The Essential Elements of a Partnership as a Business Entity

Introduction

The partnership as a form of business enterprise developed from the concept that if two of more individual owners joined forces a stronger entity would develop because they would then have at their disposal their combined resources, financial, skills and others. The South African law of partnership is largely governed by common law principles,[1] which is similar in Namibia.

A partnership may be described as a legal relationship that arises contractually between it is concluded between two or more persons (but normally not more than 20 persons)[2], in terms of which each partner must undertake to contribute the common business, with the objective of making and sharing of profits between each of them.

[3]

A partnership is not a corporate entity. It does not have a separate legal persona and this has several important legal consequences: in the relationship between the parties all rights and duties only exist between the partners inter se, the rights and duties of the partnership are the rights and duties of the partners and the continued existence of the partnership depends on the continued participation of partners in the partnership hence it has no perpetual succession.

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This paper will look at how the courts have used essentialias of a partnership, formulated by Pothier, in deciding whether or not a partnership had been established.

The essential elements of partnership

Partnerships are created by contract. Thus for a partnership to be validly formed all the general requirements as regards to contractual validity must be met. Moreover for an agreement to be one of partnership consensus must have been reached on all the essential terms of partnership.

The general principles of contractual capacity accordingly also apply to the contract of partnerships. An un-rehabilitated insolvent may conclude a partnership agreement with the permission of his curator and a minor with the assistance of his natural guardian. South African as well as Namibian law does not require that only natural persons be members of a partnership, a company as well as another partnership may become a party to a partnership agreement.

For an agreement between parties to be one of partnership, consensus must have been reached on three essential issues. The parties must agree that: 1. Each of the partners shall bring something into the partnership; 2. The business should be carried on for the joint benefit of the parties; and 3. The object should be to make a profit.

The above are also known as the essentials of a partnership, with the fourth essential being that the contract between the parties be legitimate contract. The fourth essential, viz. that the contract should be a legitimate contract, is not peculiar to contracts of partnership; it is an essential peculiar to all contracts.[4]

The essentials of contracts of partnership were formulated by Pothier and out courts have often used them as a guideline in determining whether or not a partnership had been established. One of the oldest cases, which is also the locus clasicus on partnerships, in which the essentials laid down by Pothier were accepted is Joubert v Tarry & Co[5].

In Joubert v Tarry & Co[6], Joubert and a certain Gascoyne were summoned jointly and severely, carrying on business in partnership under the firm of Bellevue Colliery for the sum of £28 15s. 6d. for work done and material supplied by the plaintiffs. To this claim Joubert denied that he and Gascoyne were partners or carried on business in partnership. The magistrate gave judgment against Joubert and Gascoyne for £28 15s. 6d., jointly and severally with cost. Joubert appealed.

The point to be decided was whether an agreement which was entered into between the Joubert and Gascoyne constituted a deed of partnership between them or not. According to the agreement, the appellant let to Gascoyne the Bellevue Colliery, with plant, tools, implements and etc. The terms of the tenancy were from the 1st day of June (1913) for an indefinite period, but terminable by either parties giving six month notice to the other to that effect. Other important stipulations in the agreement were that, firstly Gascoyne was to pay one half of the net profit derived from operating the mine to Joubert as lien for rent; secondly Gascoyne was to work the in a proper manner with the aim of making a profit.

As security for proper payment of the consideration owed to Joubert, they agreed to open an account in the name of Bellevue Colliery, which was to be operated jointly by the parties, and cheques were to be signed by both parties; moreover all monies earned by the mine were to be paid into the said bank account, and all liabilities or accounts were to be paid by cheque. Gascoyne was to furnish Joubert with monthly financial statements showing the estimated profit earning for the month.

The Court accepted Pothier’s formulation of the essentialia of partnership, stating: “Now, what constitutes a partnership between persons is not always an easy matter to determine. The definitions which have been quoted to the Court differ to some extent. But I think we are safe if we adopt the essentials which have been laid down by Pothier on Partnership, borne out as these are by the definitions which he gives of partnership. These essentials are fourfold.

First, that each of the partners brings something into the partnership, or binds himself to bring something into it, whether it be money, or his labour or skill. The second essential is that the business should be carried on for the joint benefit of both parties. The third is, that the object should be to make profit. Finally, the contract between the parties should be a legitimate contract.” The court held that there a partnership agreement had been established between Joubert and Gascoyne, thus the appeal was dismissed with cost.

In Bester v Van Niekerk[7] the court a quo held: a joint venture in regard to a single transaction is a partnership if 3 essentials are met; 1. Each partner contributes something / or binds himself to bring something be it capital or /labour / skill 2. business shall be carried out for joint benefit of parties 3. object should be to make profit

FACTS: Respondent sold a number of cattle to appellant, but appellant claims that he was not part of the sale he only introduce Mr Carr to respondent: for him to buy the cattle. Appellant and Carr met respondent visited the respondents farm and inspected the oxen’s of which 182 were selected. Appellant and Carr were both present on day of delivery of the oxen's. All cattle were sold of auction in the name of appellant; he also attended a sale of e30 oxen’s of an auction alone. All cheques at the auctions were received by appellant and deposited to the credits of his banking account. - Carr said he and appellant bought cattle from respondent as joint.

ISSUE: Whether appellant was a party to the purchase and whether defendents liability was joint and several? PRINCIPLE: that fourth essential that contract should be a legitimate one is not peculiar to a contract of partnership and thereof no need to include it in a category of the essentials of partnership.

PRINCIPLE: Where all the above requirements are present and something is missing to show that it’s a contract between parties is that of partnership, the court must come to conclusion that it is a partnership. Its not what the parties call it, be it hiring/letting but court must decide what it’s real agreement. HELD: Enforceable liability of the purchasers to pay the price to the seller was joint and several at least until dissolution of partnership [last auction]. Decision from trial court confirmed; appeal dismissed.

The statement of law, i.e Pothiers’ formulation of the essentials of a partnership, was also confirmed by the court in Bester v Van Niekerk[8] , the court approved of a Transvaal decision which summarized as follows the essentials of partnership as laid down by Pothier: 'First, that each of the partners brings something into the partnership, or binds himself to bring something into it, whether it be money, or his labour or skill. The second essential is that the business should be carried on for the joint benefit of both parties.

The third is that the object should be to make profit. Finally the contract between the parties should be a legitimate contract. . . Where all these four essentials are present, in the absence of something showing that the contract between the parties is not an agreement of partnership, the Court must come to the conclusion that it is a partnership. It makes no difference what the parties have chosen to call it; whether they call it a joint venture, or letting and hiring. The court must decide what is the real agreement between them.'

1) Each of the partners shall bring something into the partnership; [9]

This requirement is also known as contribution to the partnership property. It is essential that there is a common stock to which each partner is to contribute. Each partner must contribute something or undertake to contribute something to the partnership. The contribution may be of monetary value, skills, labour or industry. In Pezzutto v Dreyer[10] it was said that “it should be noted that the contribution to be made by each partner need not be of the same character, quantity or value (Pothier: 1.3.9). However, each partner must contribute something "appreciable", i e something of commercial value, although such contribution need not be capable of exact pecuniary assessment as, eg, where a partner contributes his labour or skill.”

The contribution must be made unconditionally, which means it must therefore be subjected to the risk of the partnership business. A person who makes a contribution to the partnership with the condition that it must be paid backto himor her irrespective of the succes of the enterprise, is a creditor of the partnership and not a partner. A partner may however also be a creditor of the partnership if he or she lends an asset or money to the partnership, in addition to making a contribution to making a contribution to it.

All contributions form part of the partnership property and are jointly owed by all the parties. On termination of the partnership all the partnership property is,generally, returned to the individual partners in the proportion in which it was contributed, unless otherwise agreed

2) The business should be carried on for the joint benefit of the parties;[11]

The second essential element is that the business must be carried on for the joint benefit of the parties. The partnership must be formed in the common interest of the parties; in the sense that the intention should be that each partner will derive a profit from it. These profits are not the gross profits, losses must first be deducted. So it is essential that partners share the profits and losses. The aforesaid element is indeed a defining element of a partnership.

The element of joint benefit embraces several other related elements, namely. 1) Business must be carried on. The business need not be a continuous one; a joint single undertaking (referred to as a joint venture) may amount to a partnership. 2) The parties to the contract must be co-owners of property rights of the partnership and co-holders of all other rights belonging to the partnership.

The partnership must have a common stock 3) Business must be carried on in common. Where each party can act independently and in his own interest no partnership exists; co-owners are accordingly not necessarily partners. It must not only be agreed that a person will act on his own behalf but on behalf of all the parties to the contract. The partnership should not merely be carried on for the benefit of every partner but on his behalf.

In Blumberg and Sulski v Brown and Freitas[12] the court also required that there should be a mutual mandate or a mandate between all the parties. However, this requirement may be subsumed under the second essentialia mentioned above. Blumberg & Sulski v Brown & Freitas[13]

Facts: Brown & Freits entered into a contract whereby F was put in occupation of a certain farm, it was agreed that he would work the land for the purpose of raising crops. B supplied F with seeds, implements, oxen and certain bags in which to store the product, it was however agreed that Blumberg would not be responsible for any loss, but F could bear the losses personally. Since B was the provider of the oxen etc he would receive one half of the profits made.

Held: Agreement was not a partnership, but a kin to a lease of land.

Principle: The common interest of the partners in the carrying on of partnership business leads to the general rule that each partner is an agent of the other to carry on business and to incur liability on behalf of all. *it is an essential of partnership that profit are made for the joint benefit of the partners, this profits are not gross profits, the losses must be first deducted, therefore partners share in profits and losses. There can be no partnership unless there exist a mandate between the contracting parties. Freitas entered into a lease agreement with Brown, Mr. Brown was not to be responsible for the losses occurred, and this is therefore not a contract of partnership but rather a contract of lease.

3) The object should be to make a profit.[14]

The main objective of the partnership must be to make a net profit, in which each of the partners may expect to have a share. It must be the actual aim of the partnership to make profits and the making of incidental profits will not suffice, thus if the parties are not interested in making a profit no partnership is formed.[15] No partnership can exist without community of profit. Should the parties agree that one or more of them will not be sharing in the profits, no partnership comes into existence.

Profit referred to in this sense does not only mean financial profit but also other material benefit, such as the saving of costs, would accordingly suffice. However, a sports club or a charitable institution cannot be conducted as a partnership. The partnership does not actually have to make a profit it must only be capable of doing so. If the possibility of making profits no longer exists, that is a ground for the dissolution of the partnership.

Furthermore, it will not suffice if the parties intend to make profits for keeping it in the partnership.[16] The aim of the partnership must be to divide profits. Ultimately, all partners must share in the profits of the partnership. The reverse does not apply; it is not necessary for every partner to share in losses, provided that the particular partner’s share of profits is determined only after taking account of losses.[17]

The classical definition of ‘business’ is “anything which occupies the time and attention and labour of a man for purpose of profit.”[18] As a general rule one or two isolated transactions cannot be described as the carrying on of business. There must be some proof of continuity. To this rule there are exceptions. The exceptions were stated in Commissioner for Inland Revenue v Stott[19] as follow: A single undertaking may be of such a nature that it can correctly be described as a business.

Thus in Stephan’s case 1919 WLD 1 the salvaging of a single ship’s cargo was considered a business because “these salvage operations which were managed by the staff of the appellant’s business, and which necessitated so many ordinary business acts such as the engaging of services of men, hiring apparatus, purchasing equipment, the transport of the cargo to Cape Town and the like stand on an entirely different footing”, per Mason J at 7.

If you are dealing with a company one of whose objects is to buy and sell land, then the company might well e considered to be doing the business of selling and buying land even though it carries out only a single transaction, but when an individual like a surveyor who is not professedly carrying on the occupation of a landjobber buys or sells one or more plots of land, he cannot be said prima facie to be doing the business of a landjobber. Before it an be said that an individual is carrying on a business there must be some proof of continuity”

Conclusion

The partners will not become owners qua partners by mere agreement. For transfer of immovable’s registration will also be necessary, while corporeal movables must be delivered to the firm. However, corporeal movable property in the partnership context often will not be transferred de manu in manum but by constitutum possessorium. Incorporeal property such as rights must be ceded to the partnership. Before cession the only rights of the partners will be the right to take cession.[20] It must be determined whether it was the intention of the partners that a certain asset, acquired by a partner, while the partnership is in being, should become a partnership asset.

[21] The type of right that the partnership will obtain nevertheless depends on the circumstances. If a corporeal asset was intended by the partners to be acquired for the partnership and a partner obtains it on his own behalf then he will become owner of the asset but the partners will have a right to have the asset transferred to them. An incorporeal asset may be claimed by the partners, in similar circumstances, but up to the time of cession, they will only have a right to claim it.

A partnership is not a legal persona. Any change in the partners destroys the partnership, and the new partnership, constituted by the remaining partners, must take over all the assets of the old partnership. Care must be taken in ensuring that the requisite forms of delivery are complied with to transfer the ownership of the assets from the old partners to the new. Moreover, each change in partners will create a new partnership. An undivided share of partnership property will now have to be transferred to the new co-owner. This will have to be effected by means of registration in the deeds office. Depending on the nature of the property and whether value-added tax would be payable on the transfer, there could also be transfer duty consequences.

The new partners may be prepared to allow the old partners to continue to have the property registered in their name but this solution should be approached carefully due to the consequent risk of third parties attaching the share in question for the debts of the old partners. Any contract concluded with the partnership is really being concluded with the partners at the relevant time. So if a partner leaves while the partnership is reconstituted either with the existing partners or with the addition of one or more new partners, all the contracts of the partnership would have to be renegotiated.

However, contracts concluded by the old partnership which is dissolved do not terminate. Subject of course to the wording of the particular suretyship, in general a suretyship given for the debts of a partnership will not apply to the debts of a differently constituted partnership. Each time there is a change in the partnership the new partnership has to acquire the assets and business of the old partnership. Accordingly, there could well be a disposal of a business for the purposes of section 34 of the Insolvency Act requiring compliance with section 34.

Bibliography

1. J. T. R. Gibson, C. Visser & JT Pretorius & R. Sharrock & M Van jaarsveld South African mercantile and company law 8th ed (2005) 2. P. Havenga; M. Havenga (ed) General Principles of Commercial Law 6th edition pg 324 3. Companies Act 61 of 1973

Table of Cases

1. Blumberg and Sulski v Brown and Freitas 1922 TPD 130
2. Commissioner for Inland Revenue v Stott 1928 AD 252
3. Joubert v Tarry & Co 1915 TPD 277
4. Pezzutto v Dreyer 1992 (3) SA 379 (A) at 390
5. Rhodesia Railways and Others v Commissioner of Taxes, and was later Applied by the court in in Bester v Van Niekerk 1960 (2) SA 779 (A) 6. Standard General Insurance Co v Hennop 1954 (4) SA 560 (A)

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[1] P. Havenga; M. Havenga (ed) General Principles of Commercial Law 6th edition pg 324 [2] In terms of section 30(1) of the Companies Act 61 of 1973, a partnership may not consist of more than 20 members. Where the partnership exceeds 20 members it will become illegal and it will not revive once the membership falls below 21 again [3] P. Havenga; M. Havenga (ed) General Principles of Commercial Law 6th edition pg 324

[4] Rhodesia Railways and Others v Commissioner of Taxes, and was later Applied by the court in in Bester v Van Niekerk 1960 (2) SA 779 (A) [5] 1915
TPD 277
[6] supra
[7] supra
[8] supra
[9] J. T. R. Gibson, C. Visser & JT Pretorius & R. Sharrock & M Van jaarsveld South African mercantile and company law 8th ed (2005) [10] 1992 (3) SA 379 (A) at 390
[11] J. T. R. Gibson, C. Visser & JT Pretorius & R. Sharrock & M Van Jaarsveld South African mercantile and company law 8th ed (2005) [12] 1922 TPD 130
[13] 1922 TPD 130
[14] J. T. R. Gibson, C. Visser & JT Pretorius & R. Sharrock & M Van Jaarsveld South African mercantile and company law 8th ed (2005) [15] P. Havenga; M. Havenga (ed) General Principles of Commercial Law 6th edition [16] P. Havenga; M. Havenga (ed) General Principles of Commercial Law 6th edition [17] P. Havenga; M. Havenga (ed) General Principles of Commercial Law 6th edition [18] Standard General Insurance Co v Hennop 1954 (4) SA 560 (A) [19] 1928 AD 252

[20] P. Havenga; M. Havenga (ed) General Principles of Commercial Law 6th edition [21] P. Havenga; M. Havenga (ed) General Principles of Commercial Law 6th edition

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“……It is, I think, a sound practical guide that where Pothier’s four requirements are shown to be present the court will find a partnership established unless such conclusion is negatived by a contrary intention disclosed on a correct construction of the agreement between parties.” Per Ogilvie Thompson JA

Purdon v Muller 1961 (2) SA 211 at 218 E