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Partnership
10 (Part I)
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Define the meaning of partnership;
2. Explain the important characteristics of partnership;
3. Discuss the rules on formation of partnership;
4. Identify the relations of partners to outsiders; and
5. Describe the liabilities of partners to third parties.
INTRODUCTION
There are various types of business that are widely being carried out in Malaysia.
The most common types of business are:
Sole Proprietorship,
Partnership; and
Company.
In Malaysia, the law that governs partnership is the Partnership Act 1961. The
Act is similar to the English Partnership Act 1890 and under Section 47(1) of the
Partnership Act 1961, it provides for the application of the rules of equity and
common law in partnership so long as they are not inconsistent with the express
provisions of the Act.
TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 159
Section 3(2) of the Partnership Act 1961 therefore excludes the following list from
the definition of partnership:
Where a partnership agreement does not exist, Section 4 of the Partnership Act
1961 provides a number of tests in determining the existence of a partnership, as
follows:
Section 4(a) Joint tenancy, tenancy in common, joint property, or part ownership
does not of itself form a partnership.
Section 4(b) The sharing of gross returns does not of itself establish a partnership,
whether the parties who share the returns have or do not have a joint
right or interest in the property from which or from the use of which
the returns are derived.
Section 4(a)
Partnership does not exist between tenants regardless whether they share or not
the profit gained through the use of the land. In the case of jointly owned
property, it does not of itself form a partnership between the owners.
162 TOPIC 10 LAW OF PARTNERSHIP (PART I)
In Davis v. Davis (1894) 70 LT 265, a father gave his business and three
houses to be shared together by his two sons. Two of the houses were
rented out. The sons used part of the money earned from the rental of the
house to improve the business and shared the other remaining portion
equally.
The Court held that: The business was a partnership between the sons but
the joint ownership of the houses and equal share on the earnings did not
make them partners.
Section4(b)
The Court decided that: Even though the defendant and Mill shared the gross
returns from the business, it did not make the defendant and Mill as partners.
Both had separate responsibility and liability. The defendant was liable to pay
for the rent of the stage and lighting services from the 60% returns he
received. Mill, on the other hand, would settle the journey expenses, salaries
of the actors and the cost incurred during the show from the 40% returns he
received. This showed that no partnership being formed between the
defendant and Mill. Thus, the defendant was not liable to the plaintiff.
Section 4(c)(i)
Payment of a debt out of profits of the business to a creditor by instalments does
not make the creditor a partner in the business. For instance, A lends B a sum of
RM15,000 and A receives a sum RM1,000 per month from the business as
repayment of the loan. Though the payment of RM1,000 per month to A comes
from the profit of the business, A is not a partner to B in the business.
TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 163
Section 4(c)(ii)
Remuneration to a servant or an agent of the business from the profit of their
employer's business. Any form of payment to a servant or an agent which comes
from the employers business profit constitute salary or wages. Therefore, a
servant or an agent is not a partner in the employers business and has no
partnership liability.
In Abdul Gaffoor v. Mohamed Kassim & Ors [1931-32] FMSLR 19, the plaintiff
was a despatch clerk in the defendants firm. He was then appointed as a
manager in one of the firms branch office. One of the firms documents stated
that the profit from the firm would be divided into 79.4 parts and would be
shared between the plaintiff, the defendant and others partners. The plaintiff
contended that he was a partner but the defendant argued that the
relationship was a mere employer-employee relationship.
The Court held that: The receipt of salary from the profit did not make the
plaintiff a partner of the firm.
Section 4(c)(iii)
Payment of an annuity or a portion of the profits to a widow or child of a
deceased partner in the business. Some partnership agreements provide a term
on payment of annuity to the dependants of a deceased partner. The annuity
comes from the profit of the partnership. In this situation, although the widow or
the child receive payment from the profit of the partnership, it did not make
them partners in the business.
164 TOPIC 10 LAW OF PARTNERSHIP (PART I)
The Court held that: As widow is not a partner of the firm. Therefore, her
portion of money must not be taxable.
Section 4(c)(iv)
Payment of interest which varies with the profits on a loan advanced for use in
the business under a written contract. A person who gives advance payment by
way of a loan and receives a payment of interest which varies according to the
profit of the business is not a partner in the business.
The Court held that: The receipt of the payment from the profit in Ys business
does not make J a partner although J was authorised to deal with the business.
Section 4(c)(v)
Payment to a seller of the goodwill of a business in the form of a share of the
profits of the business. For example, A, a solicitor agreed to sell his firm to B and
agreed to introduce his clients to B. In consideration, B agreed to give A 10% out
of the profit of the business for the period of three years. In this case, although A
receives payment out of the profit of the business, it does not make him a partner
to B in the business.
TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 165
In Rawlinson v. Clarke (1860) 15 M&M 292, a doctor sold his business and
introduced his clients to the buyer. In consideration, he received certain
payment and shares from the profit made in the first year of the business.
10.2.3 Capacity
The partners must have the capacity to enter into contract. A partner is
competent to contract if he is an adult, of sound mind and has not lost capacity to
enter into contracts under any laws. In partnership, a minor can become a
partner. However, a minor partner is not liable for all the firms debt and
contractual liabilities. When a minor partner reaches his age of majority, he can
exonerate himself from liability by withdrawing himself from the firm. But if he
remains in the firm, he will be liable with other partners.
In William Jacks & Co. (Malaya) Ltd v. Chan & Yong Trading Co (1964) MLJ
105, Jacks claimed a sum of RM12,734.91 being the payment of the goods sold
to the defendant who were partners in a firm. Yong who was a minor partner
at the time of the purchase of the goods did not defend his case but Chan
denied that the goods were for Yongs personal use. Therefore, other partners
were not liable for the claim.
The Court held that: Even though the goods were bought for Yongs personal
use, it did not mean that the firm and other partners were not liable and since
Yong did not take any action to terminate his partnership upon attaining
majority age, he was also liable as a partner.
SELF-CHECK 10.1
ACTIVITY 10.1
Therefore, for a partner to bind the firm and other partners, his act must have
been carried out within his scope of authority and in the usual way of the
partnership business. Consequently, outsiders or third parties dealing with the
partner may assume that the partner has the authority to do such acts usually
done by partners in that particular kind of business. This is an implied authority
of a partner as an agent for the firm, as illustrated in the following cases:
In another case, Chan King Yue v. Lee & Wong [1962] 28 MLJ 379, the plaintiff
lent RM35,000 to her husband who was a partner in a firm. The husband
issued a receipt under the firms name and used the money to pay the firms
debt. The plaintiff took an action to recover her money but other partners
refused to pay on the grounds that the plaintiffs husband had no authority to
borrow money.
The Court held that: The act of borrowing money by the plaintiffs husband
was important for the firms continuous business. Therefore, the firm was
liable.
Section 7 also provides that the partner who has no authority or unauthorised to
act for the firm will not bind the firm if the third party knows that the partner has
no authority or does not know or believe him to be a partner. For example, A has
been informed about B's limited authority and B was unauthorised to order
goods exceeding RM15,000. A made a contract with B for the supply of electrical
goods worth of RM17,000 to the firm. The firm was not bound by the contract.
In the case of Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223, H gave a loan
to one of the partners in a firm. As a security, a bill of sale has been issued
bearing the signature and seal by Ng Teng Tuan, a partner to Wan Lee
Chan, for and on behalf of Wan Lee Chan. The issue arose was whether
the bill of sale issued by the firm was valid and binding on the firm.
The Court held that: A partner in a firm had an implied authority to issue a
bill of sale on behalf of other partners. Therefore, the bill of sale was valid
and binding on the firm.
According to Section 9 of the Partnership Act 1961, where one partner pledges
the credit of the firm for a purpose apparently not connected with the firm's
ordinary course of business, the firm is not bound, unless he is in fact specially
authorised by the other partners. However, this section does not affect any
personal liability incurred by an individual partner.
TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 171
This means, a partner cannot misuse the trust given to him by the firm to make
debt which is not connected with the firm's business. The partner who misuse the
trust shall be personally liable unless he has been given the express authority to
do as such.
For instance, A and B are partners carrying on business of printing and selling
'batik'. A, without the knowledge of B bought a dishwasher under the firms
name. The supplier has requested payment from the firm. In this case, B may
deny liability under Section 9 and A would be personally liable. In other words,
A cannot bind the firm because his act was not carried out within the usual
course of the partnership business. Another example where a firm will not be
liable is where a partner issues the firm's cheque for the purpose of settling
personal debt.
the firm incurred while he is a partner; and after his death his estate is also
severally liable in a due course of administration for such debts and
obligations, so far as they remain unsatisfied but subject to the prior
payment of his separate debts.
In the case of Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924)
4 FMSLR 292, a partnership has been formed by six partners including
the appellant. Three of the partners borrowed RM10,000 from a third
party by effecting a promissory note. The loan was guaranteed by the
respondent (Chan Kang Swi). Later, the firm failed to pay the debt and
Chan was called to pay for the debt on his own account. He then
initiated action against the six partners for recovery of his money and
five partners accepted their liability, except the appellant.
The Court decided that: The debt was a firms debt and was obtained
for the purpose of partnership. The partners who signed the promissory
note had acted for the firm and they were authorised to do so.
Therefore, the firm or the six partners were liable.
firm, or any penalty is incurred, the firm is liable therefore to the same
extent as the partner so acting or omitting to act.
Tort is a civil wrong. The examples of tortious acts are nuisance,
defamation, trespass and negligence. In partnership, tort may occur in the
following situation. For instance A, B and C are partners carrying out
business of repairing electrical equipment. C repaired a washing machine
for a customer but due to his negligence, the customer was electrocuted
when using the washing machine. In this case, C was negligent in
performing his work and therefore, the firm and other partners were liable
to the customer.
The Court held that: H, as the partner, had done illegitimately that
which was part of his business to do legitimately. Hence, the firm was
liable for his act.
In the above case, the firm was liable because the bribe was part of the
firms money and such information was for the purpose of the partnership
business and would have been legitimate if obtained by proper means.
Provided as follows:
(i) this section shall not affect any liability incurred by any partner by
reason of his having notice of a breach of trust; and
(ii) nothing in this section shall prevent trust money from being followed
and recovered from the firm, if still in its possession or under its
control.
For example, A, B and C are partners of a firm. A who has been appointed
as a trustee, improperly uses the trust property in the business. Other
partners, B and C are not liable for the trust property. However, if B and C
174 TOPIC 10 LAW OF PARTNERSHIP (PART I)
have notice of a breach of trust, they cannot avoid liability and the trust
money may be recovered from the firm if it is still in possession and under
the control of the firm.
In Ex parte Heaton (1819) Buck 386, a father and sons were partners in a
firm. The sons used the trust property for the purpose of the firms
business. When the firm became bankrupt, the Court held that the
money which had been misappropriated could not be recovered from
the partnership property because the father had no knowledge of the
breach of trust committed by his sons.
In the case of Re Buchanan & Co. (1876) 4 QSCR 202, if the holding out
or representation is made without the knowledge or consent from the
real partner, only the person holding out as a partner shall be liable to
the third party acting in reliance of the representation.
This means the use of the deceased name for the partnership business does
not constitute holding out.
In the case of Chung Shin Kian & Anor v. Pendakwaraya [1980] 2 MLJ
246, two partners in a firm had used a trade name (Texwood)
belonged to another company on their products. There was no evidence
to prove that the second appellant was involved in the crime, except as
to become a partner in the business. Thus, the appeal of the second
appellant was allowed.
176 TOPIC 10 LAW OF PARTNERSHIP (PART I)
For a person retiring from the firm, he is not free from liabilities before his
retirement. He remains liable for the partnership debts incurred before his
retirement, as provided under Section 19(2) of the Act, a partner who
retires from a firm does not thereby cease to be liable for partnership debts
or obligations incurred before retirement. A retiring partner may only be
discharged from liabilities by a novation agreement between himself, the
new firm and the creditors.
In the case of Duke v. Brewer (1848) 2 Car. & Ker. 828, it was held that for
a new incoming partner, if the liability was for a continuous contract
(which was made before he became a partner and continue to exist after
he became a partner), then he shall be liable for the same.
SELF-CHECK 10.2
(a) How can a partner bind the firm for his act?
(b) What is the liability of a partner in contracts?
(c) Are partners jointly liable in tortious liability?
(d) What is the liability of a partner in the case of improper use of
trust property in a firm?
(e) What is the effect of holding out by a person who is not a
partner?
(f) What are the liabilities of incoming and outgoing partners?
(g) Will a partner be liable for the criminal offence committed by
other partners?
TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 177
ACTIVITY 10.2
(b) Malik and Noor were partners in a firm, operating a Cyber Caf
business. Malik made a friendly loan amounting to RM8,000
from Aiman as a capital for the business. The said loan was
guaranteed by Azmin. The firm failed to pay the loan and Azmin
had to pay instead. Then, Azmin took a civil action against both
partners, Malik and Noor to recover his money back. However,
Noor did not admit the said liability and decided to walk away
from the partnership. After Noor withdrew from the partnership,
Malik invited Jefri as a new partner to replace Noor. In helping to
settle the debt, Jefri intended to get a bank loan for the firm. In
dealing with the bank, he brought along his brother, Mr Zuki, a
well-known businessman and introduced his brother as one of
the partners in the firm. Believing the representation made by
Jefri, the bank agreed to approve the loan amounting to
RM50,000. However, the firm failed to pay the loan. Discuss the
liabilities of all parties involved by referring to the Partnership
Act 1961 and the relevant case-laws.
Joint tenancy, tenancy in common, joint property, or part ownership does not
of itself form a partnership.
The sharing of gross returns from a business does not of itself establish a
partnership.
Payment of a debt out of profits of the business to a creditor by instalments
does not make the creditor a partner in the business.
Remuneration to a servant or an agent of the business from the profit of their
employer's business does not make the servant or the agent a partner.
Payment of an annuity to a widow or child of a deceased partner does not
make the widow or the child a partner in the business.
Payment to a seller of the goodwill of a business in the form of a share of the
profits of the business does not make the seller a partner.
A partnership is not a legal persona but a label used by a number of
individuals trading under that particular name.
A partnership must be formed for a lawful purpose.
A partner is competent to contract if he is an adult, of sound mind and has
not lost capacity to enter into contracts under any laws.
Partnership agreement may be in the form of oral or written agreement.
A partner has an authority to bind the firm if he carries out the partnership
business within his scope of authority.
Every partner in a firm is liable jointly with the other partners for all debts
and obligations of the firm incurred while he is a partner.
A person who is not a partner of a firm may become liable for the firms debt
if he represents himself or allow himself to be represented as a partner in the
firm.
Any partner who commits criminal offences shall be personally liable.
A person who is admitted as a partner into a firm is not liable for liabilities
incurred before he became a partner.
TOPIC 10 LAW OF PARTNERSHIP (PART I) ! 179
Text Books:
Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang
Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.
Wu M.A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.).
Selangor: Pearson and Longman.
Cases:
Abdul Gaffoor v. Mohamed Kassim & Ors [1931-32] FMSLR 19.
Badeley v. Consolidated Bank (1888) 38 ChD 238.
Chan King Yue v. Lee & Wong [1962] 28 MLJ 379.
Chung Shin Kian & Anor v. Pendakwaraya [1980] 2 MLJ 246.
Commissioners of Inland Revenue v. Lebuss Trustees [1964] 1 All ER 475.
Cox v. Coulson (1916) 114 LT 599.
Davis v. Davis (1894) 70 LT 265.
Duke v. Brewer (1848) 2 Car. & Ker. 828.
Ex parte Heaton (1819) Buck 386.
Hamlyn v. Houston & Co [1903] 2 KB 82.
Hock Hin Chan v. Ng Kee Woo [1966] 1 MLJ 223.
Mercantile Credit Ltd. v. Garrod [1962] 3 All ER 1103.
Osman b. Haji Mohamed Usop v. Chang Kang Swi (1924) 4 FMSLR 292.
Rawlinson v. Clarke (1860) 15 M&M 292.
180 TOPIC 10 LAW OF PARTNERSHIP (PART I)