Problematic Provisions of 1890 Partnership Act

Essay question: “At the start of 2009 there were thought to be approximately 440,000 partnerships in the UK. With this in mind, it is very surprising that the Partnership Act 1890 has not been repealed and replaced by a more modern statute.” Which provisions do you consider to be the most problematic and why?

Introduction

The suitability for applying an act dating back to 1890 in the year of 2011 has always been a contentious issue. Many critics of the act base their arguments on the “out of date” content of the act. Many seem to express doubt as to its relevance of application in light of the long period of time in which it has existed in light of partnership law today. [1] However, the Partnership Act 1890 (“the Act”) stands strong and diligent over all these years. This paper will analyse and locate the most problematic sections of the Act, and assess whether those problems posed warrant its modernisation, or whether it should merely be treated as a legislative act which exists beyond time. Focus will be placed on the areas considered to be the most problematic in light of partnerships today, and will assess whether any reform would mitigate any such problems.

The formation of partnership

Perhaps the most relevant starting point for such an analysis is in the potential problems caused by the criteria stated for forming a partnership. The vocabulary is no doubt plain, in its classification of a partnership as a “relationship which subsists between persons carrying on a business in common with a view of profit.” [2] Indeed, the simple terminology of the Act allows even the layman to understand it, but what does such simplicity pose in terms of certainty in the law? There is evidence that the plain wording of the Act does not gain much ground in classifying with any strong degree of certainty which behaviour will form a partnership. [3] There is also some strength in the contention that such a lacking in formality causes the creation of a partnership to escape the time-consuming, confusing procedures often found in company law. But has the appeal to simplicity been achieved at a cost of certainty? How far can the Act be said to progress in defining with any clarity what behaviour will be said to form a partnership? This enquiry brings into play the interpretation of the term ‘carrying on a business’ and the ensuing importance of avoiding the creation of a partnership not known to those who act in common, against their intentions. This point is relevant for, in such circumstances, the perceived partners will not undertake to adopt their own personalised agreement. Therefore the default provisions of the Act will apply in governing the partnership, although it seems to be unhelpful and irrelevant. The additional practice of the courts, which can and do infer a partnership from the conduct of the parties [4] further complicates matters and heightens the need for certainty as to the stance of the law.

In fact, the Act does define a set of considerations to take into account when assessing whether a partnership is created, but it appears that the provisions state what will not constitute a partnership rather than what will. The provisions also appear to undermine the initial simplicity of the concept. Section 3 of the Act instructs that receiving shares of profits is clear evidence of a partnership, but it also states that this element will not necessarily ‘in itself’ cause a person to become a partner. [5] While there is a clear attempt to set the boundaries as to when certain behaviour may create a partnership, the reluctance to make such boundaries too restrictive has perhaps proven more disadvantageous than beneficial. While the courts are able to decide the concept on a case by case basis under the freedom created by the Act, the potential lack of certainty in such a practice is undesirable. A more comprehensive set of considerations would not have served to remove the current flexibility of the Act, yet would have provided some form of clarity into this area. However, the approach of the Act, as well as that of the courts appears to bring up the notion of profit.

In the most useful case of Kahn v Miah, [6] the court embarked upon the task of clearly defining the meaning of ‘carrying on a business’. There were conflicting opinions of the judges and there is arguably little more clarity injected into the situation by this case. It seems that a literal interpretation of the provision was adopted by Roch LJ, in that he limited the point of creation of a partnership to the point at which trading actually begins. [7] Although this was eventually overturned by the House of Lords, it appears that Roch LJ’s approach has not been entirely swept away. It is clear from decisions in cases such as Birmingham & District Cattle, that a distinction is made between preparatory acts which constitute the ‘getting ready of the business’ [8] and actual business-based behaviour, although this has been clarified little beyond the making of profit. What is clear is that acts such as purchasing property and equipment are not always likely to influence the courts’ view in favour of finding a partnership. In light of today’s business, this is arguably outdated. Partnerships will often spend a great amount of time embarking upon a business venture, entering into sales contracts and so on, and to move the point of creation to the making of profits undermines the risks involved in such acts. It does however appear that this principle will apply depending on the circumstances of the individual case; [9] the courts make a general distinction between partners acting in common and partners carrying on a business. A further potential for clarity is to be found in the Act. Section 45 of the Act states that business is not solely restricted to trade; it also defines business as a profession or occupation. The clarity would perhaps gain great amounts on ground in ensuring that minimal confusion results in terms of what constitutes carrying on a business for the purposes of the Act.

While the provision under scrutiny here is obviously leaving in the courts hands the concept of what will constitute carrying on a business, the wide array of preparatory acts in existence today call for clarification. While it has been suggested that a partnership could perhaps be said to exist upon ‘the first commercial activity undertaken’, [10] even this would need clarification. What is commercial activity? Is it the purchase of property, the opening of premises such as an office or restaurant, or perhaps it could be the employment of staff? The extremely broad potential for different activities here is overwhelming, and a more comprehensive list as to what could contribute towards the finding of a partnership could ease the task of the courts.

The possibility of separate legal personality

There is much to be said for the introduction of separate legal personality not only to ease problems surrounding liability, but also other issues concerning the Act. Currently, partnerships do not enjoy separate legal personality, which is the cause of debate among academics. [11] Although the initial reasons behind such a lack are possibly understandable, the evident need for separate legal personality is growing more and more important today. This is because business has become increasingly impersonal, and thus the need for a greater level of protection for members of a partnership has become a more central issue. Members of a partnership do not currently enjoy limited liability, which means that they are liable for the debts of the firm. [12] The introduction of the Limited Liability Partnerships Act 2000, while initially seen as a solution, has now been found to be rather lacking in content and application. The potential for partners to suffer such unlimited liability exposes the unattractiveness of entering into a partnership; the issues of trust and the potential risks would be part of the main concerns for the partners.

It does however appear that the courts have no doubts in upholding the principle of unlimited liability; the general stance is that partners are liable for all the debts incurred by the firm. [13] But would the provision of separate legal personality ease the current problems in the law? Such a provision would cause members to be liable only to the value of shares they possess, and the partnership would be able to sue and be sued in its name. [14] It is also recognised that litigation would be greatly facilitated, especially in circumstances in which legal proceedings are initiated by the partnership or against it. [15] The current situation is problematic, especially for partnerships which consist of many members; when viewed in contrast to the alternative focus of proceedings on the partnership itself, these problems could be overcome. [16]

The Act itself contains some conflicting provisions in terms of separate legal personality. Members of a partnership are categorised as a ‘firm’, [17] and this implies the notion of separate legal personality. Although the use of the term ‘firm’ is presumably for interpretative purposes, it does imply that partnerships could indeed be granted a separate legal personality. In certain circumstances, the courts have also granted at least some form of separate personality to the ‘firm’. Case law is littered with such decisions, and the decisions of Rye v Rye, which held that partners cannot lease property to themselves but may lease property to the firm of which he is also a member. [18] The courts have also held that partners of the same firm can bring actions against each other, as the firm. [19] But is this not impossible unless the partner receiving the action is granted separate legal personality in terms of the firm? The courts claim that, in some circumstances a ‘de facto’ separate legal personality will be implied. [20] Such decisions show a clear conflict between such principles, and it is also highly suggestible that the situation has not been made any clearer by such reasoning. The granting of a separate legal personality would ease the need for the judges to edge around separate personality on confusing reasoning.

Furthermore, it is recognised that the Law Commission has highlighted the need for separate legal personality in order to avoid such difficulties, [21] and such a requirement has become increasingly evident. [22] The benefits of legal personality are also not limited to the sphere of liability; it has been claimed further by the Law Commission that the function of continuation requires some form of legal personality at least. [23] The government has, however, not adopted the recommendations of the Law Commission.

The possibility of reform

As always, there are both potential benefits and disadvantages in reforming the Act. Whether it could indeed be labelled as outdated, however, is doubtful – its very continuation today conveys its lasting relevance. But how has it achieved such lasting relevance? The simplicity of the Act allows it to be adapted to specific circumstances, and the courts are provided with a broad scope of interpretation so that it may be applied to the varied types of partnerships in existence today. Perhaps any reform would restrict this freedom of interpretation, and cause even more problems than now. The debate highlights a clear need for a compromise between the flexibility provided by vagueness and the need for clarity which is only usually achieved through clarity and attention to detail. But what is the right balance in these circumstances? Could any narrowing of the Act’s application cause more problems in the quest for certainty? Is the degree of certainty in the Act unsatisfactory?

It is to be noted that a call for reform is not necessarily absolute, and the Act could ease many problems, at least in terms of defining when a business will be said to come into existence. The existing list of considerations would be made more extensive without necessarily being exhaustive. This would provide the courts with a greater degree of direction without forfeiting the freedom they currently enjoy. Indeed, any changes would require extensive research into the various natures of partnerships in existence today. There could perhaps be hidden benefits in the review and combination of courts decisions as part of the Act itself. This would cause an automatic updating of any decisions and thus provisions of the Act, in that those decisions considered irrelevant or outdated would become consumed in the more relevant decisions. How this could be more disadvantageous than beneficial remains to be seen or predicted with any convincing arguments.

However, the Act’s ancient tones are strikingly evident in specific areas, such as the way in which it deals with partners who resign from a partnership or die. In such circumstances, the partnership is said to end, [24] and the assets are divided leaving the remaining partners with the cumbersome task of reforming the company. This is arguably unnecessary, especially when viewed in light of the lesser personal qualities in partnerships today. Why a partnership with, for example, 10 members could be wound up upon the death of just one of its members reflects older views as to the equality of partners’ contributions of capital and effort to the partnership. [25] Section 33 of the Act also leaves partnerships open to dissolution at any time, should any partner choose to resign.

Conclusion

In a nutshell, it seems that a much deeper level of debate and review would be required before any specific proposals could be made for reform. While the Act’s vagueness grants it the flexibility that has undoubtedly ensured its continuing existence today, it is arguable that even a minimal degree of evaluation and reform could prove extremely beneficial. It must be noted that, however, the Act is one of those few Acts which has never been modernized and it is clear that the Partnership Act has managed to avoid heavy criticisms. Perhaps we should just appreciate the simplicity of the Act.

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