Critique of the Partnership Act 1890 Coursework

A well-drafted partnership agreement can deal with any situation that might arise during the lifetime of a business. Therefore, the partnership Act 1890 is irrelevant.

Introduction

Applying a statute that dates back to the 19^th century is evidently a problem in the UK legal system. In fact, most legal critics have argued that the Partnership Act 1890 (hereby referred to as PA 1890) has several outdated clauses that are not applicable in the modern context. Most critiques express doubt as to the relevance of application of the Act in the modern system, given that a number of clauses seem to be a problem¹. While, the PA 1890 seems to withstand time and changes in business model, it is worth noting that it may be inapplicable in some cases². In particular, the “lifetime” clause of the PA 1890 seems to be irrelevant in the modern context. This is evident when a partnership agreement is well drafted such that it can deal with issues arising during the lifetime of the business³. Therefore, the purpose of this paper is to review some of the problems associated with the PA 1890, with special reference to “lifetime” aspect of the law as it applies to modern partnership businesses.

The paper focuses on commencement, obligations, duties and expulsions as well as properties and dissolution features of the Act.

Commencement of partnership

Within the legal context, this section is the first and perhaps the most relevant point for a critical analysis of the PA 1890. Several studies have shown that the vocabulary used to state this provision of the Act is very plain, especially in terms of defining the term “partnership”. According to The Act, a partnership is a “relationship that exists between two or more persons carrying out a business under the common law and in an aim of making profit⁴. Noteworthy, this terminology is simple, which allows everybody to understand and interpret it. However, in a legal context, the simple terminology poses some problems, especially in terms of legal certainty. Evidently, the unambiguous wording used to construct the terminology shows evidence of losing ground in the classification of “partnership”. It fails to develop any strong degree of certainty in developing the classification within the context of behavior that will be used to form a firm⁵.

In addition, this definition of a partnership seems to be relatively weak because it lacks formality, which is likely to create a loophole in law that allows businesses to avoid the laborious, long and cumbersome procedures that are stated in the company law. A number of critics have raised several concerns over this section of the PA 1890⁶. In addition, critics have argued that the Act does not provide a clear definition of the kinds of actions that amount to initiation of a partnership business. In particular, the phrase “carrying on a business” is arguably inconsistent with the modern procedures of forming a partnership found in the common law⁷. There is an ensuing issue of avoiding the processes of creating a partnership business, which may not be known to the parties that act in common and against their intentions when entering into a partnership form of business. In the circumstance that the partners fail to consider adopting their own customized business agreement, this clause is relevant, and its weaknesses are evident. In such a case, the initial provisions under the PA 1890 must be used. Traditionally, case laws have been formed and applied in dealing with issues arising from these circumstances⁸. This phenomenon intensifies the need for certainty within the Act and the common law in general.

Noteworthy, the PA 1890 fails to provide a definition of a set of considerations needed when partners or courts are assessing whether a partnership business is in existence. Rather, the provisions within the Act only state the objects that do not constitute a partnership. In this context, the Act fails to state what a partnership is or will be.

The Act attempts to set some boundaries to determine when some forms of behavior by the perceived partners constitute the formation of a partnership business. However, it is too restrictive, which causes some disadvantages rather than advantages. For instance, the Act creates some freedom for courts to analyze case by case in making their decisions. Nevertheless, the provisions lack certainty, which makes it undesirable. Therefore, a comprehensive set of legal provisions is needed to provide some clarity in this definition⁹.

For instance, the case of Kahn v. Miah, the court experienced challenges in providing a concise and effective definition of the term “carrying on a business”. In fact, this was the main task the court did in delivering its ruling. The judges expressed different opinions, which were largely conflicting, resulting into a little clarification generated by the case. In the ruling, Roch J attempted to use the point in time when the two parties begun trading as the creation of a partnership. However, the House of Lords later overturned this definition.

From other case laws, it has become clear that a new term “getting ready of the business” has been developed to determine when a partnership commences. For example, in the case of Birmingham and District Cattle, the judges decided to use this term in finding the difference between those actions that mark the formation of a partnership and those that do not¹⁰. Nevertheless, the notion of profitability has a significant effect on this court definition. However, it clear that such behavior as purchasing equipments or properties for business should not influence the decision of the court because they do not necessarily indicate that a business has been formed. Arguably, this phenomenon is outdated in the modern context because a well-written agreement is likely to indicate that a business started when such behavior as purchasing property and equipment took place. For instance, business partners often go a long way before the actual realization of profit takes place, and this necessarily implies that the partnership is already in existence. Under section 45 of PA 1890, the term “business” does not restrict itself to trade because it also covers occupation and profession as part of the business.

Partner obligations/duties and liabilities

As mentioned earlier, the Partnership Act of 1890 does not include a requirement for separate legal personality in partnership businesses. Under section 9 of the Act, the partners must always remain jointly liable to liabilities such as debts and obligations¹¹. Therefore, all the partners are equal in terms of liabilities and obligations they carry. This section creates a problem because the behaviors of one partner may result into a business conflict if it causes debts and other liabilities. For instance, if a partner causes the business to incur debts due to his misbehavior, all the partners will be liable to the debts because they carry the same liability. Each partner will lose a part of the investment or even contribute from personal property in servicing the debt.

According to some sources, section 9 of the Act was established in view of protecting the business to ensure that every member is liable to the partnerships debts and obligations. This important feature safeguards corporations and is even present in the Company Act. However, this argument is weak because the modern corporation law allows judges to lift the veil based on the prevailing circumstance and if it is necessary. According to the law commission, it is necessary to grant separate legal personality in partnerships in order to protect the business. It is advisable that courts should be dealing with issues of separate legal personality to provide confidence that business agreements are not abused. At the current, it appears that courts have no doubts in citing the principle of unlimited liability in their ruling¹².

Secondly, the Act creates an additional problem because it does not provide a clear definition of the members of a partnership. In fact, members of a partnership business are considered as part of the firm, which implies the idea of separate legal personality. Although the Act uses the term ‘firm’ for the purpose of interpretation, an interpretation could lead to granting a separate legal personality to a business. However, it appears that this decision will be impossible if the partners are not given a separate legal entity. To cover this loophole, the courts may decide to provide a de facto separate legal entity to the partner bringing the action against the other. Nevertheless, the defendant is likely to argue that case successfully because the provisions of the Act remain effective, despite the loopholes they make. Thus, there is a clear conflict between the provisions of the Act, which means that only a clear and well-written agreement between partners can solve any issue arising during the lifetime of the partnership.

The problem of provision for dissolution and partner’s property

Another major problem associated with the Partnership Act 1890 is that it lacks a separate legal personality. Such a provision would define the process of dissolving a partnership and how the properties of the business would be distributed to the partners. It is arguable that such problems are associated with lack of a separate legal personality. In this view, a partnership should be an entity with rights and liabilities that are entirely separate from the members who form the business. Nevertheless, the PA 1890 has some reference to the process of dissolution of a partnership as provided under section 26. According to subsection 1 of section 26, a partner has the right to issue a notice seeking to dissolve a partnership with no fixed terms agreed earlier. This is a problem because it implies that once a member decides to leave the business, other members cannot continue with the partnership because essentially, the business will be dissolved. In addition, section 32c of the Act allows a firm to be dissolved by giving a notice for dissolution. In this case, the partner leaving the firm should give a notice. Thus, it is evident that the terms “undefined time” under section 32 and “with no fixed term” under section 26 are the problematic clauses within the Act. These sections have created some confusion in legal interpretation and are subject to contradictions.

The courts have done some recommendable job in attempting to reduce the contradictions created by these sections. For instance, in Moss v Elphick, the court attempted to provide some clarifications on the situation in order to determine the distinction between the two terms and their definitions. According to the judges, section 26 can only apply in cases where a partnership agreement does not show the duration of the business. On the other hand, the court argued that section 32(c) of the Act may only apply if a contrary intention does not exist. This section means that any provision for termination cannot be effective if it does not comply with “no fixed term”. Therefore, both sections cannot apply at such as a situation. However, it is worth noting that this decision is artificial and subject to change.

According to the Law Commission, decision making in such a situation would be easy and effective if there were provisions for separate legal personality because the exit of a partner would be taken as an exit of a member rather than the exit of an element of the firm. In such a case, the other partners would be free to continue with the business.

For instance, sections 33 and 34 state that a firm may be dissolved if one of the members dies, is bankrupt or is illegitimate. For instance, the death of a member should not be considered as a cause of termination unless the agreement of partnership has such a provision. Similarly, bankruptcy or illegitimacy of a member should not affect the business and other members. Dissolution should only result from bankruptcy or illegitimacy of the firm itself and not the members.

Conclusion

Although it has been effective for more than 120 years, the Partnership Act 1890 has a number of problems that affect the continuity of a firm registered as a partnership. Lack of a provision for a separate legal personality is the origin of a number of problems. For instance, it causes unnecessary dissolution due to lack of distinction between a member and the firm. Therefore, an agreement is needed to solve these problems. In addition, lack of proper definition for “commencement” of a business is problematic.

From this analysis, a number of issues have confirmed that there is a problem with the statute. It is worth saying that the law has several outdated clauses that are not applicable in the modern context. There is doubt as to the relevance of application of the Act in the modern system because a number of clauses seem to be a problem. While, the PA 1890 seems to withstand time and changes in business model, it is worth noting that it may be inapplicable in some cases. In particular, the “lifetime” clause of the PA 1890 seems to be irrelevant in the modern context. This is evident when a partnership agreement is well drafted such that it can deal with issues arising during the lifetime of the business. Therefore, it is worth arguing that a well-drafted partnership agreement can deal with any situation that might arise during the lifetime of a business. Therefore, the partnership Act 1890 is irrelevant. From this analysis, it is suggested that the courts determine better methods of applying new provisions for the principle of separate legal personality in order to distinguish members from the firm. In this way, it is possible to solve some issues that arise during the lifetime of a business registered as a partnership. In addition, it is important for the legislature to consider updated the PA 1890 in order to remove these problems.

References

French, Derek, Stephen Mayson and Christopher Ryan. Mayson, French & Ryan on company law. London: OUP, 2013.

French, Derek. Blackstone’s Statutes on Company Law 2013-2014. London: OUP, 2013.

HM Government. Civil Partnership Act 2004. London, UK: The Stationery Office, 2004.

Lindley, Nathaniel, William Gull, Walter Lindley and John Lorimer. The Partnership Act, 1890: With Notes: Being a Supplement to A Treatise on the Law of Partnership. London: Sweet, 2001.

Marson, James. Business Law. London, UK: OUP, 2013.

Mitchell, Rebecca, and Tony Storey. English Legal System Directions. London: OUP, 2008.

Morse, Geoffrey. An introduction to Partnership Law. London: OUP, 2010.

Nathaniel, Baron, and Lindley Lindley. The Partnership ACT, 1890; With Notes. London: General Books, 2012.

The Law commission. Law commission consultation paper no. 283. London: The Law commission. Web.

The Law commission. Partnership Law. London: The Law commission, 2010. Web.

Footnotes

1. Geoffrey Morse, An introduction to Partnership Law (London: OUP, 2010), 147.
2. The Law commission, Law commission consultation paper no. 283 (London: The Law commission, 2011), Web.
3. The Law commission, Partnership Law (London: The Law commission, 2010), Web.
4. Geoffrey Morse, An introduction to Partnership Law (London: OUP, 2010), 177.
5. Rebecca Mitchell, and Tony Storey English Legal System Directions (London: OUP, 2008), 34.
6. The Law commission, Law commission consultation paper no. 283 (London: The Law commission, 2011), Web.
7. Baron Nathaniel, and Lindley Lindley The Partnership ACT, 1890; With Notes (London: General Books, 2012) 61.
8. The Law commission, Law commission consultation paper no. 283 (London: The Law commission, 2011), Web.
9. Derek French, Blackstone’s Statutes on Company Law 2013-2014 (London: OUP, 2013), 54.
10. Nathaniel Lindley, William Gull, Walter Lindley and John Lorimer, The Partnership Act, 1890: With Notes: Being a Supplement to A Treatise on the Law of Partnership (London: Sweet, 2001), 132.
11. HM Government Civil Partnership Act 2004 (London, UK: The Stationery Office, 2004) 21.
12. Nathaniel Lindley, William Gull, Walter Lindley and John Lorimer, The Partnership Act, 1890: With Notes: Being a Supplement to A Treatise on the Law of Partnership (London: Sweet, 2001), 98.