Partnership governance - Decision-making and authority of pa...

Learning Outcomes

This article examines the rules governing decision-making within traditional partnerships under the Partnership Act 1890 (PA 1890) and the extent of a partner's authority to bind the firm. For the SQE1 assessments, you will need to understand the default statutory rules for decision-making, how these can be varied by agreement, and the principles of actual and apparent authority that determine when a partner's actions commit the partnership to obligations with third parties. This knowledge will enable you to apply the relevant legal rules and principles to SQE1-style single best answer MCQs concerning partnership governance. In addition, you should be familiar with other default management provisions in PA 1890, including equal sharing of profits and losses, the entitlement of all partners to participate in management, the absence of any default right to remuneration, and the lack of any default power to expel a partner. You should also be able to assess the effect of holding out and the notice requirements on changes in partner composition when analysing whether the firm is bound by a partner’s act.

SQE1 Syllabus

For SQE1, you are required to understand the principles of partnership decision-making and the authority of partners from a practical standpoint. This involves applying the default rules under the Partnership Act 1890 and considering the effect of partnership agreements. You are likely to encounter questions requiring you to determine how decisions are made or whether a partnership is bound by a partner's actions, with a focus on the following syllabus points:

• the default rules for decision-making in partnerships under the PA 1890 (majority versus unanimity)
• how partnership agreements can modify these default rules
• the concept of agency in partnerships and the distinction between actual and apparent authority
• the circumstances in which a partner's actions will bind the firm in dealings with third parties
• the relevance of fiduciary duties in the context of partner decision-making and authority
• other default management rules under PA 1890, including equal sharing of profits and contribution to losses (s 24(1)), participation in management (s 24(5)), and no default right to remuneration (s 24(6))
• the absence of a default power to expel (s 25) and how expulsion can be validly provided for in a partnership agreement
• holding out (s 14) and notice on retirement (s 36) and their impact on third-party dealings with the firm.

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.

1. Unless agreed otherwise, how are decisions on ordinary matters connected with the partnership business made?
   1. By unanimous consent of all partners.
   2. By a majority of the partners.
   3. By the partner with the largest capital contribution.
   4. By any single partner acting alone.
2. Which of the following decisions requires the unanimous consent of all partners under the default rules of the Partnership Act 1890?
   1. Hiring a new employee for an existing role.
   2. Changing the nature of the partnership business.
   3. Purchasing routine office supplies.
   4. Agreeing standard payment terms with a supplier.
3. A partner enters into a contract with a supplier for goods that are outside the usual scope of the partnership's business. The supplier was unaware that the partner lacked actual authority. Is the partnership likely to be bound?
   1. Yes, because every partner is an agent of the firm.
   2. No, because the partner lacked actual authority.
   3. Yes, if the partner had apparent authority.
   4. No, unless the partnership ratifies the contract.

Introduction

Understanding how decisions are made within a partnership and the extent of each partner's authority to act on behalf of the firm is fundamental to advising partnership clients and managing potential disputes. The Partnership Act 1890 provides a set of default rules, but these are often varied by the partners through a formal or informal agreement. This article explores these statutory defaults and the principles governing a partner's power to bind the firm. It also clarifies how the nature of the firm’s business (for example, whether it is a trading firm buying and selling goods, or a professional firm providing services) affects the range of acts within the “usual course of business”, and explains how changes in partner composition, expulsion clauses, and restrictions on authority operate in practice.

Key Term: Partnership Agreement
A formal or informal agreement between partners setting out the terms of their relationship, including rules on decision-making, profit sharing, and authority. It can override many default provisions of the PA 1890.

Decision-Making within the Partnership

The PA 1890 establishes baseline rules for how partners make decisions. These rules apply automatically unless the partners have agreed otherwise, either expressly in a written agreement or impliedly through their conduct.

Key Term: Majority Rule
The principle, under s 24(8) PA 1890, that decisions on ordinary partnership matters can be made by a simple majority (more than 50%) of the partners, unless otherwise agreed.

Key Term: Unanimity
The requirement, under ss 19, 24(7) and 24(8) PA 1890, that certain fundamental decisions (like changing the business nature or admitting a new partner) need the consent of all existing partners, unless otherwise agreed.

Default Rules under Section 24 PA 1890

Section 24 of the PA 1890 outlines several default provisions concerning the internal management and decision-making processes of a partnership. For the purposes of SQE1, the most critical relate to how decisions are passed:

• Ordinary Matters: Decisions regarding ordinary matters connected with the partnership business are decided by a majority of the partners (s 24(8) PA 1890). This allows for efficient day-to-day management without requiring every partner's consent for routine actions. “Majority” is by number of partners, not by share of capital or profit, unless the partners agree to a different voting structure.
• Fundamental Changes: Certain decisions require the unanimous consent of all existing partners. These include:
  • Changing the nature of the partnership business (s 24(8) PA 1890). This protects partners from being forced into a line of business they did not originally agree to.
  • Introducing a new partner into the firm (s 24(7) PA 1890). This reflects the personal nature of the partnership relationship.
  • Changing the partnership agreement itself (s 19 PA 1890).

In addition to the voting rules, the following default management terms apply unless varied:

• Equal share of profits and equal contribution to losses: Partners share income profits equally and contribute equally to losses (s 24(1)), regardless of initial capital contributions, unless the partners agree otherwise in their partnership agreement.
• Participation in management: Every partner may take part in the management of the partnership (s 24(5)). There is no default concept of “executive” and “non-executive” partners; any differentiation must be agreed.
• No default right to remuneration: No partner is entitled to remuneration for acting in the partnership business (s 24(6)), unless agreed (for example, a fixed monthly “salary” to reflect different workloads).
• No default power to expel: There is no implied power to expel a partner by majority vote (s 25). Any expulsion mechanism must be expressly agreed and is subject to good faith.

“Ordinary matters” are those connected with carrying on the firm’s existing business in the usual way—such as routine purchasing, hiring in established roles, setting day-to-day prices or fees, and agreeing standard terms with suppliers or clients. Matters that alter the firm’s character or materially change partners’ rights (for example, taking on a new line of business, changing legal form, or admitting a new partner) require unanimity under the default rules.

Varying the Default Rules

Partners frequently find the default rules unsuitable for their specific needs. A Partnership Agreement allows partners to customise their governance structure. For example, they might agree:

• Different voting thresholds for certain decisions (e.g., requiring a 75% majority for significant financial commitments or property acquisitions).
• That specific partners (e.g., managing partners) have greater day-to-day decision authority or a casting vote on specified matters.
• A specific procedure for admitting new partners that doesn't require full unanimity (e.g., a supermajority) and objective criteria for admission.
• A remuneration scheme for certain partners and an expulsion clause, with fair procedures and safeguards to avoid breach of the duty of good faith.

Under s 19 PA 1890 the mutual rights and duties of partners may be varied by consent of all partners, and that consent can be implied from a course of dealing. A partnership agreement can also provide that it may be amended by less than unanimity (for example, by a supermajority), but the legitimacy of such a clause depends on its having been originally agreed by all and on it being operated in good faith. To avoid disputes, the agreement should be clear about voting weights, quorum, categories of decision, and the process for recording decisions.

Worked Example 1.1

A partnership consists of four partners: Anya, Ben, Chloe, and David. They operate a café. There is no written partnership agreement. Anya and Ben want to start offering evening meals, changing the café's opening hours and menu significantly. Chloe agrees, but David strongly objects. Can the change proceed?

Answer:
No. Changing the nature of the partnership business requires unanimous consent under the default rules (s 24(8) PA 1890). As David objects, the decision cannot be made by the majority (Anya, Ben, and Chloe). They would need David's agreement or a partnership agreement that specified a different decision-making threshold for this type of change.

Authority of Partners to Bind the Firm

An essential aspect of partnership governance is understanding when a partner's actions legally bind the partnership in its dealings with external parties (third parties). This is governed by agency principles, as codified in the PA 1890.

Agency Relationship

Section 5 of the PA 1890 states that every partner is an agent of the firm and their fellow partners for the purpose of the partnership's business. This means a partner acting within their authority can create contractual obligations or liabilities that bind the entire firm and, consequently, all other partners.

Key Term: Actual Authority
Authority expressly given to a partner (e.g., in the partnership agreement or by specific partner consent) or implied from their position or the usual course of dealings within the partnership.

Key Term: Apparent Authority
(Also known as Ostensible Authority) Authority that a partner appears to have to a third party, based on the usual scope of business for that type of partnership, even if the partner lacks actual authority internally. The firm is bound if the third party reasonably believed the partner had authority and was unaware of any internal restrictions.

Key Term: Trading Partnership
A firm whose usual business is buying and selling goods. In such firms, the “usual way” of business may include borrowing, pledging the firm’s credit, ordering stock, and dealing with negotiable instruments, whereas in non‑trading professional firms, those acts are less likely to be considered within the usual course.

Binding the Firm under Section 5 PA 1890

Section 5 PA 1890 provides that an act done by a partner for carrying on in the usual way business of the kind carried on by the firm will bind the firm and the partners, unless:

1. The partner acting had no actual authority to act for the firm in that particular matter; AND
2. The third party dealing with the partner either knew the partner had no authority, OR did not know or believe them to be a partner.

This means that even if a partner acts beyond their actual authority (e.g., exceeding a spending limit set in the partnership agreement), the firm can still be bound if the partner had apparent authority. The key is whether the transaction appeared normal for that type of business from the third party's standpoint. The nature of the firm’s business is central: ordering supplies is “usual” for a trading retailer, but giving personal guarantees or selling the firm’s premises may not be.

Internal limitations on authority (for example, requiring co‑signatures for orders above a threshold) will not protect the firm against third parties who are unaware of those limitations. The best protection is to ensure third parties are told—clearly and in advance—about relevant restrictions (for example, by standard terms, purchase order footers, or pre‑notification letters to regular suppliers). Third parties with actual knowledge of restrictions cannot rely on apparent authority to bind the firm.

Key Term: Holding Out
Under s 14 PA 1890, a person is liable as though a partner if they represent themselves, or knowingly allow themselves to be represented, as a partner, and a third party gives credit to the firm on the faith of that representation.

Key Term: Ratification
The partners’ subsequent approval of an unauthorised act so that it binds the firm as if authorised originally. The threshold for ratification should match the threshold that would have been required to authorise the act at the outset.

Worked Example 1.2

DEF Partnership runs a bookshop. Their partnership agreement states that no partner may order stock exceeding £500 without the agreement of all partners. David, a partner, orders rare books worth £1,000 from a specialist supplier who has dealt with the firm before but is unaware of the internal limit. Is the partnership bound?

Answer:
Yes, the partnership is likely bound. Although David exceeded his actual authority, ordering books is clearly within the usual course of business for a bookshop. The supplier, being unaware of the internal restriction, would reasonably believe David had the authority to place such an order. Therefore, David acted with apparent authority under s 5 PA 1890, binding the firm. David may, however, be liable to his partners for breaching the partnership agreement.

Acts Outside the Usual Course of Business

If a partner acts outside the usual scope of the partnership business, their actions will generally not bind the firm unless they had express actual authority or the other partners subsequently ratify the act. Examples include:

• entering into long-term property leases or sales where the firm’s usual business does not involve property trading
• granting personal guarantees or securities for third-party debts
• borrowing significant sums in a non‑trading professional firm without agreed authority
• changing the firm’s core line of business or undertaking high‑risk ventures unrelated to the firm’s ordinary operations.

In trading firms, some of these acts may nevertheless be within the “usual way” (for example, routine borrowing to fund stock purchases); in non‑trading firms, they are usually outside the “usual way”.

Worked Example 1.3

GHI is a two-partner design consultancy (professional services). Without consulting the other partner, Grace signs a bank facility letter granting the firm’s guarantee for a client’s loan. The bank assumed Grace had authority, but the consultancy is not in the business of lending or guaranteeing third-party debts. Is the firm bound?

Answer:
Likely not. In a non‑trading professional firm, granting guarantees for third parties is ordinarily outside the usual scope of business. Without actual authority, and given the nature of the firm’s business, the bank cannot rely on apparent authority to bind the firm unless it shows that guarantees of this kind are part of the firm’s normal way of carrying on business or that the other partner ratified the act.

Worked Example 1.4

Julia retired from a partnership last month. She told some suppliers she remained a partner and allowed her name to remain on the firm’s website. A supplier who has dealt with the firm for years extends credit relying on Julia’s supposed involvement. Julia did not give actual notice of retirement to that supplier, nor was any Gazette notice published. Is Julia liable?

Answer:
Potentially yes. Under s 14, Julia has been “held out” as a partner and a supplier gave credit in reliance on that representation. Separately, under s 36 PA 1890, actual notice of retirement should be given to persons who previously dealt with the firm; failing to do so can result in continued liability for post‑retirement debts. Julia could mitigate liability by ensuring actual notice is served on existing suppliers and by removing her name from public materials promptly.

Worked Example 1.5

KLM Partnership’s agreement requires unanimity for property acquisitions. One partner signs a contract to buy a warehouse without actual authority. The deal is advantageous, and three of the four partners wish to proceed; the fourth opposes it. Can the firm ratify the contract by majority?

Answer:
Ratification should follow the same threshold as would have been required to authorise the transaction at the outset. As the partnership agreement requires unanimity for property acquisitions, unanimity would normally be required to ratify this unauthorised purchase. Without unanimity, the firm should not treat itself as bound, unless the transaction falls within the usual course of the firm’s business, in which case s 5 could bind the firm as against the third party.

Worked Example 1.6

NOP is a trading partnership selling kitchenware. The agreement provides that purchases above £10,000 require two partner signatures. One partner orders £12,000 of stock from a regular supplier using a standard PO that states “Orders exceeding £10,000 must be co‑signed by two partners”. The supplier sees the note and proceeds anyway. Is the firm bound?

Answer:
The supplier had actual notice of the restriction. Even though stock orders are within the usual course of business, s 5 will not bind the firm where the third party knows of the lack of authority. The firm can refuse the delivery or avoid liability for the order. Internally, the partner would not be authorised and could be required to indemnify the firm for any resulting costs.

Agency Nuances: Limits, Notice, and Nature of Business

• The firm is bound where the act is in the usual way of the kind of business carried on and the third party neither knows of the lack of authority nor doubts that the actor is a partner (s 5).
• Internal authority limits protect the firm externally only if third parties have notice of them. Regular suppliers can be notified by letter, and standard documentation can include authority cautions (as in Worked Example 1.6).
• The nature of the firm’s business matters. In trading partnerships, borrowing and pledging credit can be within the “usual way”; in non‑trading professional partnerships, they generally are not.
• When a partner retires, give actual notice to existing counterparties and publish a notice in the London Gazette (constructive notice) to protect against future debts (s 36). Remove names from public materials to avoid liability through holding out.

Key Term: Partnership at Will
A partnership without a fixed term or agreed duration. It can be terminated by any partner giving notice (s 26 PA 1890), and absent agreement, death or bankruptcy of a partner dissolves the firm (s 33).

Fiduciary Duties

While exercising authority and making decisions, partners owe fiduciary duties to each other and the firm. These include acting in good faith, avoiding conflicts of interest, and not making secret profits. PA 1890 codifies duties to:

• Render accounts and full information (s 28).
• Account for private profits made in connection with the partnership (s 29).
• Not compete with the firm without consent; any profits from competition must be accounted to the firm (s 30).

A partner acting within apparent authority might still breach fiduciary duties internally if the action benefits them personally at the expense of the firm. Partners who exceed actual authority and bind the firm may be liable to indemnify the firm for losses (s 24(2)) and must account for any personal gain. Where an expulsion clause exists in the partnership agreement, it must be operated in good faith and in accordance with agreed procedures; there is no default power to expel under PA 1890.

Revision Tip

When assessing if a firm is bound by a partner's actions, always distinguish between the partner's internal authority (actual, governed by the partnership agreement or consent) and their external power to bind the firm (apparent, based on the usual course of business and the third party's standpoint). Section 5 PA 1890 is key here. Also consider s 14 holding out and s 36 notice on retirement when analysing liability in third‑party dealings.

Key Point Checklist

This article has covered the following key knowledge points:

• Partnership decisions on ordinary business matters are typically made by majority vote, unless the partnership agreement states otherwise (s 24(8) PA 1890).
• Decisions changing the nature of the business or admitting a new partner require unanimous consent under the default rules (ss 19, 24(7), 24(8) PA 1890).
• Additional default management rules include equal sharing of profits and contribution to losses (s 24(1)), participation in management (s 24(5)), and no default right to remuneration (s 24(6)).
• There is no default power to expel a partner by majority; any expulsion power must be expressly agreed (s 25 PA 1890).
• Partnership agreements are essential for varying these default decision-making rules to suit the partners' specific needs, including setting thresholds, defining authority, and providing for expulsion.
• Every partner acts as an agent of the firm (s 5 PA 1890).
• A partner can bind the firm if they act with actual authority (express or implied).
• A partner can also bind the firm through apparent (ostensible) authority if they act in the usual course of the firm's business and the third party is unaware of any lack of actual authority (s 5 PA 1890).
• Acts outside the usual course of the firm’s business generally do not bind the firm unless authorised or ratified.
• Holding out (s 14) and notice of retirement (s 36) affect third‑party dealings and can result in liability if not managed properly.
• Partners owe fiduciary duties, including duties to account and not to compete (ss 28–30), and may be required to indemnify the firm for losses caused by unauthorised acts.

Key Terms and Concepts

• Partnership Agreement
• Majority Rule
• Unanimity
• Actual Authority
• Apparent Authority
• Holding Out
• Ratification
• Partnership at Will
• Trading Partnership