RELATIONSHIP OF PARTNERS INTER SE

1

• GENERAL DUTY OF GOOD FAITH• RIGHT & DUTIES OF PARTNERS• EXPULSION OF PARTNERS• RIGHTS OF ASSIGNEE• PARTNERSHIP PROPERTY

2

Relationship of Partners to Each Other

• Fiduciary to each other.• Based on Contractual Agreement –

– Implied – Partnership Act 1961 provisions.

– Express –Can exclude or amend - s.21:“ The mutual rights and duties of partners, whether ascertained by agreement or defined by the Act, may be varied by consent of the partners, and such consent may be either express or inferred from a course of dealing.”

- By Course of Conduct.Cruikshank v Sunderland [1923]92 LJ Ch 136The accounts of the partnership were prepared based on book value

as the assets were taken over from a previous firm was based on book value. When the plaintiff died, the issue was whether his share of the partnership’s profit should be based on fair value of assets or book value.

Hse of Lords held it should be based on fair value as no course of dealing had been proved to show that the value should be book value.

3

GENERAL DUTY OF GOOD FAITH• Partners stand in a fiduciary relationship with

one another. …based on an ‘uberrimae fidei’ type of contract, a contract that places a duty on partners to display utmost good faith in all dealings and matters affecting the partnership.

The concept of good faith and honesty of a fiduciary’s duty under Partnership Act 1961 :

• S. 30 - a duty to disclose all transactions relating to the relationship,

• S. 31 - not to make secret profits and • S. 32 - not to put himself in a position where

his duty and interest may conflict.

4

S. 30 - Duty of DisclosureS.30 states: “Partners are bound to render true accounts and full

information of all things affecting the partnership to any partner and his legal representative.”

• Amongst partners, they have a duty of utmost good faith to make honest and full disclosure of all matters relevant to the partnership dealings, transactions or matters to his partner.

• The relationship between the partners is based on mutual trust and confidence. When a partner enters into any transaction relating to the partnership business, it would be necessary for the other partners to have full information of what is going on.

• The common law duty of good faith has been made a statutory duty and applied to partners as regards their dealings with each other. This is a strict statutory duty. A partner is considered in breach of his duty even where he is not fraudulent or even negligent.

5

• Duty not only between existing partners, but also to those intending to enter into partnership, meaning future partners.

• Fawcett v Whitehouse (1829)1 Russ. & M.132A future partner had negotiated to buy a piece of property for a firm that was to be established. He was paid a commission for his effort.It was held by court that he had to surrender the commission to the firm after the firm was established.

• When one partner is dealing with another partner in a situation where he has access to certain information regarding the matter they are dealing in which is not known to the other, the one having information has a duty to act in good faith. .. to disclose it in full to the other.

…S. 30 - Duty of Disclosure

6

…S. 30 - Duty of Disclosure

• However, if the partner who has a right to the information is aware that such information is withheld from him, or he willfully or negligently acts in such a way that shows that he will not make any claims, then there is no duty of disclosure & the contract between the partners is considered valid and the partner will lose all claims against the other partner. This was established in :

• Law v Law [1905]1 Ch. 140A partner sold his share in the partnership to another partner for £21,000. At the time of sale he did not know that the partnership assets included mortgages and other securities. The partner who bought his share knew of this but never told him about it. The partner who sold his share took legal action to have the contract he had made, be declared void.It was held that the order setting aside the contract would have been made. However, a settlement out of court has been agreed to by the parties involved

7

S.31 - Duty not to make Secret Profit

S.31(1) states that: “Every partner must account to the firm for any benefit derived by

him, without the consent of the partners, from any transaction concerning the partnership or from any use by him of the partnership property, name or business connection.”

• A partner must not, without the consent of the other partner, make any profit or benefit for himself by making use of his position or any information that he had obtained in the partnership business.

• He has a duty to account for any benefit that he gets as a result of his position. Advantage or benefit obtained without consent, is said to be secret profits. Partner under a fiduciary duty to other partners, not to make any secret profit out of their position.

• Any profit obtained, however innocent, by the use of the business connection is considered as the property of the firm. The partner is thus liable to account for the profits he made to his co-partners.

8

…S.31 - Duty not to make Secret Profit• A partner can keep his profits only when his partners give their full

consent. Necessary for a partner to make a full and frank disclosure to his co-partners of all relevant facts relating to the acquisition of the profit before the co-partners can be said to be in a position to give consent.

• Pathirana v Ariya Pathirana (1967)1 A.C. 233Both plaintiff and defendant were running a petrol station as agent of Caltex (Ceylon) Ltd. On 10 Sept 1948, differences arose between them, & AP gave 3 months notice to dissolve the partnership. Before the notice expired, RWP informed Caltex that his partnership with AP had ended. Without the knowledge and consent of the AP, RWP managed to persuade Caltex to have the agency changed to his name as of 1 Oct. 1948, which is still within the period of 3 months notice. He then continued the business in his own name. AP then claimed a share of the profits to which he was still entitled.It was held by the court that he was entitled to the profits as the Appellant had obtain the renewal of the petrol supply agreement before the partnership had ended.

9

S.32 -Duty not to allow Conflict of Interests.

S.32 states that:“if a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business.”

• Normally where a person has his own personal business which is of the same nature with that of his partnership business, his personal interest and his interest as a partner would be seen to be competing and therefore, in conflict. Whether a business is in competition with a partnership is a question of fact, which will depend on the scope of the business.

10

• Conflict of Interests arises:1. A partner who runs a private business will be liable to account for

the profits that he makes, if the business is the same nature and competing with the firm’s business. This means that if it is the same, but it is not competing, it will not be against s.32. So where the business is not in competition with the partnership business, such as in another area, or for a different market, the person in general, will not be liable to account to his co-partners for any profits he made from such business.

2. Even if the business is the same and competing, it can be carried on if the other partners give express or implied consent.

• Aas v Benham (1981)2 Ch. 244A partner of a firm of shipbrokers called ‘H. Clarkson & Co.’ later wanted to form a separate business as a ship-owner under the name of ‘H. Clarkson & Co., ship owning’. The other partner brought an action to stop him from using the name of the firm in a separate business, and claimed an account of his profits and salary in connection with the new co.

Court of Appeal held; defendant cannot use name of the business, but as the business of the new co. was beyond the scope of, and not in competition with the partnership business, defendant did not have to account for the benefit or profit he had made in connection with the new co.

… S.32 -Duty not to allow Conflict of Interests

11

… S.32 -Duty not to allow Conflict of Interests

•Trimble v Goldberg (1906)95 LT 163T, G and B set up a partnership for the purpose of buying & selling certain properties belonging to one Hollard. Trimble went out to S. Africa and bought on behalf of the partnership all of Hollard’s property. At the time T also brought some plots of land from Sigma Syndicate for himself and B. When G learnt about this, he brought an action against T for the benefit that he had gained.

The court held that the action failed as the purchase of the plots of land was not within the scope of the partnership, nor was it in competition with the partnership business.

12

RIGHT & DUTIES OF PARTNERSThe rights of partners under s. 26 are based on the cm. law assumption -that in a partnership, everything is enjoyed or shared equally. •S.26 will apply to the partnership if there is no express agreement. It begins by stating:

“The interest of partners in the partnership property, and their rights and duties in relation to the partnership, shall be determined, subject to any agreement, expressed or implied, between the partners,…”

•S.26 has 9 general rules. (Not all the rules set out are suitable for certain partnerships.) It would be better to have another agreement drawn up.

The rights provided relate to:•Capital and profits;•Indemnity against liability in the firm’s business;•Advances to the firm made by partner;•Interest on capital;•Management of the partnership business;•Remuneration;•Introduction of a new partner;•Differences as to ordinary matter;•The partnership books.

13

…RIGHT & DUTIES OF PARTNERSCapital and Profits S. 26(a) states:“All partners are entitled to share equally in the capital and

profits of the business and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm.”

• Inference - every partner has a right to contribute equally to the capital. If capital is contributed in unequal amounts, it is implied that an agreement exist among the partners that their rights to capital will be based on the ratio of their contributions.

• Where the capital provided in different forms, e.g.; one partner provides the money and the other provides skill or knowledge, the skill or knowledge of such partner would be considered as equally between them. If the partners do not want it to be considered as equal, may make express agreement as to how the profits are to be divided bet. them.

• Generally where profits are divided equally between the partners, then the firm’s losses must be shared equally too

14

…RIGHT & DUTIES OF PARTNERS• In Re Albion Life Assurance Society (1880) 16 Ch. D 83, Jessel

M.R. stated:“The legal principle is that in ordinary partnership businesses, where there is a share of the profits in certain amounts, it could thus be fairly concluded that the losses would be divided in the same proportion.”

• Losses that is meant here is not only liabilities of the firm to third parties, but also losses to the capital. Thus in the case where a partner merely provided skill or knowledge, he would have to bear the losses equal to the amount borne by the partner who made a money contribution to the capital.

• If one of the partners become insolvent and is not able to contribute his share of lost capital, the solvent partner is not under any duty to contribute his share of lost capital, the solvent partner is not under any duty to contribute for him.

• From s.26(a) even though the capital provided by each partner may not be in equal shares, partners may still share profits and losses equally. It may not necessarily be connected to the proportion of the capital they have contributed.

15

Indemnity against LiabilityS. 26(b) states:“The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him:-

i. in the ordinary and proper conduct of the business of the firm; orii. in or about anything necessarily done for the preservation of the

business or property of the firm.” So, where a partner in the ordinary and proper course of partnership

business has incurred costs or liability on behalf of the firm, the firm must indemnify the partner. The firm must also indemnify a partner who has made payments or incurred personal liabilities for anything done to preserve the business or property of the firm.

Kok Hong Leong Kongsi & Ors v Seow Kah Cheng & Anor [1950] MLJ 87

Firm had defended action brought by third party who obtained $1 in damages, with each side ordered to pay own costs.

Court of Appeal held: Defending third party’s action was preservation of firm’s assets, thus partner is entitled to receive from partnership expenses incurred in performing the duty.

…RIGHT & DUTIES OF PARTNERS

16

…RIGHT & DUTIES OF PARTNERS

Advances made by a partner to the firm.S. 26(c) provides that:

“A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which he agreed to subscribe, is entitled to interest at 8% per annum from the date of the payment or advance.”

Where the partners have originally agreed to certain amounts to be contributed by each partner as capital. When the sum contributed by one or more of the partners is less, and the full capital is not achieved, one of the partners may contribute more than the agreed amount. The advance made by a partner above and beyond the amount he has agreed to contribute to the capital is considered as a loan, and not as an increase of his contribution to the capital. As such interest ought to be paid. The rate of interest however may vary by agreement.

17

…RIGHT & DUTIES OF PARTNERS

Interest on Capital• S.26(d) states that:

“A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him.”

The effect of this section - all partners in equal standing, whether they contributed to capital or not. To be fair to those who have provided capital, partnership deeds would be drawn up to provide for each partner, from time to time, to be entitled to receive interest at a specified rate per annum on the amount of capital standing to this credit.

18

Management of the Partnership Business• S.26(e) provides that:

“Every partner may take part in the management of the partnership business.”

• Basis of a partnership allows each and every partner to attend and work in the partnership business. This means that if a partner does not attend to the partnership business, he is considered to have failed in his duty. As such this could be a ground for dissolving a partnership.

• Each partner has the right to participate in the management of the business, except where there is an express agreement to the contrary: Kelly v Tucker [19907]5 CLR 1. Where T provided the financial capital, whilst K managed the business.

• Not a problem in small partnerships. However, problems could arise in bigger firms if everyone is given the right to be involved in the management of the business, especially where different partners have different opinions and styles of management.

• It would be best for the firm to make provisions to appoint those partners who are suitably qualified by seniority or ability to manage the business to manage the firm. They probably could be paid a salary, or, as an alternative, the firm may engage a manager to run the partnership business.

…RIGHT & DUTIES OF PARTNERS

19

…RIGHT & DUTIES OF PARTNERSRemuneration• S.26(f) states that:

“No partner shall be entitled for remuneration for acting in the partnership business.”

• A partner is not to be paid for taking part in a partnership business. This provision may not be fair in a partnership where there are sleeping and active partners. An agreement may be drawn up to provide the payment of a retainer to the active partner.

• However, during a winding-up of the partnership, where one of the partners die, or retire, or becomes of unsound mind, then the partner or partners left to sort out the business should also be compensated.

20

Introduction of a new PartnerS.26(g) states that:• “No person may be introduced as a partner without the consent of all

existing partners.”• A new partner can only be admitted with the consent of all the partners. If

even one partner should refuse his consent, then a person cannot be considered a partner.

• However, a partnership deed can provide that one or more of the partners have the option of introducing a new partner. If there is such an agreement, then the other partners are bound to accept the introduction of new partner.

• A person who has been nominated as a partner as allowed under the partnership deed, has a right of action when other partners refuse to admit him.

Byrne v Reid [1902]2 Ch.735:• A father nominated his son as partner as allowed under a partnership deed, but

other partners refused to admit the son. Later they agreed to execute all deeds necessary for his son’s admission. However, they did not fulfill their promise. The son sued them. Court of Appeal held - partners were bound by partnership deed. The son was a partner in the eyes of the law upon nomination and therefore could exercise his rights as such.

…RIGHT & DUTIES OF PARTNERS

21

Differences as to Ordinary Matters• s 26(h):

“Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all the existing partners.”

This section allows the majority of the partners to decide on differences over matters that may arise concerning the daily administration of the partnership, such as hiring of workers and selling and buying of materials. However, on matters affecting a change in the nature of the partnership business, e.g. changing from tailoring business to repairing electrical goods, or introducing a new partner, all partners have to agree.

Highley v Walker [1910] 26 TLR 685, Two of three partners agreed to the admission of one of their sons to be trained as an apprentice in the firm’s workshop. The third partner did not agree and decided to apply for an injunction to prevent the admission. The court held that the decision to admit an apprentice to be trained in the firm’s business was an ordinary matter that could be decided by a majority of the partners, thus allowing the partner’s son to be admitted.

 Although the majority has the power to decide, they must exercise their power in utmost good faith. This means that they must give notice and allow the minority a chance to give their opinions.

…RIGHT & DUTIES OF PARTNERS

22

Access to Partnership BooksS.26(i) states:

“The partnership books are to be kept at the place of business (or the principal place, if there are more places than one) and every partner may, when he thinks fit, have access to and inspect and copy any of them.”

• Partners are allowed to exercise their right to inspect the books. Partnership books would include all records kept by the partnership on the firm’s affairs such as accounting records, minutes of their meetings, etc.

• This right would be useful for a minority partner. The majority cannot treat him unfairly by keeping information away from him. This rule also allows an agent of a partner to have access to the books so long as the other partners have no objections to it.

…RIGHT & DUTIES OF PARTNERS

23

EXPULSION OF PARTNERSS.27 provides :

“No majority of the partners can expel any partner, unless a power to do so has been conferred by express agreement between the parties.”

• Impossible for the majority to expel any partner if there is no express agreement giving them power to take action.

• Generally, all the partners have to agree to the expulsion of any one of them unless there is an express agreement giving the majority the power to expel.

• Even if there is a provision for expulsion, the other partners may only exercise this power in good faith. Where there is such a provision, such as in cases where a partner has obviously breached the partnership deed, then a notice of expulsion can be served on the partner who has misbehaved, without first having to tell him about his misdeed.Green v Howell [1910]1 Ch.495The partnership articles of a firm contained a provision that allowed one partner to expel another partner who is in obvious breach of his duty. This, however, is subject to an appeal to an arbitrator. The other partner then served a notice of expulsion on his partner without giving him an opportunity to explain as he felt his partner was guilty of being in breach of the partnership articles. The issue here was the notice valid?The court held that the notice was valid.

24

RIGHTS OF ASSIGNEEWhen a partner assigns his share in the partnership to another party, it does not make the other party a partner, but the assignee is merely assigned the partner’s rights in the partnership assets and profits .S.33 provides: (1)An assignment by any partner of his share in the partnership, either absolute or by way of mortgage or redeemable charge, does not, as against the other partners, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any accounts of the partnership transactions, or to inspect the partnership books, but entitles the assignee only to receive the share of the profits to which the assigning partner would otherwise be entitled, and the assignee must accept the account of profits agreed to by the partners.Re Garwood’s Trusts [1903]1 Ch 236Assignee entitled to receive assigning partner’s share of the profits

25

(2) In the case of a dissolution of the partnership, whether as respects all the partners or as respects the assigning partner, the assignee is entitled to receive the share of the partnership assets to which the assigning partner is entitled as between himself and the other partners, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution.

Assignee has 2 rights when firm is dissolved:i. to assignor’s share;ii. to an account as from the date of dissolution to ascertain that share.

Watts v Driscoll [1901] 84 LT 97A partner assigned his share in a firm to his father as security for a loan his father gave him to set up the firm. He then sold his share to the other partner. The father claimed he was entitled to an account to ascertain the value of his son’s shares. Court of Appeal held the sale to the other partner did not affect an assignee’s rights since the sale took place without his consent.

…RIGHTS OF ASSIGNEE

26

PARTNERSHIP PROPERTYIn Mat Shah bin Mohamed & Anor v Foo Say Meng & Ors [1984]1 MLJ 237, Wan Suleiman F.J. considered 3 reasons why it is important to determine Partnership property: i. It’s value - to firm or partner.ii. Creditors right in event of firm’s insolvency.iii. To those who take partner’s real estate or personal estate.

S.22. (1) All property and rights and interests in property originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, are called in this Act partnership property and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement:Provided that the legal estate or interest in any land which belongs to the partnership shall devolve according to the nature and tenure thereof and the general rules of law applicable thereto but in trust, so far as necessary, for the persons beneficially interested in the land under this section.

27

(2) Where co-owners of an estate or interest in any land, not being itself partnership property, are partners as to profits made by the use of that land, and purchase other land out of the profits to be used in like manner, the land so purchased belongs to them, in the absence of any agreement to the contrary, not as partners, but as co-owners for the same respective estates and interests as are held by them in the land first mentioned at the date of the purchase.”

• Assets purchased with partnership money constitutes partnership property. However, it may be rebutted according to s.23: “Unless the contrary intention appears, property bought with money belonging to the firm is deemed to have been bought on account of the firm.”

• 3 ways of identifying partnership property:i. All property brought in originally as partnership stock.ii. Where property is acquired though purchase or other means, for

the firm.iii. Where property is acquired through any lawful means for all

means and purposes for the partnership business.

…PARTNERSHIP PROPERTY

28

i. All property brought in originally as partnership stock.The question of whether the property has been originally brought in as partnership stock or not depends on the agreement between the partners.

Miles v Clark (1953)1 WLR 537A photographer who ran a sole enterprise that was not doing well, brought in the plaintiff as partner as he had more business contacts. He allowed his equipments to be used in the cause of the photography partnership, without any definite agreement between them. Despite the business doing well, they ended the partnership over some differences.

The court held that assets such as the lease of the business premise, photography equipments, and the firm’s ‘goodwill’ were not partnership property, but the personal

property of the partners who had brought them into the partnership. Gian Singh v D. Nahar & Ors (1965)1 WLR 412

A shop was leased to the plaintiff as the main tenant. Defendant had brought in 2 partners into his business that was carried out in the same premise. Plaintiff alleged that bringing in the 2 new partners amounted to surrendering the tenancy rights to the firm without written consent. He thus sought that the shop be returned to him.

The court held that although the tenancy of the shop was an asset to the firm, it was not partnership property.

…PARTNERSHIP PROPERTY

29

…PARTNERSHIP PROPERTYii. Where property is acquired though purchase or other means,

for the firm.This is normally where the purchase is made using partnership

money and property for the firm. This is a much easier way of determining partnership property.

Ex parte Hinds (1849)3 De. G & Sm. 613 This was a trading partnership where the partners were trading in

Liverpool and the Barbados. The partner in Liverpool, without the knowledge and consent of the other, used the firm’s money to buy shares in a railway co., on behalf and for the firm.

Court decided that the shares were partnership property. There is a slight problem where property in question have been

inherited.Waterer v Waterer (1873)

A nursery business and land owned by a nurseryman was left to his three sons as tenants in common. Two of the sons bought out the shares of the third son who had died, and continued with the business. On the death of one of the surviving sons, the court held that all the land, including the nursery was partnership property.

30

iii. Where property is acquired through any lawful means for all means and purposes for the partnership business.

Not all property bought that is used in the partnership business is assumed to be partnership property.

Ratna Ammal & Ors v Tan Chow Soo [1964] MLJ 399. Parties involved had formed a syndicate to sell condensed milk. The relationship between them

was seen as a partnership. Respondent was the registered owner of the trademark. The issue in this case was the question of ownership of the trademark.

The Federal Court held that from the written agreement between the parties, it was clear that the trademark was the personal property of the respondent, and not the partnership.

N.B.Menon v Abdullah Kutty (1974)2 MLJ 159Appellant and respondents were partners of a restaurant in Kelantan, where the respondent

was the tenant, although he lived in Johore. Respondent gave notice to dissolve the partnership, & also gave notice to appellant to quit the shop.

Fed. Ct. held that the respondent never surrendered the tenancy to the partnership, thus having the right to regain the tenancy of the shop.

Ponnukon v Jebaratnam (1980)1 MLJ 282.Appellant entered into partnership with the respondent to build houses and shops for sale, and

to share such profits. Land in question was owned by him.Fed. Ct held land was not partnership property because (i) no agreement between parties for

land to be treated as partnership property; (ii) object to develop land does not necessarily mean land must be owned by the firm; (iii) land was not paid from partnership money.

…PARTNERSHIP PROPERTY

31

32