Define Partnership and states its essential elements. Or “Partnership is created from a contract and not from status. ” Discuss.
Definition of Partnership-According to S.4 of the Partnership Act, 1932—Partnership is the relation between persons who have agreed to share the profit of a business carried on try all or any of them acting for all.
Essentials of Partnership—There are following four essentials of a partnership-
1. That it is the result of an agreement.
2. That it is organised to carry on a business.
3. That the persons concerned agree to share the profits of the business.
4. That the business is to be carried on by all or any of them acting for all.
1. Partnership Must be the Result of an Agreement -S. 5 declares that the relation of partnership arises from contract, not from status. It may be too elementary to say that a partnership can arise only by an agreement between the parties concerned and in no other way. It is one of those elements which clearly explain the distinction between a partnership and the other business relations, like joint family carrying on business, which do not arise by agreement, but are the result of status, operation of law, succession or inheritance. Emphasising upon this point, S.5 says that the relation of partnership arises from contract and not from status; and in particular, the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on business as such, are not partners in such business. It must, however, be noted that it is not necessary that there should be a very formal or written agreement. An agreement to create a partnership may as well arise from the conduct of the parties concerned.
In Abdul Vs. Century Wood Industries, A.I.R. 1554, there were two brothers living together inherited certain properties on the death of their father. They did not divide the properties. Rather they sold a garden of theirs for Rs 5,000 and invested the sum in a separate timber business. There was no formal partnership agreement, but it appeared that they intended to share profits. The business, however, failed before any profits could be made and the question of-payment of liabilities arpse It was held that they must bear the liabilities as partners. The court said-“If two or more persons put together certain amounts of money in certain shares for the purpose of purchasing properties and selling them for profit for common benefit, it has to be said that such a transaction amounts to a partnership concern. An agreement of partnership need not be express. It can arise out of mutual understanding shown by a consistent course of conduct.”.
2. Partnership Must be Organised to Carry on Certain Business —. A partnership can exist in business and business alone. “Business” being essential to partnership, the question arises what does it mean ? S. 2(b) only says that it “includes every trade, occupation and profession”. This definition cannot be taken literally, because while every trade may be a business, every occupation or profession is not. Nor is there any judicial definition of the term.
In Smith Vs. Anderson, 1880, James LJ„ only said that the term ‘business must be taken in a practical sense, that is, in a sense in which men of business would use that term. Speaking broadly, it is taken to refer to any activity which if successful would result in profit. Where certain persons joined in the purchase of wheat and with the intention of dividing and paying for it equally, it was held that, they being not interested in profit or loss, were not partners. Where, on the other hand, two persons horsed a coach with their individual horses and shared the profits, this was held to be a business. The idea involved is that of a joint operation for the sake of gain. Therefore, a society for religious or charitable purposes is not a partnership. Similarly, voluntary associations for the purpose of carrying on temporary functions of a social character are not partnerships. Instances of other associations for a common object which are not partnerships, properly so called, are clubs, trade or consumer protection societies, and building and other benefit societies. It is, however, not necessary that the business should consist of a long and permanent undertaking. A partnership may exist in a single business venture. Thus, where two persons agreed to produce a film and share the profits of hiring it out, that was held to be sufficient to constitute a partnership.
3. Persons Concerned Must Agree for Sharing of Profits— It must be noted that the word “partnership” is derived from the word “to part” . which means to divide”. The division of profits is an essential condition of the .existence of a partnership. There was a time when sharing of profits was considered to be the final word.in the determination of the existence of a partnership. Every man who received any portion of the profits of a business had to incur therein the liability of a partner. This was the state of the law up to the year 1860 when in Cox Vs. Hickman, 1860, the House of Lords reconsidered the test or determining the existence of a partnership. The net result of this historic decision is that no man is a partner unless he has the right to share the profits of the business. But every man who received profits is net necessarly a partner. Thus, sharing of profits is only a prima facie evidence of the exisence of a partnership. The test is that of mutual agency. Since the section does not insist upon sharing of loss. Hence a provision for loss sharing is not essential.
4. The Business is to be Carried on by all of any of Them Acting for All—S. 4 concludes with the words that the business may be carried on “by all or any of them acting for all”. Thus, if the person carrying on the business acts not only for himself but for others also, So that they stand in the position of principals and agents, they are partners. This is the principle of Cox Vs. Hickman, 1860, where S and S were iron merchants in partnership. They became financially embarrassed and, therefore,” made a compromise with their creditors. Under the compromise the property of the firm was assigned to a few creditors selected as trustees. They were empowered to carry on the business, to divide the net income among the creditors in a rateable proportion and after the debts had been discharged, the business was to be it turned to S and S. Cox was one among the trustees although he never acted. The other trustees continued the, business. They purchased a quantity of coke from the plaintiff, Hickman, and gave him a bill of exchange for the price. The bill remaining unpaid, Hickman brought an action against the trustees, including Cox, for the price. It was held that they were not partners and, therefore, Cox was not liable. Referring to the fact that the trustees were interested in the profits, : his Lordship continued — “It was argued that as they (the trustees) would be interested in the profits, therefore, they would be partners. But this is a fallacy. It is often said that the test is whether he is entitled to participate in the profits. This is no doubt a sufficiently accurate test, for a right to participate in the profits affords a good evidence that the trade in which profits have been made was carried on behalf of the person sharing profits. But the real ground of liability is that the trade has been carried on by persons acting on his behalf. The correct mode of stating the proposition is to say that the same thing which entitles him to one makes him liable for the other, i.e., that the trade has been carried on his behalf; that he stood in the relation of principal. Every partner is an agent of the partnership, and his position is governed by the same rules as that of an agent. A partner virtually embraces the character of both a principal and agent.” Thus, the last essential of the definition lays down the fundamental principle that partners when carrying on the business of the firm are agents as well as principals. There is a creation of implied agency from the relationship of partners. Every partner who conducts the business of the firm, in doing so deemed in law to be the agent of another and all the partners are bound by the acts of each other.