The Partnership Agreement or Deed
Most partnerships will have some form of express agreement. As a minimum, this will normally include provision for sharing the profits and, on dissolution, the capital. It will usually also provide for the joining of new partners, the retirement of existing partners and termination of the partnership.
The PA 1890 contains a default code, which applies to relations between the partners themselves in the absence of any contrary agreement.
The partners’ mutual rights and obligations (under an agreement or under PA 1890) can be varied at any time by their unanimous consent (s.19 PA 1890) and this can be express or inferred from a course of dealing. Clearly it is preferable for any such agreement to be expressly and properly documented for certainty.
‘Fall back’ provisions on internal affairs
PA 1890 contains provisions dealing with the internal regulation of the partnership. These are subject to any agreement, express or implied, between the partners. The fall back provisions include the following:
- S.24(1) Profits: Partners are entitled to share equally in the profits of the business. This is the case even where the parties have contributed to the capital unequally. There should therefore be an express provision in the agreement setting out a profit sharing ratio (PSR), otherwise profits and losses are shared equally, which may not be desirable if one partner has invested more (or less) in the partnership than the others.
- S.24(6) Remuneration: Without an agreement a partner is not entitled to a salary.
- S.24(8) Decision Making: Decisions arising during the ordinary course of the business are decided by a majority, except for any change to the nature of the partnership business which requires unanimity.
- S.25 Expulsion: A partner cannot be expelled by majority vote unless all of the partners have previously expressly agreed that a majority can do this. The partners should therefore agree expulsion provisions in advance, otherwise it will be impossible to remove a partner without dissolving the partnership.
Partnership property
As a partnership does not have a separate legal personality, each partner is deemed to own a share in the property belonging to the partnership. An individual partner does not have a right to any particular partnership asset.
Section 20 PA 1890 provides that all property brought into the partnership whether by purchase or otherwise, on account of the firm or for the purposes and in the course of the partnership business, is partnership property. Whether or not a particular asset is partnership property is a question of fact, depending on the intentions of the partners at the time they acquire it. This subjective element can be difficult to prove and so it is sensible for partners to agree which assets are partnership property to minimise the potential for dispute later.
Section 21 PA 1890 provides that all property bought with money belonging to the firm/partnership is deemed to have been bought on account of the firm/partnership, unless the contrary intention is shown.
Fiduciary relationship
There is an overriding duty of good faith in a partnership. The duty owed by the partners to one another is similar to that owed by a trustee to a beneficiary. These equitable principles are reflected in the following sections of the PA 1890:
- Honest and full disclosure (s.28 PA 1890)
- Unauthorised personal profit (s.29(1) PA 1890)
- Conflict of duty and interest (s.30 PA 1890).