The Issue of Partnerships and legal

personality in England and Wales

Introduction

This essay will attempt to answer the question of whether partnerships in England and Wales should

have their own legal personality. In order for us to answer the question correctly, it is first necessary

to look at what actually construes a partnership. The Partnership Act of 1890 defines a partnership as

`The relationship which subsists between persons carrying on a business in common with a view of

profit′ (French, 2007). The definition excludes a company or any form thereof and also excludes

limited liability partnerships which are a distinct legal entity. It is important to note that the existence

of a partnership is a question of fact- a partnership doesn′t require any formalities or written

agreements to be made to legally come into existence (Scanlan et al, 2005). What constitutes a

partnership can best be judged by breaking the definition down into its fundamental parts: it is a

relationship

between two or more people (there is no theoretical maximum following the Partnership

No 17 regulations 2001 which removed the 20-person limit), who must be

carrying on a business

(rather than merely working together or intending to),

in common

(the partners should be

recognizable as such)

with a view towards profit

(distinguishing partnerships from clubs, societies

and charities) ­ Macintyre, 2005.

One of the vagaries of English partnership law is that a partnership, or firm, is an unincorporated

association, i.e. an organisation without any distinct legal personality from its members (Adams

2008). This entails that should one of the partners leave the partnership, whether by serving notice or

through other reasons such as death, the partnership ceases to exist as the original relationship has

ended. This is what sets an English partnership apart from those in other countries such as those in

the EU or even Scotland. What this means for an English partnership is that it cannot hold property or

enter contracts; being non-existent as a legal persona it cannot acquire rights and incur obligations

(DTI, 2004).

These issues and others arising from the partnership′s lack of legal personality have been brought

time and again to the attention of the country′s legal system. With this mind, proposals were

introduced in 2000 and 2003 (consultation papers 159 and 283 respectively) in order to review the

system and issue recommendations for the introduction of a distinct legal personality for partnerships.

However opposition from the bar means these proposals remained just that and no changes have been

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implemented so far (Morse, 2006). The issue continues to be up for debate, however a solution needs

to be found considering the importance of partnerships to the economy of the UK...according to the

DTI (2004), there were over 568000 partnerships in the UK at the end of 2002. Together, they

employed about 2.77 million people and generated a turnover of £137 billion (excluding VAT). With

so much at stake, this issue definitely warrants a more critical examination.

Strengths and Weaknesses of the current system

In order for us to ascertain the prudence of giving a separate legal personality to partnerships, we must

first analyse the myriad of problems that arise from the said lack of legal personality. It should be

noted that most current literature seems inherently biased in its support towards obtaining a legal

personality for English partnerships, so arguments against the fact are few. Irrespective of this, we

will aim to present a balanced view.

First and foremost, we must address the issue that their lack of a separate legal personality means

English partnerships do not enjoy perpetual succession. This is to say that, since a partnership is non-

existent without its constituent partners, any change in the membership- whether through one of the

original partners leaving; or a new partner joining the firm- would effectively destroy the firm′s

identity (

Green v Herzog

[1942]). A partner leaving a firm effectively means the cessation of the

firm′s existence. As per

Income Tax Commissioners for the City of London v Gibbs

[1942], even if

the surviving members of a firm decide to continue their partnership, it means a "new" firm is created

(the same applies if a new partner joins). The "old" firm can arrange a contractual agreement between

its members and those of the "new" firm that would allow the new firm take over its assets and

continue its business. However, Eichelbaum CJ set an important precedent in

Hadlee v

Commissioners of Inland Revenue

[1989] by ruling that even such an advance agreement that the

partners will continue their business on the retirement of one of their members does not prevent the

partnership which practises the day after this retirement from being a different one to the partnership

on the previous day.

Lindley and Banks (2002) state that- unless contractually agreed upon at the start of the partnership

agreement- an English partnership is by default a "partnership at will" which makes no provision for

the duration of the agreement. The biggest drawback of such an understanding is that it can be

dissolved by one of the partners at any time by merely giving notice to the other members. The

partnership would then cease to exist.

With a partnership effectively ceasing to exist every time the identity of the partners changes, it could

be said that the `aggregate′ approach of English law hinders the continuity of a partnership, making it

a less stable partnership than it could be (The Law Commission, LCCP283, 2003). That said, there

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appears to be a gulf between commercial perception and legal reality, whereby most companies or

individuals who deal with a partnership are unaware of a change in the membership, and assume that

the firm `name′ that they have been dealing with is the same entity they have been dealing with

before, while in actual fact, the firm is not a legal entity at all (Scottish Law Commission, 2000).

This brings us along to the issue of contracts. Being a legal non-entity, a partnership cannot enter into

a contract. Any third party makes a contract with a firm is actually entering a contract with the

partner(s) who is/are acting on behalf of the other partners in the contract (Morse, 2006). The partners

are authorised (by

Baird′s Case

[1870]) to act as the principals or as agents of each other, but not the

firm.

As a consequence of the English partnerships lack of legal personality, a partner makes a contract on

behalf of himself and the other partners (S5 of The Partnership Act 1890, as per French, 2007), and a

breach of the contract will make all the partners liable for consequential loss with no limit. As

demonstrated in

United Bank of Kuwait v Hammond

[1988], the authority of a partner to bind his firm

is both ostensible and implied. It follows that partners have extensive liability for the acts of fellow

partners, even when unauthorised. Dishonest or incompetent partners can impose significant personal

liability on other members, which starts to make the partnership less attractive as a business vehicle

(Scanlan et al, 2005). According to Sections 10-12 of The Partnership Act of 1890, partners are jointly

and severally liable for loss and injury caused to a third party while acting within the limits of their

apparent authority, and also for the misapplication of funds/property received while in the course

carrying out partnership business. The wording of the current act however, opens up partners to

having their personal assets liquidated to meet liabilities before those `attributed′ to the partnership,

and also to the possibility of unfair or unequal proceedings against some of the partners (Young,

2004,

New Law Journal).

Humble v Hunter

[1848] established that "a party to a contract cannot transfer his obligations under

that contract without the other party′s consent". Therefore, a change in the membership of a firm

would render all contracts with that firm null and void, although there have been instances where the

courts have ruled such contracts to be `vicariously upheld′.

In Scots law and in most EU countries, a partner cannot be sued for debts or torts that are judged to be

the firm′s, without them first being constituted against the firm (Lindley and Banks, 2002). In

Mair v

Wood

[1948] it was stated that a partnership has no legal persona attached to it with the consequence

that no action could be brought against it as such. This necessitates any legal action against the firm to

be made against the partners of the firm (this could be one or all of the firm′s members). While

schedule 1of the Civil Procedure Rules (CPR) does allow court action against a partnership to be in

the name under which the partners carried out the business, this does not mean the actual case would

be against the firm as an entity unto itself (The Law Commission, LCCP283, 2003). Any notice of

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