Commercial Law Part 6

CHAPTER V

Partners.h.i.+p

RELATIONS a.n.a.lOGOUS TO PRINc.i.p.aL AND AGENT.--There are a few relations, in the law, which are a.n.a.logous to that of princ.i.p.al and agent. The one which we shall take up now is the relations.h.i.+p of a partner to a partners.h.i.+p, and also to the outside world. We shall consider in a subsequent chapter, the functions, duties and responsibilities of trustees, executors, and administrators.

THE IMPORTANCE OF PARTNERs.h.i.+P LAW.--There is a very common impression that partners.h.i.+p law is not as important now as formerly. This undoubtedly is true, as more and more large business enterprises are being conducted in the corporation form; but there is still a large amount of business done in the partners.h.i.+p form. What is most important, however, is the very informality of the type of business conducted under the partners.h.i.+p arrangement. Whether, in a given case, a partners.h.i.+p exists, becomes a vital question. Two friends, A and B, in an informal way, go into a business venture. The enterprise fails and A and B owe many debts. A has some property of his own; B has nothing. You are a creditor, but all your dealings have been with B. One simple point will show you whether your claim is worthless. If A and B were partners, you may hold A. If they were not partners, your claim probably never will be worth anything to you. The question, then, whether or not a certain relations.h.i.+p const.i.tutes a partners.h.i.+p is a most important one, in the field of commercial law.

PARTNERs.h.i.+P DEFINED.--We shall have occasion, in the chapters on bills and notes, and personal property, to refer to the movement to codify certain branches of the law. This movement was begun by the Commissioners on Uniform Laws proposing the Uniform Negotiable Instruments Act, which has now been adopted in all of the States except Georgia. One of the most recent codifications is the Uniform Partners.h.i.+p Act which has been adopted in a number of the States, and which will undoubtedly follow the same course as the other acts drawn by the same Commissioners. We shall make frequent reference to the Uniform Partners.h.i.+p Act in this chapter. Although some of the writers on the law of partners.h.i.+p state that no satisfactory definition of the term partners.h.i.+p can be given, the Uniform Act defines it as follows: "A partners.h.i.+p is an a.s.sociation of two or more persons to carry on as co-owners a business for profit." It is undoubtedly true that even with this definition, a considerable amount of further explanation will be necessary to determine with any degree of certainty, just what is meant by partners.h.i.+p.

THE DIFFERENCE BETWEEN A PARTNERs.h.i.+P AND A CORPORATION.--While we may be antic.i.p.ating our chapter on corporations, it is well, at the very outset, to understand the fundamental differences between a partners.h.i.+p and a corporation. We may mention six differences:

(1) When a partner dies, the partners.h.i.+p is automatically dissolved. If a partner sells or transfers his interest in the business, this works a dissolution of the firm. On the other hand, the situation is precisely the opposite in the case of a corporation. The death of a shareholder has no effect upon the corporation. In fact, if all of the shareholders of the United States Steel Corporation should die at once, the corporation would still exist. So also the transfer of stock from one owner to another has no effect upon the corporation's existence. Many thousand shares are dealt with on the exchange each day without the slightest effect upon any corporation.

(2) The doctrine of individual liability for the debts of a firm is a fundamental characteristic of partners.h.i.+p law. Each member of the firm is absolutely liable for all the debts of the firm. Thus, if the firm consists of A, B, and C, and the firm goes into bankruptcy and owes $50,000, and B and C are both individually worthless, and A has his own private fortune, A will be obliged to pay all of the debts, although, according to the arrangements that the partners made when forming the partners.h.i.+p, each was to share the profits and losses equally.

Theoretically, A has the right to contribution from his fellow partners, and should they later acquire property, he will be able to enforce this right in a court of equity. In a corporation, a shareholder is liable only for the value of his share. If he subscribes to a share of stock, par value $100, and has paid only $50 on his subscription, and the corporation goes into bankruptcy, its receiver can compel him to pay the balance of his subscription, $50, but that would be the extent of his loss. If I buy a share of United States Steel Common, at $79, on the exchange, and the company goes into bankruptcy, my loss will be only $79. I would not be obliged to make up to the receiver the other twenty-one dollars. The only noteworthy exception to this rule as to the liability of a stockholder is in the case of a shareholder in a National bank, (this is true of some of the State banking laws also), where a shareholder is liable to an extra a.s.sessment equal to the par value of the stock he owns.

(3) In a partners.h.i.+p each member of the firm is a general agent for the partners.h.i.+p, and his acts bind the firm. In the case of a corporation, a shareholder, by virtue of the fact that he is a shareholder, has no power to bind the corporation. The position of a shareholder is very similar to that of a voter. The corporation is run by its board of directors. They are elected by the shareholders just as we elect a governor or president. If we are dissatisfied with the conduct of a governor or president, all we can do is to vote him out of office at the next election, except in unusual cases where a governor or president might be impeached. The same is true in the case of a board of directors.

(4) A partners.h.i.+p may be created by a formal contract, or a simple contract, in writing or by word of mouth; in fact it may be created in almost any way. A corporation, in order to do business, must comply with the corporation laws of the State in which it is incorporated. A regular formality must be observed. A certificate of incorporation must be filed, generally with the Secretary of State, and with the county clerk of the county in which the corporation's princ.i.p.al place of business is located in the State.

(5) A partners.h.i.+p may do anything that is legal and which the members decide to do. A corporation exists by virtue of a charter, granted by the State. The sum total of the powers given in that charter gives the total of all of the activities the corporation may undertake. Engagement in activities not authorized in the charter may result in the forfeiture of the charter by the State.

(6) In legal theory, a corporation is looked upon as a separate ent.i.ty.

Most States require at least three persons to incorporate. A, B and C form a corporation under the laws of the State of New York. There are then four legal persons in existence: A, B, and C, and this separate person, or legal ent.i.ty, the Green Corporation, if that is the name given the company. In the case of a partners.h.i.+p, the law does not, as a rule, consider the partners.h.i.+p as an ent.i.ty distinct and separate from the members who make up the firm. Of course, the business man does, in a way, look upon the partners.h.i.+p as a separate commercial ent.i.ty. The very fact that the members of the firm are all general agents for the firm, and that the members are individually liable for all of the debts of the firm, shows that the law does not carry the ent.i.ty theory into practice in partners.h.i.+ps as it does in corporations.

DIFFERENT KINDS OF PARTNERs.h.i.+P.--What we have said applies to the ordinary partners.h.i.+p. There are certain forms of partners.h.i.+p which we can only mention. One of them is the limited partners.h.i.+p. Limited partners.h.i.+ps are created under the law of the State in which the business is to be conducted and in a general way, these limited partners.h.i.+ps are a combination of the principles underlying ordinary partners.h.i.+ps and corporations. The members may limit their liability to a certain amount, and in that sense, the limited partners.h.i.+p is like a corporation. On the other hand, the general principles of partners.h.i.+p, as we shall discuss them, apply with almost equal force to the acts of a limited partners.h.i.+p. A person should not undertake to give an opinion as to a legal problem relating to a limited partners.h.i.+p until the law of the State in which the limited partners.h.i.+p is organized has been consulted.

JOINT STOCK COMPANIES.--Occasionally we meet with organizations--joint stock companies--which occupy a sort of "No-man's land" between partners.h.i.+ps and corporations. The joint stock company issues shares of stock the same as a corporation. These shares are listed on the stock exchange, as for example, the Adams Express Company. The joint stock company, however, carries with it the individual liability of the shareholders for the debts of the company, which is technically a partners.h.i.+p attribute. The New York Court of Appeals in People ex rel.

Winchester v. Coleman, 133 N. Y. 279, has put it this way: "More or less, they crowd upon and overlap each other, but without losing their ident.i.ty, and so, while we cannot say that a joint stock company is a corporation, we can say * * * that the joint stock company is a partners.h.i.+p with some of the powers of a corporation."

HOW TO DETERMINE WHETHER A PARTNERs.h.i.+P EXISTS.--In a case, not tried in court, the facts were: A Gloucester cod-fis.h.i.+ng vessel made an unsuccessful fis.h.i.+ng voyage. The sailors were to secure a certain portion of the profits of the voyage as their wages. When the s.h.i.+p returned to port, an attempt was made to collect bills incurred on the trip and to hold the seamen liable along with the owners of the vessel, as partners. It was contended that sharing in the profits made them partners. While this is true generally, this particular custom, whereby a laborer receives a certain portion of the profits of an undertaking as his wages, does not of itself const.i.tute him a partner with the person operating the vessel. This point has been decided several times. Such questions as these arise and cause great difficulty in determining whether a partners.h.i.+p exists. At times it is very important, as in the case of the seamen, to know whether or not they can be made to a.s.sume the obligations pertaining to the partners.h.i.+p relations. While we cannot go into these relations in detail, the framers of the Uniform Partners.h.i.+p Act have laid down, with the utmost care, the rules which are to be used in determining whether a partners.h.i.+p exists or not. But, you say, why cannot the parties avoid all this difficulty by making a written agreement clearing up the entire matter? They could. It is the simplest matter in the world. But the trouble comes because a partners.h.i.+p arrangement is so easy to enter into, and requires so little formality, that it is taken for granted that it will come out satisfactorily, and the precautions which should be taken are sometimes forgotten. Hence, we have to have rules of interpretation to help us when the parties themselves have not taken the necessary precautions to make matters clear. These rules of interpretation are very clearly and very definitely laid down in the Uniform Partners.h.i.+p Act, in the following language:

(1) Except as provided by Section 16, persons who are not partners as to each other are not partners as to third persons.

(2) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part owners.h.i.+p does not of itself establish a partners.h.i.+p, whether such co-owners do or do not share any profits made by the use of the property.

(3) The sharing of gross returns does not of itself establish a partners.h.i.+p, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.

(4) The 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 no such inference shall be drawn if such profits were received in payment:

(a) As a debt by installments or otherwise,

(b) As wages of an employee or rent to a landlord,

(c) As an annuity to a widow or representative of a deceased partner,

(d) As interest on a loan, though the amount of payment vary with the profits of the business,

(e) As the consideration for the sale of the good-will of a business or other property by installments or otherwise.

Section 16.--(Partner by estoppel.)--(1) When a person by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partners.h.i.+p or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partners.h.i.+p, and if he has made such representation or consented to its being made in a public manner, he is liable to such person, whether the representation has or has not been made or communicated to such person * * *.

FOR WHAT PURPOSES MAY A PARTNERs.h.i.+P BE CREATED.--A partners.h.i.+p may be created to carry on any lawful business, and whatever the individuals may do lawfully as such, two or more may do together in a group as a partners.h.i.+p. Professional occupations may be carried on in the partners.h.i.+p form advantageously. This is one case where a partners.h.i.+p has an advantage over a corporation. A group of lawyers may form a partners.h.i.+p and do business under a partners.h.i.+p name. But a group of lawyers seldom or never form corporations to practice law. The reason for this is that the corporation is a separate ent.i.ty, and the corporation as such cannot pa.s.s a bar examination and be admitted to the bar. In fact, in a few States, there are statutes prohibiting a corporation from practicing law. There is, therefore, very little advantage in creating a corporation which cannot itself do the thing for which it was created.

ILLEGAL OBJECT.--A partners.h.i.+p which is formed to carry on any illegal purpose is, of course, not recognized by law. Thus, if A, B, and C form a partners.h.i.+p to engage in the gambling business and they elect C as treasurer and have a successful business so that they have a large amount of money on hand, A and B may not be able to reap the profits of the venture. C has the money. The agreement was that all were to share equally, but C insists on keeping it all. The law will allow him to do so, because it is beneath the dignity of the court to order an accounting in a transaction where all parties are equally guilty. The maxim is "in pari delicto, condicio defendentis potior est", that is, where the parties are in equal fault, the position of the defendant is the stronger. C, the guilty party, has the money; he is the defendant, therefore, he keeps it.

WHO MAY BE PARTNERS.--At common law, a married woman was incapable of becoming a member of a partners.h.i.+p because of her general incapacity to enter a contract. Statutes removing the disability of married women have been pa.s.sed in practically all the States, and a married woman is generally free to become a partner, except, and this is true in many States still, husband and wife may not become partners. An infant may be a member of a firm on the same general principles as applied to ordinary infant's contracts. His entering the partners.h.i.+p agreement is not void, but voidable. When he becomes of age, if he affirms the contract of partners.h.i.+p, he will be liable the same as an adult. He has, however, the right to disaffirm his partners.h.i.+p agreement within a reasonable time after becoming of age, and if he does so, he will be absolved from all personal liability for the debts of the firm. It is very generally held that a corporation may not enter into a copartners.h.i.+p with another corporation or an individual. The reason for this is a general rule of public policy that in a partners.h.i.+p the corporation would be bound by the acts of persons who are not its duly appointed agents and officers.

There may be any number of members in a firm, such matters being left to the choice and wisdom of those operating the business.

DELECTUS PERSONARUM.--While the foregoing is true, one must not reach the conclusion that an objectionable person may be forced into a firm. I am a member of a firm of three persons. I decide to withdraw, and tell my two fellow partners that I have transferred all my interest in the firm to John Jones. He will take my place. My two fellow partners believe Jones to be a crook, and do not wish to be in partners.h.i.+p with him. They would not be obliged to accept him. In other words, the doctrine of delectus personarum, or the choice of the person, is strictly applied in partners.h.i.+p, because a partners.h.i.+p relation is a very confidential relations.h.i.+p. Ordinarily the business cannot be conducted satisfactorily unless all of the partners have the confidence of each other. It is for this reason, that we have the rule, heretofore referred to, that the sale by a partner of his interest in the business works a dissolution of the partners.h.i.+p. John Jones, who purchased my rights in the firm, could not compel the other members to take him in, but the firm would have to be wound up and he would simply be able to recover what my share of the a.s.sets was. It is true that Section 27 of the Act does read that a sale by a partner of his interest does not of itself work a dissolution, but the doctrine of delectus personarum is fully preserved. That section reads: (1) A conveyance by a partner of his interest in the partners.h.i.+p does not of itself dissolve the partners.h.i.+p, nor, as against the other partners in the absence of agreement, ent.i.tle the a.s.signee, during the continuance of the partners.h.i.+p, to interfere in the management or administration of the partners.h.i.+p business or affairs, or to require any information or account of partners.h.i.+p transactions, or to inspect the partners.h.i.+p books; but it merely ent.i.tles the a.s.signee to receive in accordance with his contract the profits to which the a.s.signing partner would otherwise be ent.i.tled.

(2) In case of a dissolution of the partners.h.i.+p, the a.s.signee is ent.i.tled to receive his a.s.signor's interest and may require an account from the date only of the last account agreed to by all the partners.

ARTICLES OF PARTNERs.h.i.+P.--We have learned that parties need not expressly declare themselves partners, or enter into an express contract, in order to become partners. So the framing of written partners.h.i.+p articles--a written contract of partners.h.i.+p--is not essential, though it is the ordinary and advisable course. We may note here a few rules governing the use and construction of such articles where they have been adopted. They should, of course, provide for as many contingencies as can be foreseen, such as the nature, name and place of business, when the relation is to commence and when to terminate, what capital shall be contributed by each, what the share of each in the profits and losses shall be, what the powers of the partners as between themselves shall be, whether the business shall be continued after the death of one or more of the partners and how it shall be wound up. But the important thing to note is, that if provision be not made, the general law, and particularly that part governing the powers and duties of partners to each other and to third persons, applies. In other words, the partners may, by their contract, determine what their rights as between themselves shall be; but if they do not, the rules of law will determine them. Thus they may determine that of two partners one shall have two-thirds and the other one-third of the profits; in the absence of such a clause the law determines the profits shall be divided equally. When articles have been once adopted they can be changed only by the consent of all the partners; this consent need not be formally expressed in words, but it may be implied from a long-continued course of conduct. The law provides no means to force a partner to live up to his contract except in a very few cases; the most it gives is a right of action for the breach caused by his failure to do as agreed.

FIRM NAME.--The adoption of a firm name is not an essential to a partners.h.i.+p, but is customary and advisable. The names of the partners may be combined, or a single name used, or a fict.i.tious name, or any name, so long as the rights of other persons are not violated. In some States, notably New York, the use of the name of a person not a partner is forbidden, as is also the use of the expression "& Co.," unless a partner is represented by it. Ordinarily, contracts may be made in the firm name and by one partner, but contracts under seal should be made in the names of the partners "doing business as," etc., and cannot be made by one partner without authority from the others. Conveyances of real property should be made to or by the individual partners "doing business as," etc., for the law does not generally recognize the firm as a separate person or ent.i.ty sufficiently to enable it as such to take or give a conveyance. If the deed ran to "John Doe & Co.," the t.i.tle would be in John Doe only, though he would be said to hold it in trust for the firm, for if the partners.h.i.+p name is given as the grantee, the t.i.tle goes only to those whose names appear, and if the partners.h.i.+p were doing business under a fict.i.tious name, the deed would convey to no one.

Whether land, the t.i.tle to which is in the name of one partner, is held in trust by him as partners.h.i.+p property, is a question of intention, and that question is determined by asking with what money was the land bought, what use has it been put to, has it been carried on the books of the firm, with what money have the taxes, insurance, and other charges been paid, etc. If found to have been treated as partners.h.i.+p property, the fact that the t.i.tle is in one person counts for little, as he will be said to hold it in trust for the firm; but the careful business man will avoid trouble by having the property conveyed to the firm in the manner indicated, if it is actually partners.h.i.+p property.

THE POWERS OF A PARTNER.--As a general agent, a partner has almost unlimited authority to bind the firm. Because of this, we have here one reason for not recommending the partners.h.i.+p form of doing business unless all the members of the firm have the utmost confidence in each other. These powers of the partners are so general that it is impossible for us to go into them in any detail. They are summarized in the most compact form in the Uniform Partners.h.i.+p Act. Sections 9 to 17 of that act are as follows:

9. (1) Every partner is an agent of the partners.h.i.+p for the purpose of its business, and the act of every partner, including the execution in the partners.h.i.+p name of any instrument, for apparently carrying on in the usual way the business of the partners.h.i.+p of which he is a member, binds the partners.h.i.+p, unless the partner so acting has in fact no authority to act for the partners.h.i.+p in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.

(2) An act of a partner, which is not apparently for the carrying on of the business of the partners.h.i.+p in the usual way, does not bind the partners.h.i.+p unless authorized by the other partners.

(3) Unless authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to:

(a) a.s.sign the partners.h.i.+p property in trust for creditors or on the a.s.signee's promise to pay the debts of the partners.h.i.+p,

(b) Dispose of the good-will of the business,

(c) Do any other act which would make it impossible to carry on the ordinary business of the partners.h.i.+p,

(d) Confess a judgment,

(e) Submit a partners.h.i.+p claim or liability to arbitration or reference.

(4) No act of a partner in contravention of a restriction on his authority shall bind the partners.h.i.+p to persons having knowledge of the restriction.

10. (1) Where t.i.tle to real property is in the partners.h.i.+p name, any partner may convey t.i.tle to such property by a conveyance executed in the partners.h.i.+p name; but the partners.h.i.+p may recover such property unless the partner's act binds the partners.h.i.+p under the provisions of paragraph (1) of Section 9, or unless such property has been conveyed by the grantee, or a person claiming through such grantee to a holder for value without knowledge that the partner, in making the conveyance, has exceeded his authority.

(2) Where t.i.tle to real property is in the name of the partners.h.i.+p, a conveyance executed by a partner, in his own name, pa.s.ses the equitable interest of the partners.h.i.+p, provided the act is one within the authority of the partner under the provisions of paragraph (1) of Section 9.

(3) Where t.i.tle to real property is in the name of one or more but not all the partners, and the record does not disclose the right of the partners.h.i.+p, the partners in whose name the t.i.tle stands may convey t.i.tle to such property, but the partners.h.i.+p may recover such property if the partners' act does not bind the partners.h.i.+p under the provisions of paragraph (1) of Section 9, unless the purchaser or his a.s.signee, is a holder for value, without knowledge.

(4) Where the t.i.tle to real property is in the name of one or more or all the partners, or in a third person in trust for the partners.h.i.+p, a conveyance executed by a partner in the partners.h.i.+p name, or in his own name, pa.s.ses the equitable interest of the partners.h.i.+p, provided the act is one within the authority of the partner under the provisions of paragraph (1) of Section 9.