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A PROJECT ON:
RightsandDutiesofpartners
Submitted by:
PALLAVIVERMA
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CONTENT:
1.
INTRODUCTION
2.
DUTIESOFPARTNERS
3.
1)
GeneralDutiesofpartners
2)
Dutytoattaingreatestcommonadvantage
3)
Someaspectoffiduciaryobligation
4)
Duediligence
RIGHTSOFPARTNERS
1)
Rightstotakepartinbusiness
2)
Majorityrights
3)
Righttoindemnify
4)
Righttoprofit
5)
Righttointerest
6)
Righttoremuneration
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Determination by contract
The second principle of high importance is that relations of partners to
one another are based upon the fundamental principle of absolute good
faith. Mutual trust and confidence among the partners, therefore,
becomes a necessary condition of their relations. Section 9 gives statutory
recognition to this principle by providing that partners are bound to be
just and faithful to each other. This duty cannot be excluded by any
agreement to the contrary. In Helmore v. Smith:
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another that they are partners in the first place; it is because they
continue to the trust one another that the business goes on.
Duties of partners:
All the duties of partners emerge from this overriding principle of good
faith. The following are some of them:
1. Duty of good faith(section.9)
General duties of partnersEach partner owes to the others a duty of honest and good faith. This
requirement of mutual trust arises because they have all voluntarily
constituted one another their agents in relation to the partnership affairs.
The first and unchanging aspect is the obligation to be honest. But this
does not mean that a partner satisfies the duty by mere honesty; the duty
has other characteristic; he may be in breach of it without being dishonest
or negligent, for instance if he acts for an improper motive.
The Second aspect of the duty is the requirement of openness. A partner
must conceal nothing from his partners which is relevant to the firms
business.
Thirdly, he must act in favour of the firm and not against it. He must not
exercise for his own advantage the powers which he holds as a partner
only. He may not put himself in a position which militates against
discharge of his duty to the firm.
Fourthly, he must treat fairly a minority within the firm, for instance
when contemplating an expulsion.
Finally, he must not compete with the firm or make a profit at the
expense of his
partner.
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A partner in a firm of sugars refiners, who had great skill in buying sugar
at the right time, was entrusted to buy sugar for the firm. He supplied
sugar from his personal stock, which he had bought earlier when the
prices were low. He charged the prevailing market price and thus made a
considerable profit.
When his co-partner discovered this, they brought an action for an
account of the profit. The firm was held entitled to that profit.
Similarly, where a partner, authorised to sell joint property for sold it to a
company, in which he had a large interest, for a much higher price and
concealed the excess price, he was held bound to share it with his copartner.
use of the partnership property or information , the duty not to draw any
benefit by engaging into transaction in
Section 16, Dean v MacDowell, (1878) 8 Ch D 345, 354, and Gardner V Mc Cutcheon,
(1842) 4 Beav 534: 55 RR 154; Williamson v Hine,[1891] 1 Ch 390; Benson v Heathorn,
(1842) 1 Y&C Ch 326: 9 LT 118; Miller v Mackay, (1865) 31 Beav 77: (1865) 34 Beav 295;
Shallcross v Oldham, (1862) 2 J&H 609; Maffat v Farguharson, (1788) 2 Bro CC 338.
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5
rivalry with the firm ; the duty not to divert the business opportunities of
the firm to
his own advantage.
Trustees contrasted
The partners duty of good faith is not the same as, or as strict as, the
duty imposed by the law upon a trustee. Thus a partner may for his own
benefit use property or information belonging to the firm provided that it
is not of value to the firm and he does not use it in competition with the
firms business. By contrast a trustee may not use for his own benefit the
property or information of the trust.
A partners accountability for his separate business
If a partner carries on any business of the same nature as and competing
with that of the firm, he shall account for and pay to the firm all profits
made by him in that business.
See Somerville v Mackay, (1810) 6 Ves 382: 10 RR 200; and Lock v Lynam, (1854) 4 Ir
Ch Rep 188.
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9
10
A partner was founded between certain persons for importing salt from
foreign countries and to resale the same in Chittagong. One of the
partners, while operating to buy salt for the firm bought some quantity for
himself and resold on his personal account. He was held liable to account
for this profit to his co-partners, as the opportunity to make it came his
way while he was on the business of the firm.
A partner may, however, carry on any personal work which is outside the
scope of the partnership business. In Aas v. Benham
11
10
11
[1891] 2 Ch 244.
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section44 (d) for dissolution of the firm on the ground of persistence
breach of agreement.
5) Due diligence [section-12(b) and 13(f)]
Section 12(b) declares that-Every partner is bound to attend diligently to
his duties in the conduct of the business.
In order to supplement this provision section 13(f) provides: A partner
shall indemnify the firm for any loss caused to it by his wilful neglect in
the conduct of the business of the firm.
Negligence means absence of care according to circumstances and
wilful negligence has been described as culpable negligence if the
partner is guilty of this degree of negligence and consequently the firm
suffers a loss, he would be bound to indemnify the firm for the same. But
he will not be liable for mere errors of judgement, or for acts done in
good faith. A problem of this kind arose in Cragg
v. Ford
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13
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In the suit for dissolution of a partnership and accountants, the
defendants, who were managing partners, were charged with negligence
and contribution was failed to sue certain firms for the price of coal
supplied and consequently one of the claims become time barred and
other was lost due to the debtors insolvency.
They were held liable for the claim which had become time-barred. For the
other claim the court held that the firm was an old customer and the
defendants themselves learned it too late that it had become insolvent.
14
the conduct of business, had to pay penalties which were levied upon the
firm in consequences of the purchase of illicit whisky. The purchases were
affected by the managing partners and the plaintiff partner had no
knowledge of them. They were held liable jointly and severally to
indemnify him against the amount so paid and interest on it. It was
immaterial that the loss was caused by acts of illegal nature, for the
plaintiff had not taken any part in them, not done anything which could be
regarded as acquiescence, knowledge or consent.
14
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principle section 9 makes it a duty of the partners to render true accounts
to every other partner. This principle was laid in Law v. Law
15
A partner has sold his share in the assets of the firm to his co-partner and
discovered subsequently that material information had been concealed
from him. He would have been entitled to set aside the sale but for the
fact with knowledge of the concealment and without insisting upon full
discloser, he entered into an agreement to modify the original bargain.
The court found that the matter which escaped consideration was no
consequence to the firm.
16
partners, the property of the firm shall be held and used by the partners
exclusively for the purpose of the business. The section makes it a duty of
the partners that the property of the firm shall be held and used by them
exclusively for the purpose of the business of the firm.
-The failure of a
partner to
17
16
17
AIR 1965 SC 1433: (1965) 2 SCR 429: [1965] 2 Cri LJ 431. The liability to
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deposit them in bank, failure to do so would not constitute the offence, as
the appellant was also authorised by the partners to spend the money for
the business of the partnership.
1) If a partner derives any profit for himself from any transaction of the
firm, or from the use of the property or business connection of the
firm or the firm name, he shall account for the profit and pay it to
the firm;
2) If a partner carries on any business of the same nature as and
competing with that of the firm, he shall account for and pay to the
firm all profits made by him in that business.
18
. To the same
effect is Coffeys
18
[1891] 2 Ch 244: 65 LT 25 CA; Dawson and Mason Ltd v Potter, [1986] 2 All ER 418,
use of confidential information. For other example of liability for gains made by use of
information received while in position as agent, etc. see, Boardman v Phipps, [1967] 2
AC 46; Regal (Hastings) Ltd v Gulliver, [1942] 1 All ER 378; Industrial Development
consultants Ltd v Colley, [1972] 1 WLR 443. As to how compensation is to be assessed
in such cases, see Seager v Copydex, [1969] 1 WLR 809.
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Registered Design, Re.
19
Right of partners
Mutual rights and duties of partners depend upon the provisions of
their agreement. But subject to their agreement the law confers the
following rights upon all partners:
Right to take part in business [section 12(a)]
Every partner has a right to take part in the conduct of the business of
the firm. The privilege of participation in business must be used for
promoting the interest of the firm and not for damaging it. Partnership
agreement usually provide for the exclusion of this right in the case of
some partners.
Majority rights [section 12(c)]
When every partner has a right to be consulted in the formulation of
business policy, differences of opinion among the partners may arise.
12(c) any differences arising as to ordinary matters connected with
the business may be decided by a majority of the partners, and every
partner shall have the right to express his opinion before the matter is
decided, but no change may be made in the nature of the business
without the consent of all the partners;
Resolving differences of opinion: A difference of opinion may relate
either to-
19
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(1) An ordinary matter
(2) A fundamental matter.
If the partners are divided over an ordinary matter connected with the
business, the same may be settled by a majority of the partners. But
every partner shall be given the right to express his opinion before the
matter is decided. All matters arising in connection with the execution
of the agreed business of the firm fall in this category and may be
carried through by majority opinion. But where the difference of opinion
relates to a matter of fundamental importance, consent of all the
partners
becomes
necessary.
Fundamental
matters
include
the
question of any alteration of, or addition to, the business of the firm
and the admission of a new partner. The partnership deed may,
however, provide that in all matters majority opinion shall prevail.
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21
21
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personally. For example, where a sleeping partner wanted to sell his
interest to the other partners and authorised an expert vaguer to
inspect accounts to ascertain the value of his interest, it was held
that the other partner could not object to it, unless they could show
some reasonable grounds for their objection such as, for example,
22
2.
23
(1877) 10 Ch D 185.
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He worked beyond the limits of the partnership colliery without proper
inquiry as to limits and had acted with gross negligence and recklessness
is continuing his working after notice and without consulting his partner,
when it was evident that his right to work in the disputed area was
extremely doubtful.
The second kind of indemnity is recoverable when a partner has done an
act involving expenditure in order to protect the property of the firm a loss
threatened by an emergency. It is necessary that the partner concerned
should have acted as a reasonable person would have acted in his own
case.
24
The right to indemnity is not lost by the dissolution of the firm and it also
does not matter that there is or has been no settlement of accounts.
25
26
24
Proof of actual loss attribution to the conduct of a partner is necessary and not
merely one which is merely imagined or notional. T.B.Mody v. Sanghrajka, AIR 1987 Kant
268.
25
26
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Right to remuneration [section 13 (a)]
Unless otherwise agreed, partners are not entitled to receive salary or
remuneration for taking part in the conduct of the business. Section 13(a)
so provides:
A partner is not entitled to receive remuneration for taking part in the
conduct of the business.
The partnership agreement may, however, provide for the payment of
remuneration to working partners.
27
28
29
, in the
30
31
In
32
, even
33
27
Garwood s Trusts, Re, [1903] 1 Ch 236. Income Tax Act,1961 also now recognizes
such payments as an expences provided the payment is to a working partner and in
accordance with partners agreement.
28
29
30
31
32
33
Webster v Bray, (1849) 7 Hare 159 and Robinson v Anderson, (1855) 20 Beav 98.
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BIBLIOGRAPHY
1) Law of Partnership by Dr. Avatar Singh
2) www.Futureaccountant.com
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