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Jurisprudential reviews of partnership law

By Femi D. Ojumu
03 August 2022   |   4:06 am
In 1732, the British physician and intellectual, Dr Thomas Fuller (1654-1734), opined in in his striking treatise, Gnomologia: Adages and Proverbs: “Be you never so high, the Law is above you”...

‘Femi D. Ojumu
In 1732, the British physician and intellectual, Dr Thomas Fuller (1654-1734), opined in in his striking treatise, Gnomologia: Adages and Proverbs: “Be you never so high, the Law is above you”. That expression was true then and remains true today in partnership law in its wider ramifications, as indeed all in virtually aspects of life in civilized climes. The target of this analysis is partnership law, a term used interchangeably with partnerships, in this article.

The ideological foundations of partnerships are established in contract law, evidenced in a written lawful agreement, reflecting the parties’ express aspirations, clear intentions to submit to a legal nexus and underpinned by monetary consideration. Clearly therefore, a partnership is a contractual arrangement between two or more persons for the overriding objective of making a legitimate profit.

Models
In the main, there are three different types of partnerships viz; General Partnerships, Limited Liability Partnerships and Limited Partnerships. General Partnerships are firms owned by two or more persons with a view to running the business as co-owners. Except there are contrary arrangements, each partner has an equal share of profits and losses. The seminal relevance of partnership agreements in all partnership models cannot be overstated because they set the terms of engagement, profit and/or debt sharing arrangements, ownership structures et al.

Limited Partnerships are similar to General Partnerships in the sense that the model has at least one general partner, who actively runs the entity, and one least one limited partner, who does not take an active role in the administration of the firm. The model’s attraction is the relative ease of establishment. Nevertheless, there is a presumption of unlimited liability against the general partner for the firm’s liabilities.

On the other hand, Limited Liability Partnerships, considered in some detail in this analysis, limit the partners’ liabilities. Here, the partners are not personally liable for business debts, although they are personally liable for their own wrongful acts and omissions. Broadly, Nigeria’s Companies and Allied Matters Act (CAMA) 2020, recognizes Limited Liability Partnerships (section 746), Foreign Limited Liability Partnerships (section 788 (1)) and Limited Partnership (section 795).

Reviews
Relying on the section 5 of the UK Partnership Act 1890, a statute of general application in Nigeria, section (1) 1 of the Laws of Lagos State of Nigeria 2015, affirms that a partnership “is the relationship which subsists between persons carrying on a business in common with a view to profit.” The concept of “partner” is further defined in CAMA 2020 as “a co-owner, member, or investor in a partnership, and shall include a person who joins with others to form a partnership and in a relation to a limited liability partnership, means any person who becomes a partner in a limited liability partnership, in accordance with the partnership agreement.”

Although section 19 (1) CAMA 2020 establishes the general rule that no association nor partnership consisting of more than 20 persons shall be formed for the purpose of carrying on any business for profit or gain by the association or partnership, or by individual members thereof; an exception is made by virtue of the provisions of section (19) (2) (a), (b)(i), (ii) and 3 therein. The latter exception provides a statutory cover for co-operative societies, law partnerships and accounting firms exceeding 20 members in limited circumstances.

A close correlation subsists between partnerships and the legal concept of agency. The American Restatement of the Law of Agency (3rd edition, 2006) enunciates agency as the fiduciary relationship that arises when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal’s behalf and subject to the principal’s control, and the agent manifests or otherwise consents so to act. Bowman and Reynolds (18th edition 2006) expressed a similar reasoning and established the agency as the fiduciary relationship, one predicated on trust and utmost good faith, between two or more persons, one of whom explicitly or implicitly manifests that the other should act on his behalf; in order to affect his relations with third parties, and the other of whom similarly manifests assent so as to act, or so acts pursuant to manifestation.

The inferences emanating from these propositions establish that partners are agents of one another, act, and are expected to act in a fiduciary relationship relative to the objectives of their partnership compact, and that they are implicitly or explicitly bound by their respective actions or omissions in the ordinary execution of the firm’s business. This interpretation accords with the provisions of section 5 of Partnership Act (PA) 1890, the power of partners to bind the firm, which establishes that:

“Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member, bind the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority, or does not know or believe him to be a partner.”

However, it is important to note that sections 765 and 766 CAMA 2020 significantly modify the inherent strictures of section 5 of the PA 1890 by defining the extent of partners’ liability and delimiting the liability of limited liability partnerships and partners. Thus, section 765 stipulates that a partner of a limited liability partnership is, for the purpose of the business of the limited partnership, the agent of the limited liability partnership, but not of other partners.

In other words, in Nigeria at least, Partner A will not ordinarily be vicariously liable for the actions or omissions of Partner B, in XYZ limited liability partnership (LLP). But, on that construction, Partner A can be held liable for the actions and omissions of XYZ LLP. Impliedly, this particular provision is an invocation of the doctrine of corporate personality established in Salomon v Salomon 1897 AC 22, by clearly distinguishing the discrete legal personality of Partner A from that of XYZ LLP. Nevertheless, it raises practical questions as to whether the unintended consequence thereof is to potentially establish a safe umbrella for negligent and/or reckless acts and omissions by erring partners?!

Proceeding, by virtue of section 765 (1), (a), (b), (2), (3) and (4) CAMA 2020, a limited liability partnership is not bound by anything done by a partner in dealing with a person or third party: if the partner in fact has no authority to act for the LLP in executing a particular act; and if the third party knows the partner lacks authority and neither knows nor believes him to be a partner of the said partnership.

A Limited Liability Partnership is liable if a partner of the LLP is liable to any person as a result of the wrongful act or omission on his part in the course of the LLP’s business or with its authority. The obligations of the limited liability partnership whether emanating in contract or otherwise, shall exclusively be the obligation of the said partnership. Plus, the liabilities of a limited liability partnership shall be met out of the property of the limited liability partnership.

Additional statutory protection is afforded in section 767 (1) CAMA 2020 to the extent that a partner is not personally liable, directly or indirectly for an obligation imposed on the partnership arising from contract or otherwise. However, the first limb of the subsection to section 767 (2) squarely imposes personal liability on a partner for his own wrongful act or omission; whilst the second limb expressly provides that a partner “shall not” be personally liable for the wrongful act or omission of any other partner of a limited liability partnership.

A persuasive case to consider pertaining to the second limb above, is the English case of Dixon Coles & Gill v Right Reverend, Nicholas Baines, Bishop of Leeds & Another [2021] EWCA Civ 1097. Consistent with the principles of natural justice, it was established by the Court of Appeal that blameless partners in a law firm were not inexorably liable to previous clients of the firm for losses triggered by the actions of a fraudulent partner. Put another way, this case is authority for the proposition that partners do not, automatically swim or sink together, based on the infractions of one or some. Culpability turns on the unique facts of each case.

Recommendations
Based on the foregoing, it is recommended that each partnership, irrespective of the operating model, develops a definitive partnership agreement which outlines partners’ respective rights and obligations, allocation of responsibilities, firms’ policies on profit and/or debt sharing and risk management. Likewise, there is a rational case for reviewing the provisions of section 765 CAMA 2020, to ensure that it is a genuine shield for innocent partners, and not a sword of Damocles over a noble legal profession.

Conclusion
The contention for partners to ensure they consistently uphold their fiduciary obligations to their firms, avoid ultra vires acts, consistently act with integrity within the confines of the law cannot be overstated. Afterall, as Thomas Fuller opined above, “Be you never so high, the Law is above you.”