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PARTNERSHIPS

Basically the statutory principles and regulations on the law of partnerships will be found in chapter 29 of the Laws of Kenya which is the Partnership Act.  It is based on the English partnership Act 1890 the main object of which was to codify the main principles of the pre-existing partnership law.  the rules of the common law and the doctrines of equity will therefore continue to apply only insofar as they are not inconsistent with the expressed provisions of the Act.

In interpreting Partnership Law therefore one must always look at the Act first and if the provisions are clear then there is no need to revert to case law.  however, the cases decided after 1890 would also help in understanding the interpretation of the Act.

Section 49 of the Partnership Act states that the rules of equity and common law applicable to partnerships in England shall apply to partnerships in Kenya. 

Section 3(1) of the Partnership Act defines the term partnership as the relation which subsists between persons carrying on a business in common with a view of profit.  If this relation exists in point of law whatever arrangements the parties may have made between themselves and however much they may have tried to reject the notion of partnership, each one of them will be regarded as a partner.  Therefore once a relationship of partnership is established even if the business was ran by one person and the other partner or partners only participated in the profits, even such sleeping partners will be as much liable as the active partner for the debts and liabilities of the firm.

The term partner  is a term of law and all partners are agents of each other.

Who is a partner?

There is no statutory definition of the word partner however, bearing in mind the statutory definition of partnership, it may safely be said that a partner is a person who has entered into the relation of partnership and since partnership is the relation subsisting between persons carrying on a business in common with a view of profit it follows that there are 3 essential ingredients in a partnership namely:

1.                  There must be a business;
2.                  The business must be carried on with a view of profit;
3.                  The business must be carried on by or on behalf of the alleged partners.

The term business is very crudely defined in Section 2 of PA as including every trade, occupation or profession.  This is an uncertain definition but probably the term business should best be confined to what is recognised among business persons as commercial or professional business.  That is callings in which persons hold themselves out as willing to sell to all comers goods, skills, assistance or any other services.

The term common covers sleeping partners.  The term profits means the net profits that is the difference between the net returns and the outgoings of the business.  That which remains after the firms liabilities have been discharged.

Section 4 of the PA lays down the rules for determining the existence of a partnership and paragraph (b) thereof states that the sharing of gross returns does not of itself create a partnership.  However, all the rules in this Section are very negative in tone and they do not specifically state when a partnership exists but rather state when a partnership cannot be said to exist.  But until the end of the 19th Century it was generally assumed that the mere sharing of profits constituted all recipients partners in the business.  This rule was changed in the case of Cox V. Hickman [1860] 8 HLC 268 in which it was held that although a right to participate in profits is a strong test of partnership and though there may be cases where from such participation alone partnership will be inferred yet whether that relationship exists or not must depend on the real intention and contract between the parties and not upon that one term of the contract which provides for participation in the profits.
In order to determine the existence or non-existence of a partnership one must therefore look at all the facts and not just the mere participation in profits.  Section 4 (c)  of the PA states that a receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business but the receipt of such a share or of a payment contingent on  or varying with the profits of the business does not of itself make him a partner in the business.  This is apparently a contradictory section, this apparent conflict was explained in the case of Davis V. Davis [1894] 1 Ch.d 393 by North J. who observed as follows:  “although the language in this clause appears somewhat conflicting the true meaning of the clause is that the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in it and if the matter were to rest there it would be evidence upon which the court must find the existence of a partnership.  But if there are other relevant circumstances to be considered, they ought to be considered fairly together without attaching undue weight to any of them but drawing an inference from the whole.  It would therefore appear that the import of paragraph (c) in Section 4 is that sharing of profits without more implies partnership.  But if it is only one of several facts then all the facts must be evaluated together and no specific weight is to be given to the fact of profit sharing.”

Section 4 states by say of illustration that in particular certain facts do not of themselves constitute partnership.  These are namely

1.                  The receipt of a debt by instalments or otherwise out of accruing profits;
2.                  The receipts by a servant or agent of a share of the profit by way of remuneration;
3.                  The receipt by a widow or child of a deceased partner of a portion of the profits by way of annuity;
4.                  The receipt of a portion of the profits by the vendor of a goodwill of the business; and
5.                  The receipt of a share of the profits or interests on a loan the rate of which varies with the profit by a person who has advanced money by way of a loan to a person engaged or about to engage in any business provided that the contract is in writing and signed by or on behalf of the parties thereto.

Reference may be made to the case of Re Forte Ex Parte Schofield [1897] 2 QB 455  there is dicta to suggest that where the benefit of this section is designed by a person who lends the money then the contract must be in writing and if this dicta is correct it will mean that a person who was never intended to be a partner but only a creditor may easily be regarded as a partner in the absence of a written contract and this notwithstanding that Section 4 opens by saying that the receipt of profits itself is not conclusive in determining whether one is a partner or not.  The effect of Section 4 is therefore not very clear.  In certain circumstances a person will be deemed to be a partner merely upon receipt of profits unless he rebuts the presumption by contrary evidence.

In general it reasonable to conclude that before one can tell whether or not parties to a transaction are partners one should probe into the real intentions of the parties and ask whether the parties honestly intended any advance of money from one to the other to be in the nature of a true loan or whether it was intended to be a contribution to a joint adventure.

 
 
 

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