Mutual Duties

Rights and Duties

The rights and the obligations of the partners to each other are determined by the terms of the partnership agreement, if and to the extent that there is one. There may be a written or verbal agreement or an agreement by conduct.

The Partnership Act sets out rules and presumptions which apply in the absence of an agreement to the contrary. Unless the agreement expressly or by implication covers the position, the provisions in the Partnership Act will apply.

In the absence of the partnership agreement providing otherwise, the partners have equal rights and obligations to each other.  This position is commonly varied. A contract providing for the variation of equal rights and duties must exist. Common law principles on contract formation and interpretation apply.

Unless otherwise agreed, no new partner may be introduced without the consent of all partners.


Management

Each partner is entitled, in the absence of agreement otherwise, to participate in partnership decision making and in the management of the partnership business.  This is the case irrespective of the profit sharing ratio, capital, seniority or otherwise.

It is consistent with the joint liability of the partners for the debts of the firm, that each is presumptively entitled to participate in management. If the partners improperly attempt to exclude another partner, the court can make an order to enforce his right to participate. An injunction may be granted.

There is no obligation on partners to devote their time to the management of the business or to partake at all in the business of the partnership, in the absence of agreement otherwise.  In larger partnerships, the partnership agreement may provide for management structures, similar to those in limited companies. There will commonly be management committee and a managing partner.


Payment

There is no implied or inherent right to payment for managing or participating in the management of the partnership business. There is no right of remuneration for working in the partnership business.Any right to payment may be granted by the express or implied contract or approval of the partners.

A partner’s share of profits accrue automatically. The right to drawings is governed by the agreement of the parties.

Partners may be paid sums which are described as salaries.They are typically a payment for undertaking work or a role in the business.Technically, the payments are not salaries but are drawings. The salary arises and is deducted prior to the calculation and division of partnership profits.

A partner who is acting in managing the firm after dissolution is entitled to an allowance for the management undertaken, in the course of dissolution.


Decision Making

The Partnership Act provides, that in the absence of agreement otherwise, partnership decisions in the ordinary course of business, are made by majority decision. A majority refers to a majority in number of the partners, rather than a majority in terms of capital contribution or profit-sharing ratios.

In practice, formal partnership votes may be rarely taken in many smaller scale businesses, which require the mutual trust and confidence of each partner, However, the ultimate position is that differences arising as to ordinary matters in the partnership business are decided by a majority of the partners under the default provisions.

Key partnership decisions require the consent of all partners unless otherwise provided by the partnership agreement. Unanimity is required, where the decision is not in the ordinary course of business.

What is or is not ordinary business depends on the circumstances. Any fundamental change in the nature of the partnership, a long-term or strategic decision requires the agreement of all partners.

Seperately, the admission of a new partner requires the consent of all partners under the default rules.


Exercise of Powers

Every partner is an agent of the firm (the other partners) for the purpose of the business of the partnership. The acts of each partner in carrying on in the usual way, business of the kind undertaken by the firm, binds the firm/ the partners. This is so unless the partner so acting has, in fact, no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.

An act or instrument relating to the business of the firm done or executed in the firm-name, or in any other manner showing an intention to bind the firm, by any person thereto authorised, whether a partner or not, is binding on the firm and all the partners. This does not affect any general rule of law relating to the execution of deeds or negotiable instruments.

Where one partner pledges the credit of the firm for a purpose apparently unconnected with the firm’s ordinary course of business, the firm is not bound, unless he is in fact specially authorised by the other partners. This position does not affect any personal liability incurred by the individual partner.

If it has been agreed between the partners that any restriction is to placed on any of their powers to bind the firm, no act done in contravention of the agreement is binding on the firm with respect to persons having notice of the agreement.


Duties to other Partners I

Fiduciary duties apply to certain special relationships between parties, which are capable of being abused. Partners owe fiduciary duties to their fellow partners. Fiduciary duties entail a range of consequences.

Partners must act in good faith in their dealings with each other.  They have must not disregard the interests of other partners.They must act bona fide in the interests of the partnership as a whole.

Although parters may undertake ordinary business, the majority cannot simply disregard the interests of the minority. Under the default rules, the consent of each partner to most significant decisions. Even if their agreement cover allows a majority decision on fundamental matters, their mutual duty to act in good faith required that they have regard to the interests and views of the minority.


Duties to other Partners II

Partners have a duty to act honestly in their dealings with third parties. Failure to so may incur tortious and criminal liability. It may damage or destroy the reputation of the firm.

Partners owe fiduciary duties to each another. The duties owed are similar to but not as onerous as the duties owed by trustees to their beneficiaries. They must not make a secret profit. They must not take personal advantage of business opportunities unless the same has been fully declared to the other partners and they have freely consented.

It is presumed that each partner is entitled to an indemnity from the other partners in relation to payments made and liabilities incurred in the proper course of the partnership. This includes anything necessarily done for the preservation of the business or property of the firm. If a partner undertakes an unauthorised act, the indemnity will apply if the co-partners ratify the act afterwards, provided they are aware of the full consequences.


Duty of Good Faith

Partners owe duties of good faith to each other. Equally, partners are entitled to have the other partners act in good faith to them. The obligation to act in good faith applies to parties negotiating to become partners. It survives after the partnership in dissolution and winding up.

The duty of good faith requires that partners’ powers should be exercised for their proper purpose, in the interests of the partnership as a whole.  They should not be exercised for some other purpose or motive. In particular, they should not be used to benefit the partner in a personal capacity. This is necessary in order to ensure that partners maintain mutual confidence and trust.

Where one partner breaches his duty, an agreement entered may be set aside. The innocent partner may choose to affirm the agreement after he becomes aware of the facts by which he is entitled to terminate it. In this case, the partner may waive his rights or ratify the agreement.

The fact that one partner does not observe the duty of good faith does not excuse other partners in failing to observe the obligation. The failure to observe the duty may be a repudiation of the partnership agreement, such as to entitle the innocent partner to terminate that partnership.


Information

The Partnership Act places duties on partners which reflect the duty of good faith. The partners must render true accounts and give full information to each other regarding the partnership business. The obligation to give other partners a true account and information in relation to the partnership business is fundamental.

It may be possible to limit the extent of the information to be provided by agreement, for example, as between different classes or categories of partners. However, it is not possible to exclude the general duty to account and give basic information by the terms of the partnership agreement.

Fiduciary duties imply a positive obligation on the part or partners to act in good faith and be honest in their dealings with and truthful to each other. They must act in the interests of the partnership and not in their own self-interests.

The duty entails a positive obligation to disclose material information to one another in their dealings. They must not make secret profits. They must not take advantage on any asset or opportunity that is properly that of the partnership.


Fiduciary Duties

Fiduciary duties require that the partner should not make an unapproved profit in the course of the partnership. A partner must account to the firm for benefits received by him, without the consent of their other partners, from any transaction concerning the partnership, the partnership property, its name or business connections.

The obligation to account for profits arises principally in the context of secret profits. However, the principle applies to any profit to which the other partners have not freely consented, irrespective of whether it is, in fact, secret.

The fiduciary duties continue during the winding up of the firm.  After one partner leaves and there is a technical dissolution of the firm, the obligation ceases to apply.

The fiduciary duty of partners may be limited or excluded to some extent by the partnership agreement.  However, there are limits and the basic duties and obligations to account to each other and act honestly may not be excluded.


Business Opportunities

The business opportunities of the partnership may not be taken for the benefit of a single partner. Profits from the firm’s activities or which derive from the firm’s business connections belong to the partnership. If a partner profits secretly from customer dealings, he must account to the other partners.

In order to take the benefit of a partnership opportunity, a partner must fully disclose all circumstances, relevant facts and obtain the informed consent of his fellow partners. In the event of a subsequent dispute, the onus is on the partner concerned to show that he made a full and frank disclosure.

A partner must not compete with the firm. If a partner competes without consent, he must account for profits made by him in the business. There may, however, be an obligation under the partnership agreement to devote full time to their partnership business.

After cessation of partnership, a partner may continue to service clients of the old firm with whom he has developed a relationship during the partnership.He must not breach his duties while he was a partner. Specific post-cessation restrictions on competition may be agreed in the partnership agreement, subject to competition law and to the restraint of trade doctrine.


Duty to Account

Where there has been a breach of fiduciary duty, the partner in breach must account for profits made.  Ultimately, the court may order the entire partnership to be dissolved and a full account to be rendered of the partnership dealings.  An award of damages or compensation may be granted to the partnership for breach of the duty as an alternative to an account.

Where a partner carries on business which competes with the firm, he must account to the other partners for the profit made. Competing may be permitted where the other partners clearly consent. The principle applies where the competing business of the same nature as the firm’s business.

Where one partner acting within the scope of his apparent authority receives the money or property of a third person and misapplies it; and where a firm in the course of its business receives money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm, the firm is liable to make good the loss.

If a partner, being a trustee, improperly uses trust property in the business or for partnership, the firm must account for the misapplied assets to the persons beneficially interested therein. A partner may be liable in person by reason of his having notice of a breach of trust. Trust money may be followed and recovered from the firm, if it is still in its possession or under its control.


Indemnity

Partners are entitled to an indemnity from their fellow partners in respect of payments and liabilities incurred by him personally, in the ordinary course of the firm’s business, and for anything necessarily done for the preservation of the business or property of the firm.  This rule applies in the absence of anything to the contrary.

Whether or not the matter is in the ordinary and proper course of the business of the firm depends on the circumstances.  It will depend on the nature of the business carried on and the expenses normally incurred in that business.

The other partners may be entitled to compensation or indemnity from a partner in default.  This applies to liability incurred by the firm by reason of the defaulting partner’s deliberate wrongdoing.

The position in respect of the negligence of one partner is less clear.  It is not clear if a partner owes a duty of care to fellow partners, not to be negligent to third parties thereby incurring a loss to the partnership. Negligence may be a breach of the express or implied terms of the partnership agreement.

Where the parties are sued by another, under the Civil Liability Act, a court may exempt a partner from liability to contribute or may direct that a contribution or an indemnity be given by one to another.


References and Sources

 

Irish Sources

Partnership Act, 1890

Partnership Law 2000 Twomey M. Butterworths

 

UK Sources

Lindley & Banks on Partnership: (19th Revised edition) 2016  Banks, Roderick I’Anson

Partnership & Llp Law (8th edition) 2015  Morse, G.

Partnership Law (5th Revised edition) 2015  Blackett-Ord, Mark; Haren, Sarah;


Partnership Act

Variation by consent of terms of partnership.

19. The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing.

Rules as to interests and duties of partners subject to special agreement.

24. The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules:—
(1) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses whether of capital or otherwise sustained by the firm.
(2) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him—
(a) In the ordinary and proper conduct of the business of the firm; or,
(b) In or about anything necessarily done for the preservation of the business or property of the firm.
(3) A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which he has agreed to subscribe, is entitled to interest at the rate of five per cent. per annum from the date of the payment or advance.
(4) A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him.
(5) Every partner may take part in the management of the partnership business.
(6) No partner shall be entitled to remuneration for acting in the partnership business.
(7) No person may be introduced as a partner without the consent of all existing partners.
(8) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners.
(9) The partnership books are to be kept at the place of business of the partnership (or the principal place, if there is more than one), and every partner may, when he thinks fit, have access to and inspect and copy any of them.

Expulsion of partner.

25. No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.

Retirement from partnership at will.

26.—(1) Where no fixed term has been agreed upon for the duration of the partnership, any partner may determine the partnership at any time on giving notice of his intention so to do to all the other partners.
(2) Where the partnership has originally been constituted by deed, a notice in writing, signed by the partner giving it, shall be sufficient for this purpose.

Where partnership for term is continued over, continuance on old terms presumed.

27.—(1) Where a partnership entered into for a fixed term is continued after the term has expired, and without any express new agreement, the rights and duties of the partners remain the same as they were at the expiration of the term, so far as is consistent with the incidents of a partnership at will.
(2) A continuance of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is presumed to be a continuance of the partnership.


Duty of partners to render accounts, &c.

28. Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives.


Accountability of partners for private profits.

29.—(1) Every partner must account to the firm for any benefit derived by him without the consent of the other partners from any transaction concerning the partnership, or from any use by him of the partnership property name or business connexion.

(2) This section applies also to transactions undertaken after a partnership has been dissolved by the death of a partner, and before the affairs thereof have been completely wound up, either by any surviving partner or by the representatives of the deceased partner.


Duty of partner not to compete with firm.

30. If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, he must account for and pay over to the firm all profits made by him in that business.


Cases

Conlon & Anor v Simms

[2006] EWHC 401

MR JUSTICE E COLLINS

A.         Duty of disclosure

The most fundamental obligation which the law imposes on a partner is the duty to display complete good faith towards his co-partners in all partnership dealings and transactions: Lindley and Banks, Partnership, 18th ed. 2002, para. 16-01.

The relationship between partners is of a fiduciary nature (ibid. para. 16-03). “If fiduciary relation means anything I cannot conceive a stronger case of fiduciary relation than that which exists between partners”: Helmore v Smith (1886) 35 Ch D 436, 444.

It follows that when co-partners are negotiating between each other in relation to partnership assets, each partner must put the others in possession of all material facts with reference to the partnership assets, and not to conceal what he alone knows: Maddeford v Austwick (1826) 1 Sim. 92; Law v Law [1905] 1 Ch 140, 157.

It has been said that the duty of good faith exists not only as between persons who are actually in partnership together, but also as between persons who are negotiating their entry into partnership: Lindley and Banks, para. 16-06: Spencer Bower, Actionable Non-disclosure (2nd ed Turner and Sutton, 1990), paras. 10.01 to 10.04; Chitty on Contracts, para. 6.157. It is true that the cases cited by Lindley and Banks and by Chitty do not bear out the proposition (the only one remotely near the point is Fawcett v Whitehouse (1829) 1 Russ & M 132, but that was not a case of a prospective partnership), and that Cartwright, Misrepresentation (2002), para. 11.10, on which Mr Simms relied, says that it is not clear whether the duty of disclosure arises during the negotiations for partnership.

But there is authority, including very strong persuasive authority, for the existence of such a duty. In Andrewes v Garstin (1861) 10 C.B. (N.S.) 444 the plaintiff sued for breach of an agreement to enter into a partnership with the defendant, who pleaded that previously the plaintiff had carried on trade in partnership with another person, and that the defendant made the agreement on the faith and under the belief that the plaintiff had up to that time acted with honesty towards his previous partner. But after the making of the agreement the defendant discovered that the plaintiff had before the time of making the agreement acted with fraud and dishonesty towards his partner, and did not disclose it. It was held that the plea afforded no answer to the action. Erle CJ said that the arguments urged by the defendant would have been addressed with more plausibility if the plea had been a little more specific. There was no suggestion of fraud on the defendant and as to the rest it was much too vague and uncertain. Contrary to Mr Simms’ argument, there is no suggestion in this decision that there was no duty to disclose material matters.

In Bell v Lever Brothers Ltd [1932] AC 161, at 227 (cited by Cartwright on this point, but not by Lindley and Banks), Lord Atkin assumed that an intending partner had a duty of disclosure. He said:

“Fraudulent concealment has been negatived by the jury; this claim is based upon the contention that Bell owed a duty to Levers to disclose his misconduct, and that in default of disclosure the contract was voidable. Ordinarily the failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract. The principle of caveat emptor applies outside contracts of sale. There are certain contracts expressed by the law to be contracts of the utmost good faith, where material facts must be disclosed; if not, the contract is voidable. Apart from special fiduciary relationships, contracts for partnership and contracts of insurance are the leading instances. In such cases the duty does not arise out of contract; the duty of a person proposing an insurance arises before a contract is made, so of an intending partner.”

I am satisfied on principle and authority that prospective partners have a duty to disclose material matters.

Mr Simms is right to say that the duty of disclosure depends upon the relative degree of knowledge as to the partnership affairs possessed by the parties, and there is a duty of disclosure on the partner who has “exclusive or superior knowledge of the affairs of the partnership” (Spencer Bower, para. 10.02). But this is only saying that there is no duty to disclose what is already known.

There is, in variety of contexts, a tendency towards the view that mere non-disclosure does not give a right to damages. According to the view of Spencer Bower, Actionable Non-Disclosure, and its present editors, the right of any party complaining who elects to avoid a contract in the negotiation for which material facts have been withheld is to have the contract judicially annulled or treated as a nullity and that party is not entitled to recover damages: para. 14.02. So also, according to Lindley and Banks, para. 16-08, a breach of the duty of good faith will give rise to a claim for damages in an appropriate case, but such a claim may not be sustainable where the breach involves a mere non-disclosure, citing Uphoff  v International Energy Trading, The Times, February 4, 1989 (C.A.), where it was held that even if shareholders owed each other a duty of good faith as parties to a joint venture, it was not arguable that there was a duty of disclosure in that case, but even if there had been, it would not sound in damages. Mere non-disclosure does not found an action for deceit: Clerk and Lindsell, Torts, 19th ed. 2006, para. 18-08. Nor does it give rise to liability for damages under the Misrepresentation Act 1967: Chitty, Contracts (29th ed. 2004), para. 6-072.

But is clear that where there is a duty to disclose, and the failure to disclose is fraudulent, there will be an action in deceit and damages will be an available remedy. In such cases “the non-disclosure assumes the character of fraudulent concealment, or amounts to fraudulent misrepresentation, or is otherwise founded on, or characterized and accompanied by, fraud”: Spencer-Bower, para. 14.02.

But it has been said that in practice the line between misrepresentation and non-disclosure is often imperceptible: Pan Atlantic Insurance Co. Ltd. v Pine Top Insurance Co. Ltd. [1995] 1 AC 501, 549, per Lord Mustill. The deliberate withholding of information which the person knows or believes to be material, if done dishonestly or recklessly, may amount to a fraudulent misrepresentation: HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 2 Lloyd’s Rep 61, at para. 21, per Lord Bingham. It cannot be easy to conceal material facts in the course of negotiating, without falsifying something which has been expressly or impliedly stated: ibid at para. 71, per Lord Hoffmann, who also said, at para. 72, citing Brownlie v Campbell (1880) 5 App Cas. 925, 950, that where there is a duty or an obligation to speak, and the person holds his tongue and does not speak, and does not say the thing he was bound to say, if that was done with the intention of inducing the other party to act upon the belief that the reason why he did not speak was because he had nothing to say, that was fraud also.

The Amended Particulars of Claim also plead a contractual duty, namely the implied duty of good faith which is breached by such non-disclosure. Mr Engelman cited the decision in Trimble v Goldberg [1906] AC 494, at 500 (P.C.) for the proposition that a breach of contract arising as a result of breach of an implied term of good faith sounds in damages. But the Privy Council in that passage was speaking of breach of an express term not to purchase property for the partner’s own account. Nevertheless there is no reason to doubt that breach of an implied term would give rise to a right to damages. But it is clear from the context that what is pleaded in the present case is a breach of the implied obligations in the May 2000 and September 2000 Partnership Agreements. As regards Mr Conlon, there was an express contractual duty under the 1997 partnership agreement (clause 18.1.1) to act in good faith, but no breach of that agreement is pleaded or relied upon.


Clifford v. Timms

[1907] UKHL 966

Facts:

A partnership contract between A and B, two dentists, provided that if either should “be guilty of professional misconduct or any act which is calculated to bring discredit upon or injure the other partner or the partnership business,” the other should have the right to terminate the partnership. A joined with other persons in forming, and became a director and shareholder in, a company called the American Dental Institute, Limited. This company issued large numbers of advertisements, in which they praised their own work and products in the most extravagant terms, and at the same time decried those of rival practitioners in general, against whom they also made charges of moral misconduct.

Held that A’s conduct was such as to entitle B to terminate the partnership under the clause above narrated.

Headnote:

Appeal from a judgment of the Court of Appeal ( Cozens-Hardy, M.R., Sir J. Gorell Barnes, P., and Buckley, L.J.), [1907] 2 Ch. 237, reversing a judgment of Warrington, J., [1907] 1 Ch. 420.

The facts sufficiently appear from the rubric and the Lord Chancellor’s opinion, infra.

Judgment:

Lord Chancellor (Loreburn)—I am of opinion that this appeal must be dismissed. The question is whether a particular dental practitioner has been guilty of professional misconduct and thus enabled his partner to cancel the arrangement between them. I do not think it in the least necessary to enter upon the legal question, interesting as it may be, which was discussed so much in the Court of Appeal. It seems to me to be a matter of indifference whether the order made by the General Medical Council be admitted in evidence or be excluded. What seems to me quite clear is this—that the form of advertisement which was sanctioned by the gentleman in question amounted in the circumstances to professional misconduct. I will not dwell upon the case. There was profuse advertisement in every form of self-praise and self-commendation on the part of this company and of those who carried on business under its authority. For the present purpose it is enough to say that there were two particular advertisements which I consider to be thoroughly discreditable, and to amount to professional misconduct of a serious and inexcusable kind. One of them was that which related to a suggestion that most, or nearly all, other dental practitioners omitted the necessary precaution of sterilising their instruments, whereas those who carried on the business of this company were careful not to omit that precaution. Now that was a peculiarly dangerous form of disparagement levelled against other practitioners, because it was not levelled against any one in particular, and therefore the falsity of it could not have been vindicated in any action. The second instance, which I deprecate still more strongly, is the report of an interview which appeared in the Review of Reviews, and contained the undisguised suggestion that in cases—I will not apply strictly the numerical test suggested in the Review—but in cases of English dentists it was at all events a not uncommon thing that disgraceful advantage should be taken by the operator, in the case of a woman, of the absence of some other woman to guard her honour. I can see nothing that can justify anything of that kind. It has all the elements of disgraceful imputation—it is so general that it cannot be denied, that it cannot be proved, and that it cannot be made the subject of investigation; yet it suggests to those who are sensitive about the honour of others who belong to them the most powerful motive to avoid other establishments and to seek relief from those who are engaged by this company, with the object and with the result of pecuniary profit. For my part, if this be not disgraceful conduct, if it be not professional misconduct, I know not what the terms mean.