Partnership governance - Decision-making and authority of partners

Learning Outcomes

This article examines the rules governing decision-making within traditional partnerships under the Partnership Act 1890 (PA 1890) and the extent of a partner's authority to bind the firm. For the SQE1 assessments, you will need to understand the default statutory rules for decision-making, how these can be varied by agreement, and the principles of actual and apparent authority that determine when a partner's actions commit the partnership to obligations with third parties. This knowledge will enable you to apply the relevant legal rules and principles to SQE1-style single best answer MCQs concerning partnership governance.

SQE1 Syllabus

For SQE1, you are required to understand the principles of partnership decision-making and the authority of partners from a practical standpoint. This involves applying the default rules under the Partnership Act 1890 and considering the effect of partnership agreements. You are likely to encounter questions requiring you to determine how decisions are made or whether a partnership is bound by a partner's actions.

As you work through this article, remember to pay particular attention in your revision to:

  • the default rules for decision-making in partnerships under the PA 1890 (majority versus unanimity)
  • how partnership agreements can modify these default rules
  • the concept of agency in partnerships and the distinction between actual and apparent authority
  • the circumstances in which a partner's actions will bind the firm in dealings with third parties
  • the relevance of fiduciary duties in the context of partner decision-making and authority.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. Unless agreed otherwise, how are decisions on ordinary matters connected with the partnership business made?
    1. By unanimous consent of all partners.
    2. By a majority of the partners.
    3. By the partner with the largest capital contribution.
    4. By any single partner acting alone.
  2. Which of the following decisions requires the unanimous consent of all partners under the default rules of the Partnership Act 1890?
    1. Hiring a new employee for an existing role.
    2. Changing the nature of the partnership business.
    3. Purchasing routine office supplies.
    4. Agreeing standard payment terms with a supplier.
  3. A partner enters into a contract with a supplier for goods that are outside the usual scope of the partnership's business. The supplier was unaware that the partner lacked actual authority. Is the partnership likely to be bound?
    1. Yes, because every partner is an agent of the firm.
    2. No, because the partner lacked actual authority.
    3. Yes, if the partner had apparent authority.
    4. No, unless the partnership ratifies the contract.

Introduction

Understanding how decisions are made within a partnership and the extent of each partner's authority to act on behalf of the firm is fundamental to advising partnership clients and managing potential disputes. The Partnership Act 1890 provides a set of default rules, but these are often varied by the partners through a formal or informal agreement. This article explores these statutory defaults and the principles governing a partner's power to bind the firm.

Decision-Making within the Partnership

The PA 1890 establishes baseline rules for how partners make decisions. These rules apply automatically unless the partners have agreed otherwise, either expressly in a written agreement or impliedly through their conduct.

Key Term: Partnership Agreement
A formal or informal agreement between partners setting out the terms of their relationship, including rules on decision-making, profit sharing, and authority. It can override many default provisions of the PA 1890.

Default Rules under Section 24 PA 1890

Section 24 of the PA 1890 outlines several default provisions concerning the internal management and decision-making processes of a partnership. For the purposes of SQE1, the most critical relate to how decisions are passed:

  • Ordinary Matters: Decisions regarding ordinary matters connected with the partnership business are decided by a majority of the partners (s 24(8) PA 1890). This allows for efficient day-to-day management without requiring every partner's consent for routine actions.
  • Fundamental Changes: Certain decisions require the unanimous consent of all existing partners. These include:
    • Changing the nature of the partnership business (s 24(8) PA 1890). This protects partners from being forced into a line of business they did not originally agree to.
    • Introducing a new partner into the firm (s 24(7) PA 1890). This reflects the personal nature of the partnership relationship.
    • Changing the partnership agreement itself (s 19 PA 1890).

Key Term: Majority Rule
The principle, under s 24(8) PA 1890, that decisions on ordinary partnership matters can be made by a simple majority (more than 50%) of the partners, unless otherwise agreed.

Key Term: Unanimity
The requirement, under ss 19, 24(7) and 24(8) PA 1890, that certain fundamental decisions (like changing the business nature or admitting a new partner) need the consent of all existing partners, unless otherwise agreed.

Varying the Default Rules

Partners frequently find the default rules unsuitable for their specific needs. A Partnership Agreement allows partners to customise their governance structure. For example, they might agree:

  • Different voting thresholds for certain decisions (e.g., requiring a 75% majority for significant financial commitments).
  • That specific partners (e.g., senior partners) have greater voting weight or the deciding vote on certain matters.
  • A specific procedure for admitting new partners that doesn't require full unanimity.

Without a clear agreement, the potentially inconvenient default rules of the PA 1890 will apply.

Worked Example 1.1

A partnership consists of four partners: Anya, Ben, Chloe, and David. They operate a café. There is no written partnership agreement. Anya and Ben want to start offering evening meals, changing the café's opening hours and menu significantly. Chloe agrees, but David strongly objects. Can the change proceed?

Answer: No. Changing the nature of the partnership business requires unanimous consent under the default rules (s 24(8) PA 1890). As David objects, the decision cannot be made by the majority (Anya, Ben, and Chloe). They would need David's agreement or a partnership agreement that specified a different decision-making threshold for this type of change.

Authority of Partners to Bind the Firm

An essential aspect of partnership governance is understanding when a partner's actions legally bind the partnership in its dealings with external parties (third parties). This is governed by agency principles, as codified in the PA 1890.

Agency Relationship

Section 5 of the PA 1890 states that every partner is an agent of the firm and their fellow partners for the purpose of the partnership's business. This means a partner acting within their authority can create contractual obligations or liabilities that bind the entire firm and, consequently, all other partners.

Types of Authority

A partner can bind the firm if they act with either actual or apparent authority.

Key Term: Actual Authority
Authority expressly given to a partner (e.g., in the partnership agreement or by specific partner consent) or implied from their position or the usual course of dealings within the partnership.

Key Term: Apparent Authority
(Also known as Ostensible Authority) Authority that a partner appears to have to a third party, based on the usual scope of business for that type of partnership, even if the partner lacks actual authority internally. The firm is bound if the third party reasonably believed the partner had authority and was unaware of any internal restrictions.

Binding the Firm under Section 5 PA 1890

Section 5 PA 1890 provides that an act done by a partner for carrying on in the usual way business of the kind carried on by the firm will bind the firm and the partners, unless:

  1. The partner acting had no actual authority to act for the firm in that particular matter; AND
  2. The third party dealing with the partner either knew the partner had no authority, OR did not know or believe them to be a partner.

This means that even if a partner acts beyond their actual authority (e.g., exceeding a spending limit set in the partnership agreement), the firm can still be bound if the partner had apparent authority. The key is whether the transaction appeared normal for that type of business from the third party's standpoint.

Worked Example 1.2

DEF Partnership runs a bookshop. Their partnership agreement states that no partner may order stock exceeding £500 without the agreement of all partners. David, a partner, orders rare books worth £1,000 from a specialist supplier who has dealt with the firm before but is unaware of the internal limit. Is the partnership bound?

Answer: Yes, the partnership is likely bound. Although David exceeded his actual authority, ordering books is clearly within the usual course of business for a bookshop. The supplier, being unaware of the internal restriction, would reasonably believe David had the authority to place such an order. Therefore, David acted with apparent authority under s 5 PA 1890, binding the firm. David may, however, be liable to his partners for breaching the partnership agreement.

Acts Outside the Usual Course of Business

If a partner acts outside the usual scope of the partnership business, their actions will generally not bind the firm unless they had express actual authority or the other partners subsequently ratify the act.

Fiduciary Duties

While exercising authority and making decisions, partners owe fiduciary duties to each other and the firm. These include acting in good faith, avoiding conflicts of interest, and not making secret profits. A partner acting within their apparent authority might still breach their fiduciary duties internally if the action benefits them personally at the expense of the firm.

Revision Tip

When assessing if a firm is bound by a partner's actions, always distinguish between the partner's internal authority (actual, governed by the partnership agreement or consent) and their external power to bind the firm (apparent, based on the usual course of business and the third party's standpoint). Section 5 PA 1890 is key here.

Key Point Checklist

This article has covered the following key knowledge points:

  • Partnership decisions on ordinary business matters are typically made by majority vote, unless the partnership agreement states otherwise (s 24(8) PA 1890).
  • Decisions changing the nature of the business or admitting a new partner require unanimous consent under the default rules (ss 19, 24(7), 24(8) PA 1890).
  • Partnership agreements are essential for varying these default decision-making rules to suit the partners' specific needs.
  • Every partner acts as an agent of the firm (s 5 PA 1890).
  • A partner can bind the firm if they act with actual authority (express or implied).
  • A partner can also bind the firm through apparent (ostensible) authority if they act in the usual course of the firm's business and the third party is unaware of any lack of actual authority (s 5 PA 1890).
  • Understanding the distinction between actual and apparent authority is essential for determining the firm's liability to third parties.

Key Terms and Concepts

  • Partnership Agreement
  • Majority Rule
  • Unanimity
  • Actual Authority
  • Apparent Authority
The answers, solutions, explanations, and written content provided on this page represent PastPaperHero's interpretation of academic material and potential responses to given questions. These are not guaranteed to be the only correct or definitive answers or explanations. Alternative valid responses, interpretations, or approaches may exist. If you believe any content is incorrect, outdated, or could be improved, please get in touch with us and we will review and make necessary amendments if we deem it appropriate. As per our terms and conditions, PastPaperHero shall not be held liable or responsible for any consequences arising. This includes, but is not limited to, incorrect answers in assignments, exams, or any form of testing administered by educational institutions or examination boards, as well as any misunderstandings or misapplications of concepts explained in our written content. Users are responsible for verifying that the methods, procedures, and explanations presented align with those taught in their respective educational settings and with current academic standards. While we strive to provide high-quality, accurate, and up-to-date content, PastPaperHero does not guarantee the completeness or accuracy of our written explanations, nor any specific outcomes in academic understanding or testing, whether formal or informal.
No resources available.

Job & Test Prep on a Budget

Compare PastPaperHero's subscription offering to the wider market

PastPaperHero
Monthly Plan
$10
Assessment Day
One-time Fee
$20-39
Barbri SQE
One-time Fee
$3,800-6,900
BPP SQE
One-time Fee
$5,400-8,200
College of Legal P...
One-time Fee
$2,300-9,100
Job Test Prep
One-time Fee
$90-350
Law Training Centr...
One-time Fee
$500-6,200
QLTS SQE
One-time Fee
$2,500-3,800
University of Law...
One-time Fee
$6,200-22,400

Note the above prices are approximate and based on prices listed on the respective websites as of May 2025. Prices may vary based on location, currency exchange rates, and other factors.

Get unlimited access to thousands of practice questions, flashcards, and detailed explanations. Save over 90% compared to one-time courses while maintaining the flexibility to learn at your own pace.

All-in-one Learning Platform

Everything you need to master your assessments and job tests in one place

  • Comprehensive Content

    Access thousands of fully explained questions and cases across multiple subjects

  • Visual Learning

    Understand complex concepts with intuitive diagrams and flowcharts

  • Focused Practice

    Prepare for assessments with targeted practice materials and expert guidance

  • Personalized Learning

    Track your progress and focus on areas where you need improvement

  • Affordable Access

    Get quality educational resources at a fraction of traditional costs

Tell Us What You Think

Help us improve our resources by sharing your experience

Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal