Learning Outcomes
After studying this article, you will be able to identify and apply the key procedures governing partnerships under the Partnership Act 1890. You will understand how partnerships are formed, the default rules for management and decision-making, the authority of partners, and the extent of partner liability to third parties. You will also be able to explain how these rules can be modified by agreement and how retirement and dissolution affect liability.
SQE1 Syllabus
For SQE1, you are required to understand the governance of partnerships under the Partnership Act 1890 from a practical viewpoint. Focus your revision on:
- The statutory definition and formation of partnerships under the Act
- The default rules for partnership management and decision-making
- The authority of partners to bind the firm and each other
- The liability of partners for debts and wrongful acts
- Procedures for retirement, expulsion, and dissolution of partnerships
- The effect of partnership agreements on statutory procedures
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.
- Under the Partnership Act 1890, what is required for a partnership to exist?
- How can a partner bind the firm in contract with a third party?
- What is the default rule for sharing profits and losses among partners?
- What steps must a retiring partner take to avoid liability for future partnership debts?
- Can a partner be expelled from a partnership without an express agreement?
Introduction
The Partnership Act 1890 (PA 1890) sets out the legal framework for the formation, management, and dissolution of partnerships in England and Wales. It provides default rules for governance and partner liability, which apply unless the partners agree otherwise. For SQE1, you must be able to identify these statutory procedures and explain how they operate in practice.
Partnership Formation and Status
A partnership arises when two or more persons carry on a business in common with a view of profit (s. 1(1) PA 1890). No formal registration is required. A partnership can be created by express agreement, implied conduct, or by operation of law.
Key Term: partnership
A relationship between persons carrying on a business in common with a view of profit, as defined in s. 1(1) PA 1890.
A partnership is not a separate legal entity. The partners are collectively known as the "firm" and act through each other.
Key Term: firm
The collective name for the partners in a partnership under the PA 1890.
Unless the partners agree otherwise, the PA 1890 provides default rules for partnership management and decision-making:
- All partners are entitled to participate in management (s. 24(5)).
- Ordinary business decisions are made by a majority of partners (s. 24(8)).
- Changes to the nature of the business require unanimous consent (s. 24(8)).
- Admission of a new partner requires unanimous consent (s. 24(7)).
- No partner is entitled to remuneration for acting in the partnership (s. 24(6)).
- All partners share profits and losses equally (s. 24(1)).
Key Term: partnership agreement
A written or oral agreement between partners that can modify or override the default rules of the PA 1890.
Worked Example 1.1
Three partners run a design business. Two want to expand into a new area. The third disagrees. Can the majority proceed?
Answer: No. Changing the nature of the business requires unanimous consent under s. 24(8) PA 1890.
Authority of Partners
Each partner is an agent of the firm and the other partners for the purpose of the partnership business (s. 5 PA 1890). A partner can bind the firm in contract with third parties if acting within actual or apparent authority.
Key Term: actual authority
Authority expressly given by the partnership agreement or by the other partners.Key Term: apparent authority
Authority where a partner acts in a way that would lead a reasonable third party to believe they have authority, even if not expressly authorised.
Worked Example 1.2
A partner in a retail partnership signs a supply contract. The other partners object, claiming they did not authorise it. Is the firm bound?
Answer: Yes, if the contract is within the usual business of the firm, the partner has apparent authority and the firm is bound.
Liability of Partners
Partners are jointly liable for all debts and obligations of the firm incurred while they are partners (s. 9 PA 1890). Each partner can be held responsible for the full amount.
Key Term: joint liability
Liability where each partner is responsible together with the others for the whole debt.Key Term: several liability
Liability where each partner can be sued individually for the full amount.
The firm is also liable for wrongful acts or omissions of a partner acting in the ordinary course of business or with the authority of co-partners (s. 10 PA 1890).
Worked Example 1.3
A partner negligently gives advice to a client, causing loss. Who is liable?
Answer: The firm is liable for the partner's wrongful act if it was done in the ordinary course of business.
Procedures for Retirement and Expulsion
A partner may retire in accordance with the partnership agreement or, if none, by giving notice in a partnership at will (s. 26 PA 1890). There is no statutory right to expel a partner; expulsion is only possible if expressly agreed (s. 25 PA 1890).
Key Term: partnership at will
A partnership with no fixed term, which can be dissolved by any partner giving notice.Key Term: expulsion
The removal of a partner from the partnership, only permitted if expressly provided for in the partnership agreement.
A retiring partner remains liable for debts incurred while they were a partner (s. 17 PA 1890). To avoid liability for future debts, the retiring partner must give actual notice to existing clients and constructive notice (e.g., by advertising in the Gazette) to others (s. 36 PA 1890).
Key Term: actual notice
Direct notification to those who have dealt with the firm.Key Term: constructive notice
Notice given by advertising in the Gazette, deemed to notify those who have not previously dealt with the firm.
Dissolution and Winding Up
A partnership may be dissolved by agreement, expiry of a fixed term, notice in a partnership at will, death or bankruptcy of a partner, or by court order (ss. 32–35 PA 1890). Upon dissolution, the firm's assets are used to pay debts, then advances and capital to partners, and any surplus is divided according to profit shares (s. 44 PA 1890).
Key Term: dissolution
The process by which a partnership is brought to an end and its affairs wound up.
Modifying Statutory Procedures by Agreement
Most default rules in the PA 1890 can be modified or excluded by express or implied agreement between the partners (s. 19 PA 1890). A well-drafted partnership agreement should set out management, profit-sharing, decision-making, retirement, expulsion, and dispute resolution procedures.
Exam Warning
The PA 1890 does not provide for expulsion of a partner unless expressly agreed. Attempting to expel a partner without such a provision is invalid.
Revision Tip
Always check for a written partnership agreement. Most statutory procedures can be changed by agreement.
Key Point Checklist
This article has covered the following key knowledge points:
- A partnership exists when two or more persons carry on business in common with a view of profit.
- The PA 1890 provides default rules for management, decision-making, and profit-sharing, which apply unless varied by agreement.
- Each partner is an agent of the firm and can bind the firm within actual or apparent authority.
- Partners are jointly liable for debts and wrongful acts of the firm.
- Retirement requires notice to partners and third parties to avoid future liability.
- Expulsion is only possible if expressly agreed in the partnership agreement.
- Dissolution and winding up follow statutory procedures unless modified by agreement.
Key Terms and Concepts
- partnership
- firm
- partnership agreement
- actual authority
- apparent authority
- joint liability
- several liability
- partnership at will
- expulsion
- actual notice
- constructive notice
- dissolution
