The Issue Of Partnerships and Legal Personality in England and Wales

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 nonexistent 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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court action would still have to be served against the individual partners in their names and addresses, which is sometimes made difficult by the fact that unlike a registered company, a partnership is not required to register the details of members or the length of time a partner served with a firm under the Business Names Act of 1985(DTI, 2004). Thus the CPR Sched 1 could be criticised as being misleading and ambiguous.

Another bugbear of the English partnership’s lack of legal personality is that a partnership cannot own property- instead, two or three partners usually hold the building in a trust for the partnership (DTI, 2004). Therefore, it is not always easy to establish what constitutes ‘partnership property’ and what is the property of the individual partners. It therefore becomes difficult to establish the assets available to meet the claims of creditors and to attribute the monetary benefits should the value of the asset rise. The trust by which partners hold a property for the firm is often express rather than implied and such circumstances, it becomes necessary for the courts to establish the purpose behind the acquisition of the property and the means by which it is financed before passing any judgement (The Law Commission, LCCP283, 2003). These grey areas make cases involving partnership property more complex and time-consuming than would be the case if a partnership could be treated as a legal entity that could hold property.

The most prominent issue concerning partnership property under the current system is the question of how to transfer property upon a change in the firm’s membership. As per Income Tax Commissioners for the City of London v Gibbs [1942], a change in the composition of the partners effectively creates a new firm, and no provision is made in the Partnership Act 1890 for transfer from this ‘old’ firm to the ‘new’ firm. According to Sec 20 of the act, “partners are to hold and apply partnership property exclusively for the purposes of the partnership and in accordance with the partnership agreement” (French, 2007). When there is a change in the firm’s composition, the new partner(s) wouldn’t need to become a trustee but would automatically become beneficially entitled as a tenant-in-common. Similarly, a retiring partner forfeits his right to any benefits from appreciation in partnership property the moment he leaves. Another unlikely consequence of the English partnership’s lack of a legal persona in this regard is the incidence of partners making fraudulent insurance claims- according to The Scottish Law Commission (2000), “the Scottish partnership’s distinct legal personality prevents partners from having title to sue for damage to partnership property or having an insurable interest in it”, upheld in MacLennan v Scottish Gas Board [1983] and Mitchell v Scottish Eagle Insurance Ltd [1997] respectively.

So far, we have seen a whole set of problems that arise due to the partnership’s lack of legal personality. Yet whenever there have been proposals to change this state of affairs, they are never realised due to objections from prominent legal bodies such as The Chancery Bar Association and The

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