnership Acts read as follows:

49 50

N. TADESSE, op. cit., p. 78. See in this sense C. G. BOSHOP, op. cit., p. 7 and L.D. CORWIN, op. cit., p. 5. Check reference!!! 51 Art. 47 para 1 of Law on Bar Association. 52 It has also been confirmed through the information provided on November 9, 2011 by Me Richard MUGISHA, the Managing Partner of Trust Law Chambers.

Every partner in a firm is liable jointly with the other partners for debts and obligations of the firm incurred while he is a partner, but a person who is admitted as a partner into an existing firm does not thereby become liable to creditors of the firm for anything done before he become a partner; and after his death his estate is also severally liable in the due course of administration for those obligations, so far as they remain unsatisfied, but subject to the prior payment of his separate debts53

From the forgoing reading on partnerships many elements can be deduced; but the three more important are only stressed below. First, the liability of partners for partnership debts and obligations is joint. Secondly, a partner is not liable for debts incurred while he/she was not a partner. Finally, the deceased partners estate is, after his/her death, severally liable for unpaid debts and obligations incurred in due course of administration of the latter provided that his/her separate debts are first paid.

In the Rwandan context, where there is no law on partnerships at the moment, the judge faced with the lacuna in the law is required to adjudicate the case brought to court in accordance with rules of law he/she would enact were he/she required to do the work of the legislator with the inspiration of the case law, custom, general principles of law or doctrinal writing.54 Thus, none is certain about the conclusion the judge would reach. However, I am of the view that, apart from tax liability of informal partnerships and the liability of lawyers practicing in association in as far as legal affairs of the client are concerned which are specifically regulated, for other partnership debts and contract obligations like contracts with employees, suppliers ... partners have joint liability as described above.

53

Kenya Partnership Act, Section 11 and Ontario Partnerships Act, section 10 (1). Despite the slight difference in the wording the Ugandan, British as well as the Tanzanian acts on partnerships convey the same content too. (See the Uganda Partnerships Act, Section 9 (1) and (2); Tanzanian Law of Contracts Act, Section 203; UK Partnership Act, Section 9). 54 See article 6 para. 1 of the Law No 18/2004 of 20/06/2004 relating to Civil, Commercial, Labor and Administrative Procedures as modified and completed to date, O. G., No special bis of 30/07/2004.

The joint liability of partners, as argued by or deduced from arguments of some scholars, has to do with partnerships debts and contracts obligations55to the exclusion of partnerships debts resulting from torts.56 In the latter case the liability of partners is joint and several.

2. Joint and Several Liability of Partners

Where the partnership is liable then each partner is unlimitedly and personally liable for the partnerships debts.57 Under this subsection the meaning of joint and several liabilities is firstly discussed. In the second place, the scope of application of joint and several liability is dealt with.

A. Meaning of Joint and Several Liability

Joint and several liability means that a third party may sue all of the partners together (jointly) or one or more of the partners separately (severally)58 and the partner may be individually liable to the full claim59. Moreover, this implies that the partners liability to third parties is unlimited and no agreement avoiding externally unlimited liability as well as joint and several liability among partners is effective against an innocent third party.60

In the absence of a law specifically regulating partnerships in Rwanda, some of the provisions of the Civil Code Book III are worthy discussing. In fact, article 98 of CCB III states that there is joint and several liability of debtors where they are bound to the same obligation in such a way that any of them can be held liable for the full claim and payment made by him discharges others towards the creditor61.

55 56

L. Y. SMITH et al., op. cit., p. 696. R. L. MILLER and F. B. CROSS, op. cit., p. 462. 57 L. Y. SMITH et al., op. cit., p. 699. 58 Ibid. 59 N. TADESSE, op. cit., p. 78. 60 M. GILLEN et. al., Corporations and Partnerships : Canada, Deventer, Kluwer Law and Taxation Publishers, 1994, p. 173 and N. TADESSE, op. cit., p. 78. 61 Authors translation (original version: Art. 98 CCB III Il y a solidarit de la part des dbiteurs lorsqu'ils sont obligs une mme chose, de manire que chacun puisse tre contraint pour la totalit et que le paiement fait par un seul libre les autres envers le crancier ).

The debtor (partner) from whom the full debt is claimed cannot invoke the benefit of division62. However, under Rwandan civil code, a debt contracted jointly and severally is automatically divisible between debtors who are bound each for his/her share63 and the partner who has paid more than his/her pro rata share is entitled to claim contribution from partnership and fellow partners who did not pay their allocable share.64

Furthermore, it should be noted that, as R. L. MILLER and F. B. CROSS point out, joint and several liability implies that a court decision against one partner severally (separately) does not extinguish the others liability as the release of one partner does not discharge the partners several liability.65 Thus, partners (debtors) who have not been sued in the first action can be subsequently sued,66 unless the first action was conclusive for the partnership on the issue of liability. This implies that where one partner is sued and the court does not hold the partnership liable, the claimant cannot file a case against another partner and succeed on the issue of the partnerships liability.67

B. Scope of Application of Joint and Several Liability of Partners

In most states the liability for tortious acts or omissions imputable to the partnership is joint and several. Some other states, however, recognize joint and several liability for all the debts and obligations of the partnership whether arising out of contracts or torts.

Examples of cases where joint and several liability for torts is the rule include Kenya where, under Section 16 of its Partnership Act, every partner is liable jointly with his copartners and also severally for everything for which the firm, while he is a partner therein, becomes liable under section 14 or 15. The two sections referred to herein respectively deal with the liability of

62 63

Art. 101 CCB III. Art. 111 CCB III. 64 S. E CLARK, Choice of Entity Considerations in Forming a New Business and Avoiding Personal Liability in Business Entities, Dallas, 2011, pp. 9-10. See also art. 112 CCB III. 65 R. L. MILLER and F. B. CROSS, p. 462. 66 Ibid. See also art. 102 CCB III. 67 R. L. MILLER and F. B. CROSS, p. 462.

the firm for loss or injury resulting from wrongful acts or omissions of a partner imputable to the firm and misapplication of money or property received for or in custody of the firm.68

These provisions are quite similar to those of some other acts like the Ugandan Partnerships Act (with slight difference)69, the UK Partnership Act70 and Ontario Partnership Act71.

Examples of cases where joint and several liability of partners applies to all the obligations of the partnership, on the other side, include the American Uniform Partnership Act which states in its section 306 (a) that Except as otherwise provided in subsections (b) and (c) all partners are liable jointly and severally for all obligations of the partnership unless agreed by the claimant or provided by the law72. Per this provision, it is quite clear that no distinction is made and the liability of partners is joint and several whether it arises out of contract or torts.

Under Rwandan law, in the absence of a specific law on partnerships provisions of civil code in terms of joint and several liability would apply to partners liability only if it is expressly stipulated in the contract that there shall be joint and several liability of debtors or is provided by the law since joint and several liability cannot be presumed73. It is quite clear that for there to be several and joint liability of partners the contract entered into with a third person may expressly stipulate that there shall be joint and several liability of partners. Otherwise, neither the third creditor nor the court can invoke joint and several liability of partners relying on civil code provisions which of little help in such instance.

Section 14 states that where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm, or with the authority of his co-partners, loss or injury is caused to any person not being a partner in the firm, or any penalty is incurred, the firm is liable therefor[e] to the same extent as the partner so acting or omitting to act and Section 15 states that (a) where one partner, acting within the scope of his apparent authority, receives money or property of a third person, and misapplies it; and (b) where a firm in the course of its business receives money or property, and money or property so received is misapplied by one or more of the partners while it is in the custody of the firm, the firm is liable to make good the loss. 69 Ugandan Partnerships Act, Sections 13 and 14. 70 UK Partnership Act, Sections 10, 11 and 12. 71 Ontario Partnership Act, Sections 11, 12 and 13. 72 The two subsections mentioned therein deal with exclusion of personal liability of a partner for partnerships obligation incurred before the person is admitted as a partner and liability in limited liability partnerships respectively (RUPA, Section 6 (b) and (c)). 73 Art. 100 CCB III.

68

Thus, in the absence of a law on partnerships providing for joint and several liability (which would apply even if joint and several liability is not stipulated in the contract) as it is the case in some other countries74and in the absence of any stipulation thereof in the contract, I share the view with some professionals practicing as partners that the liability would be joint and several.75

Furthermore, where it is the matter of tortious liability it is difficult to hold partners liable for tortious prejudice caused by their copartners since it can only fall within the ambit of joint and several liability if there is oneness of the prejudice sustained by the creditor (victim)76. This implies that many faults whether contractual or tortious have contributed to the same prejudice suffered by the debtor (victim).77 It is thus clear that to successfully sue for joint and several liability of partners, the claimant must prove the role of every partner in the occurrence of the prejudice sustained. It is obviously difficulty to hold all the partners liable in case where the loss is due to the act or omission of one single partner basing on the ordinary joint and several liability (liability in solidum). The victim is left with no alternative other than suing the partner who actually caused the prejudice.

According to one lawyer who is a partner in a law firm, the tortious liability must be joint and several as long as the partner committed the tort while dispensing his/her duties as a partner in a partnership78. On the other side, according to one medical doctor who is a partner in a medical clinic (who added that cases have already occurred), even if the claimant can sue the entire clinic (all the doctors of the clinic) the liability must at the end of the day fall upon the doctor who actually committed the tort irrespective of whether the latter was conducting the normal business of the clinic (if all the partners have paid as a clinic the tortfeasor ought to indemnify others).79

It is the case of art. 201 Code [belge] des Socits as it is asserted by P. A. FORIERS , Les Obligations, Tome Second, 2008-2009, p. 192 available at <<http://www.be-droit.be/syllabus/ba3_obligations_tome2.pdf>> , accessed on November 6, 2011. 75 The information provided on the 9th November 2011 by Me D. KAYIHURA, a Partner in Fountain Law Chambers. 76 See A. M. NGAGI, Cours de droit civil des obligations, Manuel pour Etudiants, Butare, Les Editions de lUniversit Nationales du Rwanda, 2004, p. 249. 77 P. A. FORIERS , op. cit., p. 204. 78 Information provided on the 9th November 2011 by Me D. KAYIHURA, a Partner in Fountain Law Chambers. 79 Interview with Dr. P. C. KANIMBA, Medical Doctor at Policlinique La Medicale Dr. Pierre Clestin Kanimba et Mdecins Associs, on the 10th November 2011.

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In a nutshell, there is legal uncertainty insofar as the liability of partners is concerned due to the absence of the law governing partnerships in Rwanda. Nevertheless, in such a status of affairs my opinion is that, with the inspiration of doctrinal writings, partners should be jointly and severally liable for tortious debts imputable to the partnership.

3. Special Regimes of Partner Liability

In some instances, partners in particular situations enjoy special considerations in as far as liability is concerned. It is the case of the incoming and outgoing partners liability as well as minor partners liability.

A. Liability of Incoming Partner

Where a person is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he/she became a partner.80 It is clear that without any exception the liability of a new partner is not extended to any liability incurred before his/her admission into the partnership.

Nonetheless, the American Uniform Partnership Act, is more precise and limitative on the liability of an incoming partner. In fact, under Section 306 (b) of the aforesaid act the person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the persons admission as a partner. The comment of this provision clearly stresses that what is excluded is the personal liability of the new partner to the existing creditors of the partnership; but his/her investment in the firm is at risk for the discharge of existing partnership debts.81 In fact his/her contribution in the firm can be used for any purpose including extinguishing pre-existing debts. This rule is understandable in the sense that, as

Kenya Partnership Act, Section 21(1); Ontario Partnership Act, Section 18 (1); UK Partnership Act, Section 17 (1); Tanzanian Law of Contracts Act, Section 208 (1) and Ugandan Partnerships Act, Section 19 (1). 81 See comment of section 306 of the RUPA (included in the text). L. Y. SMITH et al., op. cit., p. 700; D. A. EVANS, op. cit., p. 531 and R. L. MILLER and F. B. CROSS, op. cit., p. 462.

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discussed earlier, the existence of a partnership does not require the creation of a new business; but the continuation of an existing one also constitute a partnership.82

Thus, by joining an existing partnership the new partner agrees to share not only profits but also losses (including the pre-existing ones) and this is one of evidence that there is intention to carry on business in common which is one of the elements for the existence of a partnership.83 That an incoming partner cannot be personally held liable for debts existing before his/her admission into the existing partnership is reasonable too. In my view, partners are personally liable because they are deemed and expected to have power of control and to avoid some of the risky debts since they are all entitled to have a say in the management of a general partnership.84 It would not be fair, therefore, to hold a person liable for debts in the occurrence of which he/she neither took part nor had a say.

B. Liability of an Outgoing Partner

The liability of an outgoing partner may be considered at two different times. Liability for partnership debts incurred before the partner retires and liability for debts incurred after retirement.

1. Liability of an Outgoing Partner for Debts Incurred while a Member

A partner who retires from the firm does not thereby cease to be liable for the partnership debts incurred before the partners retirement.85 In fact, the partner remains liable for firm obligations incurred when he/she was a partner and this applies, as pointed out by E. B. GINN and D. A. EVANS, even where the remaining partners agreed to relieve him/her of such liability when
See Chapter I, Sect. 1, 2, A. This is also the view of some partners in Rwanda (Information provided on the 9th November 2011 by Me D. KAYIHURA, a Partner in Fountain Law Chambers). 84 See L. E. MITCHELL and M. DIAMOND, Corporations, A contemporary Approach: Cases and Materials for a Course in Corporate Law, Durham, Carolina Academic Press, 2004, p. 288 and Kenya Partnership Act, Section 28 (e) and Uganda Partnerships Act, Section 26 (e). 85 Information provided on the 9th November 2011 by Me D. KAYIHURA, a Partner in Fountain Law Chambers. See also Kenya Partnership Act, Section 21(2); Ontario Partnership Act, Section 18 (2); UK Partnership Act, Section 17 (2); Tanzanian Law of Contracts Act, Section 208 (2) and Ugandan Partnerships Act, Section 19 (2).
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he/she left.86This scholar argues that no one other than the creditor may discharge a debtor from a debt.87

This is confirmed by some acts on partnerships whereby a partner who retires can be discharged from liability by agreement between him/her and the members of the firm newly constituted and the creditors.88

2. Liability of Outgoing Partner for Debts Incurred after Retirement

After he/she withdraws from the partnership, the partner should make sure that notice is brought to all who may continue to deal with the firm believing that he/she is still a partner.89 The outgoing partners must, in order avoid being held liable after his/her departure, personally inform all the regular clients, customers or suppliers of the firm of his/her departure. Otherwise, he/she can be held liable as a partner by estoppel for debts incurred after his/her departure by those who customarily deal with the partnership.90

C. Liability of the Purported Partner

E. B. GINN, Partnership-Existing Liability of Retired Partner-Effect of Indemnification Agreement. White v. Brown [1962], Boston College Law Review, Vol. 3, p. 307 available at <http://lawdigitalcommons.bc.edu/bclr/vol3/iss2/26>, accessed on November 10, 2011 and D. A. EVANS, op. cit., p. 532. 87 Ibid. 88 Kenya Partnership Act, Section 21(3); Ontario Partnership Act, Section 18 (3); UK Partnership Act, Section 17 (3); Tanzanian Law of Contracts Act, Section 208 (3) and Ugandan Partnerships Act, Section 19 (3). 89 See A. W. BAYS, American Commercial Law Series (Volume 2), available at << http://www.ebooksread.com/authors-eng/alfred-w-alfred-william-bays/american-commercial-law-series-volume-2sya/page-4-american-commercial-law-series-volume-2-sya.shtml>>, accessed on November 8, 2011. 90 D. A. EVANS, op. cit., p. 532.

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Various expressions are used to describe a purported partner such as a partner by estoppel91 or a partner by holding out.92 Whatever expression is used they all convey the same idea. If fact, any person who represents himself/herself or knowingly consents to being represented as a partner is liable as a partner to anyone who has, relying on such a representation, entered into transactions with the actual or purported partnership immaterial of whether the representation has or has not been made or communicated to the person who enters into transactions with the partnership or this is done with the purported partner93. I my view, this rule is logically understandable, since, on the one side, people who deal with the partnership in reliance on the membership of the purported partner need to see that person intervening when it comes to liability. On the other side, the purported partner must also have knowledge of his/her being represented as a partner where it is not himself/herself who does so. This implies that he/she has the opportunity of disowning this status; otherwise he/she should be considered to have impliedly accepted to be a partner. (Doctrine needed)

D. Liability of a Minor Partner

The partnership arises from contract and a minor is not competent to enter into contract94 and a minor cannot be a full-fledged partner.95 Thus, a minor is not a partner but is only entitled to the benefits of the partnership96. Where a minor is admitted to the benefits of the partnership, he/she cannot not be held personally liable for any obligation of the firm and only his/her share in the property of the firm is liable for the obligations of the firm;97 i.e. he/she gets his/her share profits

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The American Uniform Partnership Act of 1914, 16, in W. A. KLEIN, J. M. RAMSEYER and S.M. BAINBRIDGE, Business Associations- Agency, Partnerships, LLCs,and Corporations 2007 Statutes and Rules, New York, Foundation Press, 2007, pp. 31-46. 92 The Kenyan Partnership Act, Section 18; Uganda Partnership Act, Section 16 and Tanzanian Law of Contracts Act, Section 206. 93 See Kenya Partnership Act, section 18and Ugandan Partnerships Act, Section 16 (1). 94 Art. 23 CCB III and 95 See Tanzanian Law of Contracts Act, Section 211 (wherein a minor is expressly declared to be incompetent to be a partner in a firm) and C. KUMAR, What are the different types of partners in a partnership firm available at < http://www.preservearticles.com/201101153415/different-types-of-partners-in-a-partnership-firm.html>, accessed on November 11, 2011. 96 This may be justified by the general principle that a minor cannot be a promisor but can be a promise or beneficiary (P. C. TULSIAN, Mercantile Law, New Delhi, Tata McGraw Publishing Company Limited, 2007, p. 1317) 97 Kenya Partnership Act, Section 12 see others

after the liabilities of the firm are paid off.98 When he/she attains the age of majority, however, he/she becomes liable for all the obligations incurred by the partnership since he/she was so admitted, unless the latter publicly repudiates the partnership.99

98

X., The Position of a Minor in a Partnership, available at < http://www.informationbible.com/article-theposition-of-a-minor-in-partnership-50.html>, accessed on November 11, 2011 and X., Common Delusions Relating to s.30 of Indian Partnership Act, available at <http://www.lawyersclubindia.com/articles/print_this_page.asp?article_id=1308>, accessed on November 11, 2011. 99 Kenya Partnership Act, Section 13 see others