COMMERCIAL LAW (LMER1624)

UNIT 1 C : PARTNESHIPS

T: +27 51 401 9111 | E: info@ufs.ac.za | www.ufs.ac.za

 PARTNERSHIPS

T: +27 51 401 9111 | E: info@ufs.ac.za | www.ufs.ac.za

 Definition
A partnership is a legal relationship - created by
way of a contract between two or more persons -
in terms of which each of the partners agrees to
make some contribution to the partnership
business - which is carried on for the joint benefit
of the parties - the object of which is to make a
profit .
(Pezzutto v Dreyer and Others 1992 (3) SA 379 (A)
at 390).
 Definition
 Key elements of definition:

(a)legal relationship - created by contract

(b)agreement by each partner to contribute;
(c)conduct of the enterprise for the joint
benefit of the parties; and ;
(d)making of profit as the primary objective.
 Partnerships and the Companies Act of
2008
• The Companies Act of 2008 does not define
or deal with partnerships, but it does make
provision for a personal liability company to
be formed.
• A personal liability company may be
described as an ‘incorporated partnership’.
Types of partnership
 Types of partnership
(1) Universal partnership

• P/ship where partners contribute all their

property/earnings to the partnership – for an
open-ended period and for wide-ranging
purposes – with a commensurate sharing of
the profits of their businesses
 Types of partnership
(2) Particular partnership

• P/ship entered into for a temporary and

focused/narrow purpose in pursuit of which the
partners contribute their resources and share
in profits resulting from that particular project
only.
 Types of partnership
(3) Ordinary partnership

• This is a partnership in which the

partners are jointly and severally liable for
all of the debts of the partnership
 Types of partnership
(4) Extraordinary partnership
• This is a partnership in which the liability of one
or more of the partners is limited in some way –
general and special partners.
• There are three forms of extraordinary p/ship:
(a) Partnership en commandite
(b) Anonymous partnership
(c) Special partnership
 The essentials of a partnership
Absence of requirements of form

• No formalities are required for a

partnership agreement

• The contract may be in writing, oral or

implied by conduct
 The essentials of a partnership
Essential requirements
(1) Contribution - Each partner must contribute
something of commercial value to the
partnership.
(2) Joint benefit - The business must be carried
on for the joint benefit of all the parties and
each party must share in the losses and profits
of the partnership business
 The essentials of a partnership
Essential requirements – cont’d

(3) Profit - The object of the partnership must

be to make a profit.

(4) Intention - The parties must have the

intention of establishing a partnership
 The essentials of a partnership
(5) Validity of contract - The contract
must be legitimate.

(6) Compliance with the law - A

partnership cannot conduct business
which is prohibited by law or public
policy.
 Legal nature of a partnership
South African law adopts the aggregate
theory of p/ship and not the entity theory
Aggregate theory:
• Views partnership as a collection/aggregate
of individual parties (ie, the partners).
• Accordingly, the business structure does not
have a legal identity separate from the
collective.
 Legal nature of a partnership
Entity theory

•Views a partnership as an entity separate

from its members.
• Accordingly, the p/ship can become the
holder of rights and obligations and even enjoy
the characteristic of perpetual succession.
Legal nature of a partnership
• Exceptions to aggregate theory (ie
circumstances in which the law effectively
follows the entity theory – treating the p/ship
as having legal personality):
(1) Insolvency – section 13(1) of the
Insolvency Act 24 of 1936 provides that the
sequestration of a partnership estate is to
be treated as distinct from the estates of
the individual members of the partnership
Legal nature of a partnership
Exceptions to aggregate theory – cont’d

Case law: Michalow NO v Premier Milling

Co Ltd 1960 (2) SA 59
Note especially the rationale for this
exception to the application of the
aggregate theory in SA law.
 Legal nature of a partnership
(2) Litigation

• A partnership may be sued in its own

name (Rule 14 of the Uniform Rules of
the High Court and Rule 54 of the
Magistrates’ Courts Act 32 of 1944).
Nature of legal relationship between partners

• A partnership is a contract uberrimae

fidei (a contract of the utmost good
faith).
• Each partner is, therefore, in a
fiduciary relationship to his fellow
partners.
Nb: What are the special implications?
 Rights of partners
Partners have a right to:
(a) Share in the profits of the partnership
(b) Participate in the management of the
business
(c) Compensation
(d) Inspect the partnership books
(e) Participate in the distribution of assets on
dissolution.
 Duties of partners
•The duties of a partner to the p/ship include:

(1) A duty to make a contribution towards

the partnership – capital raising.

(2) A duty to share in the losses – risk

sharing
 Duties of partners
• Duties of partners (continued)
(6) A duty to acquire benefits for the partnership
• Because of the fiduciary duties that partners owe to each
other, a partner may not acquire/ retain any
benefit/advantage out of an opportunity/venture that
falls within the scope of the partnership business.

• Rather, it is the duty of the partner to acquire such

benefits for the partnership
 Duties of partners (continued)
Duty to acquire benefits for the p/ship – cont’d

• Similarly, a partner may not compete with the

p/ship by carrying on a business of the same
nature as that of the p/ship.

• In the event of such a conflict, all the profits so earned

must be shared with and thus accounted to the
partnership.
 Duties of partners (continued)
(7) A duty to guard against a conflict of interest

• A partner should not place herself in a

position where her interest may conflict with
the duties that she owes towards the p/ship.

Case law: De Jager v Olifants Tin ‘B’ Syndicate 1912

AD 505
 Duties of partners (continued)
(8) A duty to disclose ALL information affecting
the partnership to other partners

• The disclosure must be made to all co-partners.

• So, eg, where there is a prospect of profit to
the p/ship by virtue of a partner’s participation in
a particular venture, such a prospect should be
brought to the attention of the other partners
Partner’s authority to bind the partnership

• A partner’s authority may be actual or ostensible

• Actual authority may be expressly granted or implied.

• Note the importance of the requirement of a link/nexus

between the nature of the p/ship business and the
subject matter of the act allegedly done on behalf of the
p/ship.
 Partner’s authority to bind the partnership
(continued)
• Unless the p/ship agreement provides
otherwise, each partner has authority to
perform all acts that are necessary for, or
incidental to the proper conduct of the
p/ship business; such acts fall within the
scope of implied authority.
• Note that Implied authority may be varied,
limited or excluded by express agreement
between partners.
 Partner’s authority to bind the
partnership (continued)
Case law: Goodricke’s v Hall (1978) (4) SA 208

• Partnership of two persons established to carry on a

restaurant business. One partner appoints an
attorney to apply for a liquor licence for their
restaurant.

• The issue was whether the partner’s agreement with

the attorney was binding on the partnership.
Partner’s authority to bind the partnership
(continued)
Case law: Goodricke’s v Hall – cont’d
HELD:The partner’s act in instructing the
attorney was done in furtherance of the
partnership business. Accordingly, the
act fell within the partner’s implied
authority to bind the partnership
 Partner’s authority to bind the
partnership (continued)
Ostensible authority & responsibility for the
action(s) of a non-partner
•In terms of ostensible authority a partnership
may be liable to a bona fide third party if it (a)
holds out (represents) a non-partner as a
partner, or (b) with knowledge allows a non-
partner to represent himself, as a partner.
 Partner’s authority to bind the
partnership (continued)
Ostensible authority & responsibility for
the action(s) of a non-partner – cont’d

Case law:
Levin v Barclays Bank DCO 1968 (2) SA
45
 Personal liability of
partners
• A fundamental principle of partnership law is that partners
are co-debtors in respect of the debts of the partnership.

• Accordingly, each partner is liable jointly and severally for

partnership debts.

• During the existence of the partnership, creditors cannot sue

some of the individual partners but must sue all the partners.
Personal liability of partners – cont’d

Case law:

Geldenhuys v East and West Investments (Pty)

Ltd 2005 (2) SA 74
 Dissolution of partnerships
•The most important ways in which a partnership may be
dissolved are:

(i) Effluxion of time for which it was agreed that the

partnership was to exist
(ii) End of a particular undertaking

(iii) Mutual agreement

(iv) Change in membership caused by retirement or admission
of a new partner
 Dissolution of partnerships
(continued)
(v) Death of a partner, unless the p/ship
agreement provides otherwise
(vi) Insolvency of the partnership or any
of its members.
(viii) If the partners become alien
enemies on or after the outbreak of war
 Dissolution of partnerships (continued)

(ix) If a court order is granted upon

application of one or more of the
partners for good cause.
Consequences of termination of a partnership

• A proper rendering of an account must be

completed before amounts owed to individual
partners may be claimed (unless the
partnership agreement provides otherwise)

• A creditor may sue the partners as

individuals, jointly and severally, for
outstanding debts.
Consequences of termination of a partnership
(continued)

• No partner has implied authority to

bind the partnership

• Each partner may demand an account

from his co-partners.
 THE END

T: +27 51 401 9111 | E: info@ufs.ac.za | www.ufs.ac.za