Because a firm has no legal personality separate from the partners, the partners are personally bound under, and hence liable on, contracts which are binding on the firm. The PA 1890 contains provisions relating to the nature and extent of such liabilities. In some circumstances, non-partners can also become personally liable.
Nature of partners’ liability (ss.9, 10 and 12 PA 1890)
Contractual Liability: Every partner in a firm is liable jointly with the other partners for all the debts and obligations of the firm incurred whilst he is a partner (s.9).
Tortious Liability: In tort the partners’ liability is joint and several (ss.10 and 12).
Liability of non-partners: new and former partners (ss.17 and 36 PA 1890)
Under s.17(1) a new partner will not automatically be liable in relation to any debts incurred by the partnership before he joined.
Under s.17(2) a partner will still be liable after he retires in respect of debts incurred by the partnership whilst he was a partner. In order to relieve a partner from an existing liability once he retires, a partnership may novate the relevant agreement; this must be with the consent of the creditor (s.17(3)).
It is also possible for a former partner to become liable for new partnership debts incurred after he has left under s.36. If a partner leaves, a third party can treat all apparent partners of the firm as it was before the change (i.e. including the departing partner) as jointly liable to pay any new debt incurred by the partnership UNLESS that third party has been notified of this change either by:
- actual notice (s.36(1)) – for those who have had actual dealings with the partner before departure; or
- constructive notice by virtue of publication of the departure in the London Gazette (s.36(2)) – for those who have not had actual dealings with the partner before departure.
However, a former partner will not be liable for debts to any third party who did not know him to be a partner before he left. No notice at all has to be given to such persons.
Liability of non-partners: ‘holding out’ (s.14 PA 1890)
Generally, a person who is not a partner has no personal liability for partnership debts. However, s.14 sets out circumstances where a non-partner may be personally liable on a partnership debt if he has held himself out as a partner (or has knowingly allowed himself to be so held out).
The elements required for s.14 to have effect are (i) a representation to a third party to the effect that a person is a partner, (ii) the third party’s action in response (‘giving credit to the firm’, e.g. by supplying goods or services to the firm) and (iii) the third party’s state of mind (‘believing (having faith in) the representation’).
It is important to appreciate that s.14 relates to the liability incurred by the NON-PARTNER, not the liability of the firm. The liability of the firm for the acts of a non-partner is established by applying the common law principles of agency.