Partnership governance - Decision-making and authority of partners

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Overview

Understanding partnership governance under the Partnership Act 1890 is key to excelling in the SQE1 FLK1 exam. This analysis examines the decision-making processes, partner authority, and liability within partnerships. By reviewing statutory provisions, case law, and practical scenarios, this article provides candidates with the necessary tools for both exam success and professional application.

Decision-Making in Partnerships

Statutory Framework and Rules

The Partnership Act 1890 defines the rules for decision-making in partnerships. Section 24 outlines default guidelines unless an agreement states otherwise:

  1. Routine matters may be decided by majority vote (Section 24(8)).
  2. Changes to the nature of the business require unanimous consent (Section 24(8)).
  3. Admitting new partners also needs unanimous consent (Section 24(7)).

These rules can be adjusted with a formal partnership agreement.

Unanimous Decisions vs. Majority Rule

Although the Act favors majority decisions for routine matters, key decisions require unanimous consent:

  1. Altering the partnership agreement
  2. Modifying the business scope
  3. Admitting new partners
  4. Expelling partners (absent specific agreement provisions)

Example: In Const v Harris (1824) T & R 496, the court ruled that a majority couldn’t force a dissenting partner to extend credit, emphasizing the need for unanimous agreement on substantial changes.

Partnership Agreements and Protocols

Effective partnership agreements often include specific protocols, detailing:

  1. Voting rights and processes
  2. Quorum requirements for meetings
  3. Decision thresholds for various business types
  4. Dispute resolution methods

Authority of Partners

Actual and Apparent Authority

Section 5 of the Partnership Act 1890 states that each partner acts as an agent for the partnership, leading to:

  1. Actual Authority: Granted by the partnership agreement or through partners' conduct.
  2. Apparent Authority: Authority perceived by third parties interacting with the partnership.

Scope and Limitations

Partners generally have wide-reaching authority, but with limits:

  1. Actions must align with usual business practices (Section 5).
  2. Partners can't commit the firm to unrelated transactions.
  3. Restrictions aren't effective against third parties unless they’re aware.

Example: In Mercantile Credit Co Ltd v Garrod [1962] 3 All ER 1103, a partner improperly secured finance using partnership letterhead. The court ruled he had apparent authority, as financing was typical of the business, and the company was unaware of any restrictions.

Fiduciary Duties

Partners owe duties to one another and the partnership:

  1. Acting in good faith and loyalty
  2. Prioritizing the partnership's interests
  3. Avoiding conflicts of interest
  4. Accounting for benefits derived from the partnership

Joint and Several Liability

Partner Liability

Section 9 of the Partnership Act 1890 establishes that partners are collectively responsible for debts and actions while they are partners, including:

  1. Collective liability for debts
  2. Joint and several liability for wrongful acts
  3. Extended liability beyond individual capital contributions

Impact on Third-Party Dealings

Joint and several liability affects partnerships in several ways:

  1. Creditors can target any partner for full debts.
  2. Partners can seek contributions from others for debts settled.
  3. New partners aren't liable for previous debts.
  4. Retiring partners may remain liable unless discharged.

Example: In Tower Cabinet Co Ltd v Ingram [1949] 2 KB 397, a retiring partner remained liable as he didn't notify creditors of his departure sufficiently.

Managing Liability

Approaches to limit exposure include:

  1. Defining business scope in agreements
  2. Implementing thorough controls
  3. Using insurance for potential liabilities
  4. Considering Limited Liability Partnerships (LLPs)

Partner Expulsion and Departure

Statutory Provisions and Agreements

The Partnership Act 1890 doesn’t default to partner expulsion procedures. These must be articulated in the partnership agreement, covering:

  1. Justifications for expulsion
  2. Procedural steps (e.g., notice, voting)
  3. Financial outcomes for the expelled partner
  4. Partnership continuity post-expulsion

Managing Departures

Partner exits have key considerations:

  1. Retirement notice requirements (Section 26)
  2. Valuing and paying departing partners
  3. Adjusting profit-sharing ratios
  4. Notifying stakeholders to limit liability

Example: In Hitchman v Crouch Butler Savage Associates (1982) 263 EG 915, the court decided a retiring partner deserved profit shares up to the retirement date.

Ongoing Liability

Departing partners may face lingering liability for prior debts. To mitigate:

  1. Proper notification should be given to creditors and the public.
  2. Partnerships might indemnify outgoing partners against future claims.
  3. Novation agreements may transfer liability to remaining partners with creditor approval.

Conclusion

A solid understanding of partnership governance, decision-making, and partner authority is essential for SQE1 FLK1 exam performance. This review has covered the statutory framework, importance of partnership agreements, and the complexities of partner authority and liability. Key aspects to remember include:

  1. Differentiating majority and unanimous decision needs.
  2. Understanding actual versus apparent authority.
  3. Recognizing the impact of joint and several liability.
  4. The role of detailed agreements in altering rules and handling partner changes.
  5. Strategies for managing ongoing liability for departing partners.

By comprehending these elements, candidates will be well-prepared for tackling complex partnership law situations in exams and professional practice.