Monday, 30 July, 2018
Many Australian commercial entities are partnerships and often have to deal with third parties and outside entities in the course of business.
Due to the nature of the partnership relationship, when an issue of liability arises, the actions of one partner may affect the other, and it’s important to be mindful of some of the liabilities that may occur in relation to outside parties that can potentially affect all persons involved in a partnership.
What actions may bind partners?
All jurisdictions in Australia, with New South Wales being the exception, have laws in place that bind a partner who does any act for the carrying out of business. For example, looking towards s 5 of the Partnership Act 1958 (Vic), states the following;
“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.”
The essential element of the section, is that any act done by a partner for the purpose of the business partnership, will bind the other unless the outside party has knowledge that the partner does not have the authority to act for the business in the particular matter – or is unaware that the person is a partner.
One of the more interesting aspects relating to partnerships is that a partner can both be an agent and principal. Therefore, a partner can bind the other person, while on the other hand, each partner may be bound by the other.
If a partnership incurs debts, what are the liabilities of the partners?
Generally, if a debt is incurred, the liability is a joint liability and a creditor can only bring a single action against the partnership, whilst any partner may be able to request a stay on any action until all partners are a party to the action – although, the debt should be joint in this instance, rather than joint and several.
Furthermore, if judgment is in relation to one partner, no action can be taken against the other members of the partnership.
What happens if a partner is deceased? Is the partnership still liable for any debts incurred?
The estate of a deceased partner is severally liable for the debts of the partnership contracted before the death of the partner. Although, the debts may first be subject to prior payments to any debts incurred by the partner separately.
Partner representations
A partner that makes representations concerning the affairs of the partnership that is in the ordinary course of business, may be used as evidence against the partnership if a matter arises. Any notice provided to one partner, can also be considered as notice against the partnership, except in instances of fraud.
Ultimately, it’s important to be mindful that the actions of a partner in the ordinary conducting of a business can affect the other partner.
Speak with our business and commercial lawyers to get the right advice.