Scottish Law Commission (Reports)

PART VI

THE AGENCY AND LIABILITY OF A PARTNER

Introduction

6.1     This Part deals with six issues relating to the way in which a partner binds the partnership and the secondary liability of partners for the debts and obligations of the partnership. The issues are (1) the agency of a partner, (2) the liability of the partnership for obligations incurred by a partner, (3) the nature of a partner's liability for partnership obligations, (4) the liability of the incoming partner, (5) the liability of the outgoing partner and (6) the liability of a person who appears to be, but is not, a partner - the apparent partner.
6.2     In our recommendations, we adapt the existing law to the introduction of separate legal personality. In so doing we seek to preserve the intimate involvement of partners in the partnership business and their immediate liability for partnership obligations. Apart from the changes which flow from continuity of partnership, the recommendations to modernise and clarify the law do not alter substantially the law relating to the agency and liability of a partner. We recommend however that several provisions of the 1890 Act relating to the agency of a partner and the liability of the firm should not be re-enacted as it is appropriate to leave such matters to the general law of agency which has developed since 1890.

The agency of a partner

Existing law

6.3     In English law a partner is the agent of the other partners.^[1] In Scots law a partner is the agent of the partnership.^[2] The difference is a consequence of the adoption of the aggregate approach in England and the entity approach in Scotland. The agency of a partner is a special form of agency which arises out of his status as partner and not out of a contract of agency with his principal.
6.4     The 1890 Act contains several provisions which specify the characteristics of the agency of a partner. Section 5 sets out the basic rules. A partner who acts within the scope of his actual authority (express or implied) will bind the partnership. A partner has implied authority to bind the partnership when he does anything which would be usual in the course of carrying on partnership business. Even if that implied authority has been revoked or limited, the partner will have apparent authority when he does things which amount to no more than carrying on the partnership business in the usual way unless the third party has knowledge of the lack of authority.^[3]
6.5     Section 6 provides that a partnership is bound by an act or instrument relating to the business of the partnership and done or executed in the firm-name by a partner or other person who is authorised to do so.^[4] Section 7 provides that a partnership is not bound by a partner's pledging the credit of the partnership for a purpose apparently not connected with the partnership's ordinary course of business, unless the partner was authorised to do so. Section 8 provides that a partnership may effectually restrict the power of a partner to bind the partnership by giving notice of the restriction to third parties. Section 15 provides that an admission or representation made by a partner concerning partnership affairs and in the ordinary course of its business is evidence against the partnership. Section 16 establishes a general rule that notice to a partner who acts in the partnership business of any matter relating to partnership affairs operates as notice to the partnership. That general rule does not apply, however, where the partner in question commits or consents to a fraud on the partnership.

Our provisional proposals

6.6     In the Joint Consultation Paper we proposed that where a partnership had separate legal personality a partner should be the agent of the partnership.^[5] We also proposed the re-enactment of the other provisions relating to agency with certain minor amendments.

Consultation

6.7     There was general support for the proposal to make a partner the agent of the partnership where the partnership had separate legal personality. The Inland Revenue, however, suggested that mutual agency was the justification for the existing rules on the taxation of partnerships and stated that it might be necessary to enact provisions similar to those in the Limited Liability Partnerships Act 2000 in order to preserve tax transparency. One consultee opposed the recommendation, arguing that the existing formula reflected the collective liability and the several liability of partners for partnership debts.
6.8     Several consultees suggested improvements to the presentation of the legal rules but only one of our recommendations for the re-enactment of the provisions provoked substantive comment.
6.9     The Institute of Chartered Accountants in England & Wales (ICAEW) took issue with our proposal to re-enact section 16 (which provides that notice to a partner is notice to the partnership). They expressed concern that section 16 had been interpreted in a way which caused problems to accountants' professional practice.^[6] They suggested that section 16 should be confined to legal notice given to the partnership and that it should exclude knowledge acquired by partners in the conduct of the partnership's professional and other activities. The Scottish Institute (ICAS) expressed similar concerns and pointed out that it was undesirable that all partners be deemed to be aware of confidential information about one client when dealing with another client's affairs. They suggested that the problems were particularly acute in audit and forensic investigation.

Reform recommendations

6.10     We recommend that a partner should be the agent of the partnership. We believe that mutual agency is not consistent with separate legal personality. Our approach is consistent with the Limited Liability Partnerships Act 2000^[7] and with RUPA.^[8] This achieves conceptual clarity. However, partners will continue to be liable to third parties, as they are now, for partnership debts and obligations.^[9] In particular, as discussed in Part VII below, we recommend that a creditor of a partnership may enforce a claim against the assets of a partner without first having to exhaust his remedies against the assets of the partnership.^[10]
6.11     We have taken the opportunity in preparing this report and the draft Bill to review the need for several of the provisions in the 1890 Act relating to the agency of a partner. Although there is an argument that it is convenient to include provisions of the general law of agency which affect partnerships, there have been developments in the law of agency since 1890 and we do not think that it would be either necessary or appropriate to try to reproduce within the Bill a full statement of the law of agency as it applies to partnerships.
6.12     Section 5 of the 1890 Act provides that every partner is an agent of the firm and his other partners and sets out the usual authority of the partner. We think that it is desirable to set out the ordinary scope of authority of a partner; and to state that, while the partners can limit that authority, such a limitation will be ineffective against those dealing with the partner unless brought to their attention. Section 6 is, as we have suggested, concerned with the actual authority of a partner. In our view, there is no need to re-enact this provision which can be left to the general law of agency and to the particular agreements which partners make with each other.
6.13     We have reconsidered our proposal to re-enact section 7 of the 1890 Act, which regulates the liability of a partnership where a partner uses the credit of the partnership for private purposes.^[11] We think that the provision is unnecessary. A partner has no implied authority to grant securities over partnership property to secure borrowing for his own purposes. Nor is such an act within a partner's apparent authority under section 5 of the 1890 Act as it would not be an act for carrying on in the usual way business of the kind carried on by the partnership. The rules in section 5 of the 1890 Act achieve the same result as section 7.
6.14     We think that there is no need to re-enact sections 8 and 15 of the 1890 Act. Section 8 provides that where a third person has notice that the partners have restricted the authority of a partner to bind the firm, any act by the partner in contravention of that restriction will not bind the firm in a question with that third person. In the modern law of agency this is simply an aspect of the rules relating to apparent authority: a third party who knows that an agent has no authority to transact cannot hold the principal bound as he has not relied on any representation of the agent's authority.^[12] Section 15 of the 1890 Act, which provides that a partner's admission or representation concerning the partnership affairs and made in the ordinary course of its business is evidence against the firm, may be viewed either as a special rule of evidence or as an aspect of the apparent authority of a partner. On either view the section does not take matters very far, and we do not consider that it needs to be repeated. It provides merely that the representation or admission is evidence against the firm. It was enacted at a time when there were strict rules against hearsay evidence which might have made the admissibility of such an admission questionable. Under the present rules of evidence both in England and Wales and in Scotland there can be no doubt about the admissibility of such a statement.
6.15     We have also reviewed our provisional proposal to re-enact section 16 of the 1890 Act in the light of the concerns which the two Chartered Accountants' Institutes have expressed. Section 16 provides:

Notice to any partner who habitually acts in the partnership business of any matter relating to partnership affairs operates as notice to the firm, except in the case of a fraud on the firm committed by or with the consent of that partner.

6.16     It appears that the provision is not confined to formal notice given to the partnership but can operate to impute to a partnership knowledge gained by a partner while acting in the partnership business. A literal reading of section 16 would support such a view and justify the concerns of the two Institutes. On a strict reading of section 16 unfortunate results could occur. Thus suppose that one partner in a professional firm gained knowledge while acting for client A. That knowledge would, as it happens, be very useful to client B. Another partner in the firm is responsible for client B's affairs and does not know that information. If a literal interpretation of section 16 were adopted, knowledge of that information would be imputed to the second partner, giving client B a claim in negligence against him, if the second partner did not advise him in the light of it. This cannot be right.
6.17     The courts have attempted to restrict the imputation to other partners of knowledge gained by one partner of his client's affairs. A partnership may, with its clients' express or implied consent, act for different clients while respecting the confidentiality of each.^[13] The courts have also sought to draw a distinction between knowledge "relating to partnership affairs" and knowledge relating to a client's affairs.^[14]
6.18     There is also some uncertainty about the scope of the fraud exception at the end of section 16. It is consistent with the general law of agency that the knowledge of a partner who is guilty of a fraud on the firm is not imputed to the partnership.^[15] But two questions arise. First, it is not clear why a formal notification made by a third party to a partner should not be effective notice to the firm where the third party was unaware that the partner was fraudulent.^[16] Secondly, even on a broad interpretation of "fraud", it is unlikely that the term would cover circumstances where a partner was acting beyond his powers or was in breach of his duty to disclose to his partners what he had done.^[17] It appears therefore that section 16, which was intended to reflect the general rules of agency,^[18] has thus separated partnership from the continuing development of the general principles of agency by confining the exception to fraud. As a result textbook writers on partnership law have warned that one must be cautious about treating cases on agency outside the ambit of partnership as authoritative in partnership law.^[19]
6.19     The general law of agency takes a more nuanced approach to the imputation of knowledge. It makes allowance for confidential information and it would more readily allow the distinction to be drawn between knowledge relating to partnership affairs and knowledge relating to a client's affairs and thus avoid the absurdity to which we referred above.^[20]
6.20     Bowstead & Reynolds summarise the law on the imputation to a principal of knowledge gained by an agent in the following terms:^[21]

(1) A notification given to an agent is effective as such if the agent receives it within the scope of his actual or apparent authority, whether or not it is subsequently transmitted to the principal, unless the person seeking to charge the principal with notice knew that the agent intended to conceal his knowledge from the principal.

(2) The law imputes to the principal and charges him with all notice or knowledge relating to the subject-matter of the agency which his agent acquires or obtains while acting as such agent.^[22]

(3) Where an agent is authorised to enter into a transaction in which his own knowledge is material, or where the principal has a duty to investigate or make disclosure, the knowledge of the agent may be attributed to the principal whether it was acquired in connection with the agency or not.

6.21     We have come to the view that a re-enactment of section 16 of the 1890 Act would do more harm than good: it would preserve both the problem that a literal interpretation would lead to unacceptable results and the separation of partnership law from the general law of agency in relation to the imputation of knowledge. We see no need to re-enact section 16 and believe that the giving of notice and imputation of knowledge to a partnership are best left to the general law of agency.^[23]
6.22     We therefore recommend:

(1) That a partner should be the agent of the partnership and not the partners; (Draft Bill, cl 6(3))

(2) That a partnership should be bound by anything done by a partner for carrying on in the usual way business of the kind carried on by the partners; (Draft Bill, cl 16(1))

(3) But that a partnership should not be bound if the partner has no authority to do the thing on behalf of the partnership, and the person with whom he is dealing has notice of his lack of authority or does not know or believe him to be a partner in the partnership; (Draft Bill, cl 16(2))

(4) That the rules in (2) and (3) above are subject to the provisions of the draft Bill on the execution of deeds in England and Wales.^[24] (Draft Bill, cl 16(3))

The liability of the partnership for obligations incurred by a partner

Existing law

6.23     A partnership is bound by the acts of a partner through the agency of a partner as discussed in the preceding paragraphs. The 1890 Act also contains provisions on the liability of the partnership: (a) for wrongs committed by a partner (s 10); (b) for the misapplication of money or property received for the partnership or in its custody (s 11); and (c) in relation to the improper employment of trust property for partnership purposes (s 13).
6.24     The liability of a partnership for the wrongs committed by a partner does not extend to liability for loss or injury caused to another partner in the same partnership.^[25]

Our provisional proposals

6.25     In the Joint Consultation Paper we did not suggest radical changes to these provisions. We provisionally proposed however that it should no longer be the law that a partnership is not liable for loss or injury caused by one partner, acting with authority or in the ordinary course of the partnership's business, to another partner.^[26] We also proposed a minor alteration to section 13 to cater for the separate legal personality of a partnership.

Consultation

6.26     There was broad support for the proposal to extend the liability of a partnership to wrongs committed by one partner which caused loss and injury to another partner. But several consultees expressed concern over possible circularity as a wronged partner would ultimately bear a share of the liability to himself. One consultee expressed concern over insurance arrangements of a partnership. Another consultee suggested that it was sufficient that the partner who committed the wrong was liable.
6.27     Among the consultees who addressed the issue there was almost unanimous support for the proposal to amend section 13^[27] to cater for separate personality. One consultee, however, pointed out that section 13 addressed only English law and was not apt for the equivalent Scots law rules of unjustified enrichment and delict.

Reform recommendations

6.28     We have reconsidered our approach to the liability of the partnership for wrongs committed by a partner on another partner. The issue is closely linked to the nature of the duty of care which a partner owes to the partnership and to his partners. Since the consultation exercise we have revised our views on whether there should be a statutory default rule defining the duty of care which a partner owes to the partnership and his partners. We now recommend that there should not be a statutory statement and that the issue of the duty of care should be left to the general law.^[28]

Vicarious liability of the partnership in tort or delict

6.29     We think that the partnership should be liable for the wrongs committed by a partner which cause loss or injury to any person who is not a partner in that partnership.^[29] This is the existing law.^[30] In addition we think that the partnership should also be vicariously liable for loss and injury, which is so caused, to a partner in the partnership.

Liability for loss to a partner

6.30     The types of loss for which a partnership should be vicariously liable will be determined by the general law. They include a partner's personal injury or death caused by another partner acting in the ordinary course of the partnership's business or with the authority of the partnership.^[31] In addition there is no reason why a partnership should not be liable for physical damage done by one partner in the course of partnership business to the private property of another partner. For example, a partner might damage another partner's car through carelessness in parking his car in the partnership's car park.^[32] Similarly there is no reason why a partnership should not be liable for economic loss caused to a partner, other than loss to the value of the partner's share in the partnership. It would, however, be incongruous to make the partnership vicariously liable for a wrong committed by a partner against the partnership or the other partners where the loss caused by the wrong was simply a reduction in the value of the other partners' shares in the partnership. There the loss would be that of the partnership and the partner's loss would be derived from the firm's loss. We think therefore that the vicarious liability of the partnership for damage to the property of another partner would not include financial loss through the diminution of the other partner's interest in the partnership.

The provision of free or cut-price services

6.31     Circumstances may arise where one partner undertakes professional services for another partner, for example in providing advice or selling and conveying his home. Why, it is asked, should the partnership not be liable for professional negligence which causes economic loss to the other partner in that context? We think that liability would depend on a proper analysis of the basis on which the services were provided on the particular facts of the case.^[33]
6.32     For example, if one partner gets another to carry out work on his behalf gratuitously and as a favour, it is not evident that the partner carrying out the work is assuming personal responsibility to his partner for the work in question. But where the partner instructing the work asks his partner to treat him as if he were a client and the partner carrying out the work agrees to do so, it is easier to infer that the partner carrying out the work has undertaken a duty of care to his partner in carrying out the transaction. This duty would be different from those which arise as a result of the parties' relationship as partners. In such circumstances we think that the partnership would be vicariously liable for the economic loss which one partner causes the other through lack of reasonable care in advising him or carrying out the transaction. This, in turn, is because the partner in the ordinary course of business or with the authority of the partnership has taken on a duty of care to the other partner.^[34]
6.33     We propose that the unlimited liability of partners for the obligations of the firm should exclude only liability for purely internal obligations of the partnership to present and former partners (liabilities of the partnership to a partner in his capacity as such); and that the internal rights of indemnity or contribution of a partner against the firm and other partners should be the subject of default rules. These are discussed below.^[35]

Liability for penalties

6.34     Section 10 of the 1890 Act also provides that the partnership is liable for any penalty incurred by the wrongful acts and omissions of a partner acting in the ordinary course of business or with the authority of the partners. These penalties could cover both professional disciplinary penalties and also criminal penalties. We have considered whether it is appropriate that a partnership under English law should be capable of committing a criminal offence and have concluded that it should not unless a statute expressly provides otherwise.^[36] If therefore the norm is that a partnership is not criminally responsible, it would be odd for it to be responsible for penalties imposed on partners who were so responsible. While there are penalties which are not connected to criminal offences, for example penalties imposed by professional and other regulatory bodies, it will be a matter for the construction of the individual regulation as to how it impacts on a partnership and the partners. In these circumstances we do not recommend re-enactment of section 10.^[37]
6.35     We recommend therefore that a partnership should be vicariously liable to another person for loss or injury caused by the wrongful act or omission of any partner acting in the ordinary course of the partnership business or with the actual authority of the partnership. (Draft Bill, cl 22)

Vicarious liability of the partnership for misapplication of property by a partner

6.36     Since the preparation of the Joint Consultation Paper we have reconsidered judicial decisions on the liability of a partnership for wrongs and for money and property received and have revised our views on whether it is necessary to re-enact sections 11 and 13 of the 1890 Act.
6.37     In Bass Brewers Ltd v Appleby,^[38] Millett LJ explained the difference between sections 11 and 13 of the 1890 Act as follows:

Section 11 deals with money which is properly received by the firm (or by one of the partners acting within the scope of his apparent authority) for and on behalf of the third party but which is subsequently misapplied. The firm is liable to make good the loss. Section 13 is concerned with money held by a partner in some other capacity, such as trustee, which is misapplied by him and then improperly and in breach of trust employed by him in the partnership business. His partners can be made liable only in accordance with the ordinary principles of knowing receipt.^[39]

6.38     In Dubai Aluminium Company Limited v Salaam,^[40] the Court of Appeal held that a partnership's liability for wrongful acts and omissions under section 10 of the 1890 Act extended to knowing assistance of breach of trust and that it was not restricted to torts.^[41] In the House of Lords,^[42] Lord Millett agreed with the Court of Appeal in rejecting the argument that section 10 was confined to torts or other common law wrongs. He emphasised that section 10 assimilated the vicarious liability of partners to that of employers and suggested that it would be absurd if a professional firm were vicariously liable for the acts of an employee but would not be liable if the same acts had been committed by a partner. He stated:

Wisely, and no doubt deliberately, section 10 was drafted in the widest terms to embrace every kind of wrong capable of causing damage to non-partners, so that there was no danger that the vicarious liability of partners (unlike that of employers) might be ossified by the terms of the statute and fail to keep step with future developments.^[43]

6.39     Lord Millett rejected the appellants' argument that section 10 was concerned with liability in tort while sections 11 and 13 dealt with liability in equity. He said:

Sections 11 and 13 are not concerned with wrongdoing or with vicarious liability but with the original liability of the firm to account for receipts. I explained the difference between the two sections in Bass Brewers Ltd v Appleby [1997] 2 BCLC 700 at 711. Section 11 deals with money which is properly received by the firm in the ordinary course of its business and is afterwards misappropriated by one of the partners. The firm is not vicariously liable for the misappropriation; it is liable to account for the money it received, and cannot plead the partner's wrongdoing as an excuse for its failure to do so. Section 13 deals with money which is misappropriated by a trustee who happens to be a partner and who in breach of trust or fiduciary duty afterwards pays it to his firm or otherwise improperly employs it in the partnership business. The innocent partners are not vicariously liable for the misappropriation, which will have occurred outside the ordinary course of the firm's business. But they are liable to restore the money if the requirements of the general law of knowing receipt are satisfied.

…The critical distinction between section 10 on the one hand and sections 11 and 13 on the other is not between liability at common law and liability in equity, but between vicarious liability for wrongdoing and original liability for receipts. The firm (section 10) and its innocent partners (section 12) are vicariously liable for a partner's conduct provided that three conditions are satisfied: (i) his conduct must be wrongful, that is to say it must give rise to fault-based liability and not, for example, merely receipt-based liability in unjust enrichment; (ii) it must cause damage to the claimant; and (iii) it must be carried out in the ordinary course of the firm's business.^[44]

6.40     We consider that the circumstances which section 11 covers – the receipt by a partner acting within the scope of his apparent authority or the receipt by the firm in the course of its business and the subsequent misapplication by a partner of the received money or property – are circumstances which would give rise to liability on the part of the firm in the general law. In each case the partnership will be answerable for the money or property which it or its agent received. We see no need to re-enact section 11.
6.41     In Walker v Stones^[45] the Court of Appeal decided that it was not possible for a partnership to be vicariously liable under section 10 for breach of an express trust by one partner as this would contradict section 13; breaches of trust must fall outside the ordinary business of any partnership. If section 10 were to apply, it would presuppose that individual trusteeships which a partner may undertake are in the ordinary course of the business of a partnership and that would cover the exact situation described in section 13. The Court of Appeal recognised that it might appear anomalous that when a partner acts as a trustee he is not necessarily treated as acting in the ordinary course of business but pointed out that sections 10 to 13 applied to all partnerships and not merely solicitors' partnerships.^[46]
6.42     In so far as the Court in Walker v Stones has held that breaches of trust by a partner are outside section 10, we respectfully disagree. The Court of Appeal felt constrained to reach what we regard as an unfortunate result because of its reading of section 13. We think that many breaches of trust give rise to fault-based liability. Section 13 applies only where a partner who is a trustee takes money in breach of trust and introduces it into the partnership. We think that it is unlikely that such a breach of trust would be committed "in the ordinary course of business" and give rise to vicarious liability of the partnership under section 10.^[47] Section 13 does not apply where money is held by the partnership, one partner becomes a trustee of it and then breaches the trust.^[48]
6.43     We see no need to re-enact section 13. Either (as we think) it merely states the law of knowing receipt, in which case it is unnecessary, or (contrary to our view) it produces the result which the Court of Appeal felt constrained to reach in Walker v Stones, in which case it is undesirable. Nor is the re-enactment of section 13 necessary for the purposes of Scots law.
6.44     In Scots law the obligation to make restitution is a duty imposed by law to reverse unjustified enrichment. In Shilliday v Smith,^[49] the Lord President (Rodger) stated:

A person may be said to be unjustly enriched at another's expense when he has obtained a benefit from the other's actings or expenditure, without there being a legal ground which would justify him in retaining that benefit. The significance of one person being unjustly enriched at the expense of another is that in general terms it constitutes an event which triggers a right in that other person to have the enrichment reversed.^[50]

6.45     Where such unjustified enrichment arises, Scots law allows remedies to be devised to reverse the enrichment.^[51] It has not developed detailed doctrines such as knowing assistance and knowing receipt.^[52]
6.46     In English law the doctrines of knowing assistance and knowing receipt have been developing in recent years and may undergo further change. In Scotland also the law relating to unjustified enrichment has recently developed.^[53] We think that it would not be appropriate to crystallise in statutory words the present state of the law as that would hamper further development in these fields.

The liability of partners for the obligations of the partnership

Existing law

6.47     In English law partners are jointly liable with one another for the obligations of a partnership.^[54] In Scots law they are jointly and severally liable.^[55] In both jurisdictions a creditor of the partnership can recover a partnership debt by enforcement against a partner's assets without first enforcing against and exhausting the assets of the partnership.
6.48     In Scotland, where a partnership has separate personality, in theory the partnership is the primary obligant and the partners have a subsidiary liability. In Mair v Wood^[56] the Lord President (Cooper) gave this description of partners' liability:

Partners are of course liable jointly and severally in a question with a firm creditor for the obligations of the firm, but the theory of Scots law views them as being so liable only subsidiarie, the partners being in substance guarantors or cautioners for the firm's obligations, and each being entitled on payment of a firm debt to relief pro rata from the others.

Our provisional proposals

6.49     In the Joint Consultation Paper we proposed that partners in both jurisdictions should be jointly and severally liable for the debts and obligations of the partnership. We also proposed the abolition of the anomalous rule of English law that the liability of the estate of a deceased partner for partnership debts is subject to the prior payment of the deceased partner's separate debts.^[57]
6.50     Our major proposals were:

(1) that if separate legal personality were introduced the partnership should have primary liability and the partners' liability should be secondary;

(2) that creditors of a partnership should normally be required to obtain a judgment against a partnership before enforcing their claims against the assets of a partner but that they should not have to litigate twice nor should they be required to exhaust enforcement remedies against the assets of the partnership before enforcing the judgment against the partner's assets; and

(3) that a partner satisfying a claim against the partnership should have the right to be indemnified by the partnership, failing which, to the extent that he has paid more than his due proportion, he should have the right to a pro rata contribution from the other partners.^[58]

Consultation

6.51     Among English consultees there was strong support for making partners' liability joint and several and for the abolition of the anomalous postponement of partnership creditors' claims against the estate of a deceased partner.
6.52     There was also strong support for the introduction of subsidiary liability of partners in the context of separate legal personality in English law. But some consultees, who were opposed to legal personality, thought that the issues raised showed the unnecessary complexity of the entity approach to partnership. One consultee suggested that a requirement to look first to the entity before pursuing a partner might enable a miscreant partner to use separate personality to defeat the claim. Some consultees suggested that there should be procedural safeguards to protect the interests of partners.^[59] We address these issues in more detail in Part VII below.^[60]
6.53     Our proposal that the partnership creditor should not have to exhaust enforcement remedies against the assets of the partnership before enforcing the judgment against the assets of a partner is an important attribute of the separate legal personality which we proposed.^[61] Almost all Scottish consultees supported it. It was also generally supported by English consultees, although some consultees thought that it undermined the separate personality of the partnership. Again we discuss this in more detail in Part VII below.

Reform recommendations

6.54     We have considered the concerns of the minority of consultees about the nature of a partner's liability for partnership debts and obligations. The introduction of separate legal personality with the characteristics which we proposed will not give a partner a basis either for defeating a claim against him or for seeking postponement of enforcement against his assets. Our proposals will allow a creditor to proceed directly against the assets of a partner without first having to exhaust his remedies against the assets of the firm. In Part VII we propose that a creditor of a firm who seeks to enforce the debt against the assets of a partner or former partner should obtain judgment against that partner or former partner. The creditor can do this either by calling the partners as defendants in the action against the firm or by making a subsequent claim. That apart, creditors will have immediate recourse against partners' assets to enforce partnership debts.
6.55     We have not followed the approach of RUPA which requires a creditor of a partnership to enforce judgment against and exhaust partnership assets before levying execution against a partner's assets unless the court otherwise grants permission.^[62] RUPA provides that a partnership creditor may not levy execution against the assets of a partner unless either (a) the partnership has failed to satisfy a writ of execution against it, (b) the partnership is bankrupt, (c) the partner has agreed that the creditor need not exhaust partnership assets or (d) the court in its discretion grants permission to do so.^[63]
6.56     In our view, it is consistent with partnership law and practice in both of the British jurisdictions, and with the expectations both of partners and partnership creditors, that a creditor should have immediate recourse against a partner's assets. There was very limited support among consultees for changing this. To do so would significantly alter an important characteristic of partnership law in Great Britain. In the absence of demand to do so, we see no need for reform. It is against this background that we make our recommendations on the nature of a partner's liability for partnership debts and obligations.
6.57     It is a fundamental concept that the partners in a general partnership have unlimited liability for the obligations incurred by the partnership while they are partners. By contrast a limited partnership must have one or more general partners each of whom has unlimited liability and one or more limited partners each of whom has limited liability. We discuss the liability of the general partner and the limited partner in Parts XVI and XVII below. As the draft Bill covers both general partnerships and limited partnerships,^[64] we think that it is appropriate to have a statement of the liability of partners early in the Bill.

Partners' liability

6.58     We think that each partner should be liable for the whole amount of all debts and obligations of the partnership. Under our recommendations relating to contribution and indemnity, the liability of the partners for partnership obligations is joint and several liability.^[65] However, although a partnership creditor may seek payment in full from the firm or from any one of the partners, so that from the viewpoint of the creditor there is joint and several liability,^[66] the relationship between the partners and the firm has certain special features. There are three aspects to this. First, as we discuss in Part VII, the liability of a partner is secondary: the partnership creditor must establish the existence and amount of the firm's liability in the same or earlier proceedings. Secondly, the partner who pays the firm's debt is entitled to an indemnity from the partnership. The firm on the other hand is not entitled to an indemnity from the partners. Thirdly, while the partner who pays the firm's debt is entitled to contribution from the other partners who had secondary liability for that debt, the firm on paying its debt would not be entitled to contribution from the partners.
6.59     We recommend therefore that:

(1) It should be provided (a) that each of the partners in a general partnership has unlimited liability and (b) that a limited partnership must have one or more general partners, each of whom has unlimited liability, and one or more limited partners, each of whom has limited liability; (Draft Bill, cl 3)

(2) Each partner who has unlimited liability is personally liable for the whole amount of the debts and obligations of the partnership and his payment in discharge of that liability discharges the firm's obligation and the personal liability of any other partner for that obligation to the same extent. (Draft Bill, cl 23(1), (3), (4) and (5))

A partner's right to indemnity from the partnership

6.60     As a default rule, a partner who meets a partnership liability will be entitled to indemnity from the partnership. This is the position under the existing law.^[67] We consider that a partner should be entitled to be indemnified by the partnership where he reasonably and in good faith discharges a debt which he believes to be a partnership obligation. This is probably the existing law.^[68] We discuss this in Part X below.^[69] Similar rules should apply where a partner pays out money in the proper conduct of the partnership business, for example, in using his private funds to purchase stock for the partnership, or expends funds to preserve the partnership business or property. This is again the existing law.^[70] The paying partner should be entitled to an indemnity from the firm. The indemnity should not prevent the firm and the other partners from pursuing claims against the paying partner in relation to any wrong he may have committed against them.

A partner's right to contribution from other partners

6.61     We also have to consider the question of the mutual rights and liabilities of the partners between themselves if the partnership does not meet a liability which it owes to a partner. Examples include where the firm fails to pay an indemnity to which a partner is entitled (as discussed in the previous paragraph) or where a partner has a claim against the partnership in respect of a loan to the firm or his undrawn share of the profits of the firm and the partnership is unable to pay the debt.
6.62     The general rule that a partner has personal liability for the whole of any partnership obligation incurred while he is a partner requires to be qualified in relation to partnership obligations owed to a partner or former partner. Otherwise the general rule would clash with the agreements entered into between the partners or between partners and former partners for contribution and indemnity in relation to partnership obligations and the sharing of partnership losses.^[71] Partners should be free to determine such matters as between themselves. Thus to ascertain the liability of a partner to make contribution to or indemnify another partner or a former partner one looks to the contract between the parties, failing which to the default code.
6.63     Where a partner makes a payment in settlement of a partnership obligation to a third party (including a payment in reasonable settlement of his alleged personal liability for a partnership obligation) but is not repaid or fully repaid by the partnership, the partner will – as a default rule – be entitled to contribution from the other partners who were liable for the obligation in question. While the firm is able to indemnify the partner, he will normally seek reimbursement of his outlays from the partnership's assets without having to call on his partners to contribute. However, where, for example, the firm is temporarily short of cash or the partners think it expedient not to withdraw funds from the partnership, the partner who has paid should be able to demand a contribution from the other partners who were liable for the obligation. The partner who meets the partnership liability (A) will be entitled to contribution from the other partners (B and C) in the same proportions as B and C are liable to bear partnership losses. If those partners (B and C) make a contribution to the partner who has paid (A), they in turn should be entitled, in the default regime, to indemnity from the firm in respect of their contribution and A, B and C can obtain reimbursement of their contributions when the firm has the means to pay. But if C is insolvent, A should be entitled to fifty per cent contribution from B, but A and B would both retain the right to contribution from C. This is the same rule as applies between co-guarantors where a guarantor is insolvent.^[72]
6.64     Similarly if a partner pays out money in the proper conduct of the partnership business but is not repaid by the partnership, or if the partnership fails to pay to a partner any other amount for which it is liable to account to him, the other partners should be liable - as a default rule - to contribute in the same proportions as if the amount were a partnership loss.
6.65     We therefore recommend that:

(1) There should be the following default rules:

(a) That a partner should be entitled to an indemnity from the partnership in respect of (i) any payment made by him in the proper conduct of the partnership business or in connection with anything necessarily done to preserve the partnership business or property and (ii) any payment which he has made towards the discharge of his personal liability for a partnership obligation or in reasonable settlement of an alleged personal liability for a partnership obligation; (Draft Bill, cl 12(3))

(b) That the indemnity under (a) above should not affect any claim which the partnership or another partner may have against the partner; (Draft Bill, cl 12(4))

(c) That if the partnership does not pay the indemnity under (a) above, the partner should be entitled to contribution from any other liable partner on the same basis as if the amount unpaid were a debt for which he and each other liable partner were co-guarantors in the same proportions as they would be liable to pay any partnership losses; (Draft Bill, cl 12(5))

(d) That partner A may claim against partner B as an "other liable partner" under (c) above (i) in the case of A's liability (or alleged liability) for a partnership obligation, if B was a partner when the payment was made and was liable with A for the obligation (or, in the case of settlement of an alleged liability, would have been liable if the alleged liability had been established) or (ii) otherwise, if B was a partner when the payment was made; (Draft Bill, cl 12(6))

(e) That if a firm wrongly fails to pay to a partner any other amount (for example, a loan due to the partner) for which it is liable to account to him, the partner should be entitled to contribution from the other partners in the same proportions as if the amount were a partnership loss; (Draft Bill, cl 12(7))

(f) That the personal liability for a partnership obligation in respect of which a partner may claim indemnity or contribution should include not only the partner's liability under (a)(ii) above but also his liability to contribute under (c) or (e) above and his liability to indemnify or make a contribution to a former partner;^[73] (Draft Bill, cl 12(8))

(2) That in order to allow partners to agree their obligations amongst themselves, the rule that a partner is personally responsible for the whole amount of any partnership obligation incurred while he is a partner (clause 23(1) of the draft Bill) should not apply to a partnership obligation owed by a partner (A) to a partner or former partner (B) if the partnership agreement or any other agreement to which A and B are parties makes provision about whether or not B is entitled to indemnity or contribution from A in respect of the obligation; (Draft Bill, cl 23(2))

The liability of the incoming partner

Existing law

6.66     Under section 17 of the 1890 Act a person who is admitted as a partner into an existing partnership does not thereby become liable to the creditors of the partnership for anything done before he became a partner.
6.67     In practice, however, it is common on a change of membership for a partnership to give an indemnity to an outgoing partner. We understand that it is less common for an incoming partner to give an express indemnity to an outgoing partner who has left the partnership or who leaves at the same time as the incomer joins. But if the "new" partnership, which includes the incoming partner, gives such an indemnity,^[74] the incoming partner's assets will therefore indirectly be exposed to a prior creditor's claims. In any event, if the "new" partnership pays prior creditors in the ordinary course of business, the expense of meeting those obligations may reduce the value of the incoming partner's interest in that partnership.

Our provisional proposals

6.68     In the Joint Consultation Paper we did not propose any change to section 17(1) of the 1890 Act. We agreed with the principle that a new partner does not become liable for existing obligations merely by being admitted into a partnership. We suggested that the principle was well adapted to a partnership which was a continuing legal personality.^[75]
6.69     We pointed out that any capital contributed by the incoming partner would be available to meet the partnership's liability. The partnership, as a continuing entity, would be liable to creditors whose claims arose before the incoming partner joined the partnership. Thus the incoming partner's capital contribution, as a partnership asset, would be available to prior creditors but, in accordance with the principle, his personal assets would not.^[76]

Consultation

6.70     As we proposed no change to the principle, we made no formal proposition and did not ask a question to which consultees could respond. Nevertheless, the issue of the liability of the incoming partner was raised by some consultees in their response to (a) separate legal personality and (b) the default rule under which legal personality continues on a change of partners.
6.71     One consultee opposed continuing legal personality and viewed the right of a creditor to enforce against the partnership's assets as a major change in the law because the capital of the incoming partner would be available for the use of pre-admission creditors (that is to say creditors of the "old" partnership). The consultee thought that this would discourage people from taking up offers of partnership. It also said that the proposal would require the incoming partner to conduct an exercise of "due diligence" and suggested that inchoate negligence claims would be a further complication.
6.72     Another consultee suggested that if continuing legal personality were introduced the existing partners would have to give an indemnity to the incoming partner to protect his assets from prior claims.^[77]

Reform recommendations

6.73     We recommend no change to the principle enshrined in section 17(1) of the 1890 Act: admission into a partnership will not, of itself, expose the private assets of the incoming partner to the claims of creditors in respect of existing obligations.^[78] In accordance with the existing law, however, the incomer's private assets will be exposed indirectly to the claims of prior creditors if the partnership of which he is a member grants an indemnity to an outgoing partner.^[79]

The incoming partner's capital

6.74     We recognise that the introduction of a default rule of continuing legal personality will place the capital invested by the incoming partner at risk to the claims of prior creditors. But we are not persuaded that this is in reality a major innovation. Under existing English law (and on one view Scots law) the protection of the incoming partner's capital may in many cases be theoretical more than real.
6.75     The starting point under the existing law is that the "new" partnership, which is created on a change of membership of the firm, takes over the business of the "old" partnership. This involves the "new" partnership taking over the assets of the "old" partnership and (in most cases) its liabilities. The "new" partnership on paying out the retiring partner will normally have given him an indemnity against all liabilities of the firm when he made over his interest in the partnership to the continuing partners.^[80] Even if no indemnity is given in the deal to pay out an outgoing partner, the "new" partnership often pays off the liabilities of the "old" partnership in the ordinary course of business as and when they fall due. It will only be when the "new" partnership is unable to pay those debts from its assets that creditors of the "old" partnership are likely to initiate litigation to pursue their claims against the personal estates of the partners of the "old" partnership. Often some of those partners will also be partners in the "new" partnership.^[81] If the partners of the "old" partnership who are also partners in the "new" partnership are not able to meet the claims either of the creditor or of a former partner under his indemnity, the viability of the "new" partnership will be threatened. In that event the incoming partner's capital will be put at risk.^[82]
6.76     There may be circumstances in which partners of the "old" partnership and the partners of the "new" partnership ring-fence the liabilities of the "old" partnership. But even then the problem of the insolvency of the "old" partners who are also partners in the "new" partnership remains, with its adverse effect on the viability of the "new" partnership. If the incoming partner wishes to protect his capital investment in the "new" partnership, the safe way to do so is for there to be a genuine new partnership which purchases the assets of the old partnership which is then wound up. In such circumstances the incoming partner's capital is safe under both the existing law and the reforms which we recommend.
6.77     Nor are we persuaded that the exposure of the incoming partner's capital will deter people from joining partnerships. Since 1914, partnership law in the United States of America has exposed the capital contribution of incoming partners to the claims of prior creditors.^[83] We are not aware from our discussions with American lawyers that this has been a significant disincentive to joining partnerships.
6.78     We see no need to provide any further protection to the capital of the incoming partner. In any event, the incoming partner often faces a bigger problem under the existing law when a senior partner retires and is paid out. If the "new" partnership gives the outgoing partner an indemnity either expressly or impliedly when buying out his share, the newly-joined partner takes on liability for the pre-existing debts through the medium of that indemnity.^[84]

The date when an obligation is incurred

6.79     Section 17 of the 1890 Act speaks of the incoming partner not incurring liability for "anything done before he became a partner". We intend to replicate this regime by providing that a partner is personally liable for partnership obligations incurred while he is a partner. Thus if the partnership entered into a contract before he became a partner, he would not incur secondary liability in relation to the contract.^[85] Similarly if an act or omission which occurred before he became a partner gave rise to loss and thus to a claim against the partnership after he had joined the firm, he would not incur secondary liability in relation to that claim.^[86]
6.80     We therefore recommend that:

(1) The rule in section 17(1) of the 1890 Act that an incoming partner who joins an existing partnership does not thereby become liable to the creditors of the partnership for partnership obligations incurred before he became a partner should be re-enacted (but the capital invested by an incoming partner in an existing partnership will be available to meet prior debts); (Draft Bill, cl 23(1)) and

(2) In this context an obligation of the partnership which results from the (a) breach of a duty in tort or delict (including quasi-delict) (b) breach of trust or (c) breach of a fiduciary duty should be treated as having been incurred at the time of the act or omission which gave rise to the breach. (Draft Bill, cl 23(7))

The liability of the outgoing partner

Existing law

Liability for pre-retirement debts

6.81     A partner who retires from a partnership does not thereby cease to be liable for partnership debts or obligations incurred before his departure.^[87] The outgoing partner can be released from such obligations by agreement with the other partners and the creditors of the partnership.^[88]

Liability for post-retirement debts

6.82     The operation of the doctrine of apparent authority has the effect that an outgoing partner will be liable for obligations incurred by his former partners after he leaves the partnership unless he gives notice of his withdrawal to any third party with whom the former partners deal. Section 36 of the 1890 Act distinguishes between persons who had dealings with the partnership before the partner withdrew and those who did not. A withdrawing partner removes the apparent authority of his former partners in a question with the latter simply by advertising his withdrawal in the appropriate Gazette.^[89] If a person was known by a creditor to be a partner before retirement, the withdrawing partner must give actual notice of retirement if the creditor has had previous dealings with the old partnership.^[90]

Liability through "holding out"

6.83     A person who has withdrawn from a partnership but who allows himself to be represented as a partner in the partnership may incur liability to anyone who acts in reliance on that representation.^[91]

Our provisional proposals

6.84     In the Joint Consultation Paper we suggested that the policy of the existing law was sound. We suggested that section 17(2) and (3) of the 1890 Act should apply not just to a retiring partner but to all outgoing partners. We also provisionally proposed that the protection against liability arising out of the continued use of a firm-name or of an outgoing partner's name as part of a firm-name should be available to all outgoing partners. We discuss this latter issue below.

Consultation

6.85     There was overwhelming support for the proposal to extend section 17(2) and (3) to all outgoing partners. Several consultees suggested that this was already the law. One consultee questioned the need for section 17(3) in Scots law. The provision was only required to address the English law doctrine of consideration. Consultees supported the introduction of a provision that an agreement to release an outgoing partner from further liability is not a contract which needs to be supported by valuable consideration.

Reform recommendations

6.86     We think that the law on this subject is generally satisfactory but that there is room for modernising the rules in relation to the liability of a former partner which arises as a result of his being held out as a partner. In particular we are not persuaded that advertisement in the appropriate Gazette is an effective means of giving notice of a partner's withdrawal. We discuss these issues below.^[92] In relation to the rules which are currently section 17(2) and (3) of the 1890 Act we recommend two minor changes. We make our recommendation in relation to the use of the firm-name in our discussion of the liability of the apparent partner below.^[93]
6.87     First, we propose that the rules of section 17(2) and (3) should apply to all outgoing partners. This is probably already the law. Secondly, we think that there is no need to provide that it is possible for an outgoing partner, the continuing partners and creditors of the partnership to agree to discharge the outgoing partner. This is the general law. Rather, the provision should be re-framed as a rule that in English law such a contract does not need to be supported by valuable consideration.^[94]
6.88     We therefore recommend:

(1) That a person who ceases to be a partner does not thereby cease to be liable for partnership obligations incurred while he was a partner; (Draft Bill, cl 33(1))

(2) That, for the purposes of the draft Bill, a partnership obligation which results from a breach of a duty in tort or delict (including quasi-delict), a breach of trust or breach of a fiduciary duty should be treated as having been incurred at the time of the act or omission which gave rise to the breach; (Draft Bill, cl 23(7)) and

(3) That a person who ceases to be a partner may be discharged from personal liability for a partnership obligation by an agreement between himself (or his estate), the partnership and the creditor of the partnership without requiring valuable consideration in English law. (Draft Bill, cl 33(3) and (4))

The liability of the apparent partner

Existing law

6.89     We have mentioned above the rule that a person who deals with a partnership after a change in its membership is entitled to treat all apparent partners as still being members of the firm until he has notice of the change, and the provision for advertisement in the appropriate Gazette.^[95] Both are currently contained in section 36 of the 1890 Act. Section 14(1) of that Act contains further provision on holding out, providing that:

Every one who by words spoken or written or by conduct represents himself, or who knowingly suffers himself to be represented, as a partner in a particular firm, is liable as a partner to anyone who has on the faith of any such representation given credit to the firm, whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or suffering it to be made.

6.90     This is a statutory application of the doctrine of estoppel or, in Scotland, personal bar.
6.91     In the Joint Consultation Paper we discussed the difficulty of ascertaining when it could be said that a person "knowingly suffers himself" to be represented as a partner but we did not propose any change in this rule.^[96]
6.92     Section 14(2) of the 1890 Act also provides that the continued use of a firm-name or of a deceased partner's name as part of a firm-name of itself does not make his personal representatives liable for any partnership debts contracted after his death.

Our provisional proposals

6.93     We provisionally proposed that section 14(2) of the 1890 Act should be extended so that the continued use of a firm-name or of an outgoing partner's name as part of a firm-name should not of itself make the outgoing partner liable for any partnership debts contracted after he left the partnership.^[97]

Consultation

6.94     Several consultees expressed views on the expression of the rule on holding out in section 14(1) of the 1890 Act. One consultee suggested that the provision was obscure and should be reworded. He also expressed concern about the effect of holding out on a "salaried partner" who might be unaware of his exposure by such holding out.^[98] Another consultee suggested that the provision be extended to cover joint business ventures which were not partnerships but which held themselves out as such. As section 14 presupposes the existence of a partnership, it does not include joint business ventures which are not partnerships but the principle of joint and several liability should apply to the parties to such ventures. Another consultee suggested that the provision did no good and that it could do harm. He advised that the matter be left to the common law of personal bar.
6.95     There was general support for the proposal to protect the outgoing partner from liability through holding out by the use of the firm-name after he left the partnership. In England, two consultees opposed the proposal, suggesting that the section 14(2) protection should remain confined to deceased partners as they could not suffer themselves to be represented as anything, while living partners who had withdrawn from the partnership could. In Scotland one consultee opposed the proposal, arguing that the issue could be left to the common law of personal bar.

Reform recommendations

6.96     As section 14(1) of the 1890 Act is an application of the law of estoppel or personal bar, we do not see a means of protecting the "salaried partner" who may often be a junior person within a partnership. The general law is available to persons who act in reliance on a representation that persons are carrying on business in partnership. Nonetheless, it is common for partnership statutes to contain provisions on the liability of a purported partner.^[99] We think that it is desirable to include in a partnership statute, which contains several provisions dealing with the liability of a partner, a provision dealing with the liability of an apparent partner arising from holding out. A provision can be worded in general terms so as to avoid restricting the development of the law.
6.97     We think that the statute should explain coherently the liability of the apparent partner. The existing rules are based partly on the rules of agency and partly on the law of estoppel or personal bar.^[100] With the adoption of an entity approach to partnership, there will be no mutual agency of partners. Accordingly, the liability of the former partner for debts of the partnership incurred after his withdrawal will not be on the basis of any failure by a principal to revoke his agent's authority but will be solely on the basis of estoppel or personal bar. This is, we think, more principled: the person seeking to impose liability on the former partner or any other person represented to him as a partner should have to prove detrimental reliance on the representation.
6.98     We do not think that advertisement in the appropriate Gazette is a particularly practical way of giving notice of changes in the membership of a partnership. While it is not uncommon for professional firms to advertise the withdrawal of partners in the Gazette, we doubt whether small commercial partnerships do so and whether those who deal with partnerships consult the Gazette before transacting with them.^[101] We therefore favour a new approach to the liability of an apparent partner based on estoppel or personal bar. We note that RUPA^[102] provides that a dissociated partner remains liable as a partner for transactions entered into by the partnership within two years after departure, if the other party does not have notice of the partner's dissociation and reasonably believes when entering the transaction that the dissociated partner is still a partner. We think that there is merit in a regime along those lines.
6.99     A non-partner (including a former partner) should be liable to a third party as if he were a partner only where he represents himself or knowingly allows himself to be represented as a partner and the third party transacts with the partnership in reliance on that representation. His liability should be treated in the same way as a partner's liability: his payment discharges the partnership of the obligation and payment by the partnership or the partners discharges him, to the extent of the amount paid.
6.100     In relation to the former partner, liability should also arise if the representation were made while he was a partner but he had ceased to be a partner at the time when the third party dealt with the firm in reliance on the representation. In such circumstances however we think that it is appropriate to place a limit on the time during which it is reasonable for the third party to rely on a representation in deciding to deal with a partnership and not enquire as to the present composition of the firm. This would give some certainty to the former partner that a representation which, when made, was true would not impose on him liability for partnership debts for an indefinite time after his withdrawal.
6.101     We consider that it would be appropriate to confer similar protection on the "salaried partner", who may have been held out to the world as a partner but who in reality was an employee. Where an employee has been held out as a partner and then leaves the employment of the firm, we see no justification for exposing him to a longer period of potential liability through holding out than that applicable to a partner.
6.102     While the fixing of the period during which such a representation can be efficacious is to a degree an arbitrary judgment, we have decided (a) that the period should run from the date of the representation and not the date of withdrawal and (b) that the period should be for one year. Thus if in June of year 1, while A was a partner, a representation was made to B that A was a partner, and A retired from the partnership in September of that year, B would not be entitled to rely on that representation after June in year 2. We prefer this approach, which ties the period into the date of the representation, to that of RUPA in which the period runs from the date of the partner's dissociation. It is not clear to us why a representation made two years before a partner's retirement should remain efficacious for the same period after the retirement as a representation which is made on the eve of the retirement.
6.103     The outgoing partner (or employee) should also be able to exclude the risk that liability as an apparent partner may arise from a representation while he is a partner by giving notice of his withdrawal to persons who have dealt with the firm before his withdrawal. We propose that a former partner or employee of the firm ("A") should not be liable through holding out where the representation that A was a partner was made or communicated while he was still a partner or an employee if, before a person ("B") dealt with the partnership in reliance on the representation, notice was given to B that A had ceased to be a partner. Under this regime the outgoing partner (or employee) can protect himself by giving notice of his retirement (or causing the partnership to give notice) to all persons who had dealings with the firm in the previous twelve months before his resignation.
6.104     We also think that it would be advantageous to provide that all outgoing partners will be protected from liability by holding out through the use of the firm-name or of the outgoing partner's name in the firm-name after they have left the partnership. Where the use of the firm-name is one among several facts which point towards a representation that a former partner remains a partner, that use would still be taken into account. However, of itself the use of the firm-name would not be sufficient to amount to such a representation.
6.105     We consider that the apparent partner should be entitled to the same indemnity from the partnership as that of a partner or outgoing partner.^[103]
6.106     We therefore recommend that:

(1) Where a person who is not a partner ("A") represents himself, or knowingly allows himself to be represented, as one, and another person ("B") deals with the partnership in reliance on that representation, A should be liable as if he were a partner for the whole amount of any obligation which the partnership incurs to B as a result; (Draft Bill, cl 26(1), (3) and (4))

(2) Where A is a partner at the date of the representation but is no longer a partner at the time when B deals with the firm in reliance on the representation, then subject to (4) and (5) below A should be liable to B for the whole amount of any obligation which the partnership incurs to B as a result; (Draft Bill, cl 26(2))

(3) If A in (1) or (2) above pays an amount in or towards discharge of his personal liability (or what he reasonably and in good faith believes to be his liability) he should be entitled to be indemnified by the partnership in respect of that amount; (Draft Bill, cl 26(5))

(4) If A was still a partner when the representation was made ((2) above), he should not be liable if more than one year has passed since the representation before B deals with the firm in reliance on it; (Draft Bill, cl 35(1) and (2))

(5) A should not incur liability under (2) above if notice of his withdrawal from the partnership was given to B or sent to B's last known address before he dealt with the firm in reliance on the representation; (Draft Bill, cl 35(3))

(6) A should not be liable by holding out after he ceases to be a partner if the representation consists merely in the partners continuing to carry on the partnership business in the same partnership name or the partnership name continuing to include A's name after he ceased to be a partner; (Draft Bill, cl 35(4)) and

(7) In order to protect the salaried partner who is an employee, the protections in paragraphs (4) – (6) above should be available to A if he is an employee of the partnership. (Draft Bill, cl 35(5))

Note 1    The partner’s agency or power to bind the partnership arises from the status as partner and not from an agency contract. The current editor of Lindley & Banks (at para 12-05) suggests that a partner acts in a dual capacity, ie as agent for the partners collectively and as agent of the other partners in their individual and separate capacities. This, he suggests, is the pure form of mutual agency, but he notes that Lord Lindley did not recognise this dual capacity.    [Back]

Note 2    The 1890 Act, s 5 obscures the differences between English law and Scots law by providing that “every partner is an agent of the firm and his other partners…”.    [Back]

Note 3    See Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 503 per Diplock LJ.    [Back]

Note 4    This appears to refer to actual authority. See Re Briggs & Co, ex p Wright [1906] 2 KB 209.    [Back]

Note 5    See the Joint Consultation Paper, para 9.7. This would involve the rewording of s 5 of the 1890 Act to remove the formula that a partner is “an agent of the firm and his other partners”. The Partnership Bill initially referred to the partner as an agent of the other partners but an amendment in Standing Committee introduced the words “the firm and his” into cl 5 of the Partnership Bill after Lord Watson proposed amendments in order to include Scottish partnerships in the Bill viz Hansard (HC) 1 July 1890, third series, vol 346, col 417 and the amendments reported by the Standing Committee.     [Back]

Note 6    They referred to a report by the Irish Review Group on Auditing which suggested that all partners were assumed to know everything known to their fellow partners. While the ICAEW doubted this interpretation they expressed concern that it would undermine the Chinese Walls which accountancy partnerships establish to prevent the dissemination of knowledge. Accountancy partnerships use Chinese Walls in an attempt to get round conflicts of interest when acting for different clients.     [Back]

Note 7    The Limited Liability Partnerships Act 2000, s 6(1) provides that every member of a limited liability partnership is the agent of the limited liability partnership.    [Back]

Note 8    RUPA, s 301(1) provides that each partner is an agent of the partnership for the purpose of its business.     [Back]

Note 9    See para 6.59 below.    [Back]

Note 10    See para 7.64(2) below.    [Back]

Note 11    Section 7 provides: “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; but this section does not affect any personal liability incurred by an individual partner.” The section enacted the common law set out in Kendal v Wood (1871) LR 6 Ex 243: see Lindley on Partnership (5th ed 1888) p 172 and the Supplement on the 1890 Act, p 29.    [Back]

Note 12    Apparent authority is not actual authority but results from the operation of estoppel, or in Scotland, personal bar. See Freeman & Lockyer v Buckhurst Properties (Mangal) Ltd [1964] 2 QB 480, 502-503 per Diplock LJ.    [Back]

Note 13    See Kelly v Cooper [1993] AC 205, Bolkiah v KPMG [1999] 2 AC 222.    [Back]

Note 14    See Campbell v McCreath 1975 SLT (Notes) 5, Northumberland v Alexander (1984) 8 ACLR 882, 904-905.    [Back]

Note 15    SeeBowstead & Reynolds, para 8-204.    [Back]

Note 16    Notice of a fact given by a third party to a partner is not notice to the firm if the third party knew that the partner would fraudulently conceal the information from his partners: seeBowstead & Reynolds, para 8.204(1); Lacey v Hill (1876) 4 Ch D 537, 549 per Jessel MR.    [Back]

Note 17    Lord Lindley (5th ed 1888) suggested that these were circumstances in which there would be no imputation of knowledge to the partnership but the current editor of Lindley & Banks (para 12-30) suggests that Lord Lindley’s statement should be approached with caution as s 16 excepts only cases of fraud. See also Blackett-Ord, Partnership, (2nd ed) para 16.104.     [Back]

Note 18    Lindley on Partnership (5th ed 1888) p 141 and Supplement pp 41 and 42.    [Back]

Note 19    Lindley & Banks, para 12-30; Blackett-Ord, Partnership (2nd ed 2002) para 16.104.    [Back]

Note 20    See para 6.16 above. See also the criticism of the fraud exception in agency law in Peter Watts “Imputed Knowledge in Agency Law” [2001] 117 LQR 300.    [Back]

Note 21    Bowstead & Reynolds, Art 97, para 8-204.    [Back]

Note 22    This principle is general but not unqualified. See paras 6.17 and 6.18 above.    [Back]

Note 23    We do not think that there is a need to include in the draft Bill a provision in relation to the circumstances in which a partner is authorised to receive notices or information on behalf of a partnership. The general rules set out in cl 16 of the draft Bill relating to the agency (actual or apparent) of a partner should suffice: knowledge acquired by an agent while acting within the scope of his authority will normally be imputed to the principal. See Taylor v Yorkshire Insurance Co Ltd [1913] 2 IR 1, 21 per Palles CB.     [Back]

Note 24    See the draft Bill, cl 20 and para 9.98 below.    [Back]

Note 25    1890 Act, s 10 refers to liability for loss and injury caused to “any person not being a partner in the firm”.    [Back]

Note 26    Joint Consultation Paper, para 10.26.    [Back]

Note 27    Section 13 of the 1890 Act provides: “If a partner, being a trustee, improperly employs trust property in the business or on the account of the partnership, no other partner is liable for the trust property to the persons beneficially interested therein: provided as follows: (1) This section shall not affect any liability incurred by any partner by reason of his having notice of a breach of trust; and (2) 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.”    [Back]

Note 28    See para 11.66 below.    [Back]

Note 29    The partnership, of course, would not be liable for wrongs committed by a partner which caused loss only to the partnership itself.    [Back]

Note 30    1890 Act, s 10.    [Back]

Note 31    This would reverse the result of the 1890 Act, s 10 and Mair v Wood 1948 SC 83.    [Back]

Note 32    This example assumes that the use of the car was in the ordinary course of the partnership’s business.    [Back]

Note 33    In each case, for the partnership to be vicariously liable the partner’s act or omission would have to occur either in the ordinary course of the partnership business or with the firm’s authority.     [Back]

Note 34    It has been pointed out that there is an element of circularity in this approach as the injured partner himself would incur secondary liability through the vicarious liability of the firm. We do not think that this matters as (a) he has a claim against the wrongdoing partner and (b) the vicarious liability of the firm gives him another person against whom he can seek at least partial reparation.     [Back]

Note 35    See paras 6.60 – 6.65 below.     [Back]

Note 36    See para 4.47 above.    [Back]

Note 37    The removal of the firm’s liability for penalties is not intended to call into question Lord Millett’s interpretation of s 10 of the 1890 Act – that it is not confined to tort/delict but covers every kind of wrong capable of causing damage to non-partners. See para 6.38 below. Clause 22 of the draft Bill is intended to have similar effect – but covers damage to partners as well as non-partners.     [Back]

Note 38    [1997] 2 BCLC 700.    [Back]

Note 39    Ibid, at p 711.    [Back]

Note 40    [2001] QB 113.    [Back]

Note 41    See also Agip (Africa) Ltd v Jackson [1990] Ch 265, Millett J at p 296.    [Back]

Note 42    [2002] UKHL 48, [2003] 1 All ER 97, [2002] 3 WLR 1913 and [2003] 1 Lloyd’s Rep 65.    [Back]

Note 43    Ibid, at para 108.    [Back]

Note 44    Ibid, at paras 110 and 111.     [Back]

Note 45    [2001] QB 902.    [Back]

Note 46    Ibid, Sir Christopher Slade at p 950.    [Back]

Note 47    Section 13 of the 1890 Act is also unnecessary because under the draft Bill the partners are not agents of each other (but rather, are agents of the partnership). As such there is no reason that one partner’s breach of trust should result in liability for another partner unless the conditions in section 10 are fulfilled. Vicarious liability of the section 10 type is dealt with in cl 22 of the draft Bill.    [Back]

Note 48    We note that Walker v Stones has been appealed to the House of Lords and our understanding is that it is likely to be heard in December 2003.    [Back]

Note 49    1998 SC 725.    [Back]

Note 50    Ibid, at p 727B-D. See also Dollar Land (Cumbernauld) Ltd v CIN Properties Ltd 1996 SC 331, 348-349 per Lord Cullen.    [Back]

Note 51    Shilliday v Smith 1998 SC 725, the Lord President (Rodger) at pp 727D-728C, Morgan Guaranty Trust Co of New York v Lothian Regional Council 1995 SC 151, the Lord President (Hope) at p 155B-D.    [Back]

Note 52    In Scots law liability also arises where a person has knowingly profited from another’s breach of trust. See Clydesdale Bank v Paul (1877) 4R 626; Bank of Scotland v MacLeod Paxton Woolard & Co 1998 SLT 258. We would suggest that in many circumstances this could be seen as fault-based liability.    [Back]

Note 53    See, for example, Shilliday v Smith 1998 SC 725.    [Back]

Note 54    1890 Act, s 9. In English law the position is substantially similar if the liability is joint and several. See the Joint Consultation Paper, para 10.4.    [Back]

Note 55    1890 Act, s 9.     [Back]

Note 56    1948 SC 83, 86.    [Back]

Note 57    1890 Act, s 9. Separate debts are a partner’s debts which are not partnership debts: Re Barnard (1886) 32 Ch D 447.    [Back]

Note 58    Joint Consultation Paper, para 10.20. We also made proposals about the enforcement of judgments against partners which we discuss in Part VII below.    [Back]

Note 59    It was suggested that a former partner should have an opportunity to participate in proceedings against a partnership. Two Scottish consultees expressed similar concerns, attacking the proposal that a creditor could enforce a judgment against a partnership directly against the assets of a partner without it being necessary to obtain judgment against that partner.    [Back]

Note 60    See paras 7.55 – 7.64 below.    [Back]

Note 61    We attach importance to this attribute as it emphasises the intimate involvement of partners in the partnership business in both jurisdictions and confirms that the introduction of separate legal personality is not designed to alter the commercial reality of English law partnerships.     [Back]

Note 62    RUPA, s 307(d).    [Back]

Note 63    RUPA, s 307(d)(1) – (4). The court has an equitable discretion to grant permission. Specified grounds include a finding that the partnership’s assets subject to execution are clearly insufficient to satisfy the judgment and that exhaustion of partnership assets is excessively burdensome.    [Back]

Note 64    As well as the special limited partnership in Part XIX below.    [Back]

Note 65    See paras 6.60 – 6.65 below.     [Back]

Note 66    The creditor may thus sue the firm and the partners jointly and severally.    [Back]

Note 67    1890 Act, s 24(2).    [Back]

Note 68    See McIlreath v Margetson (1785) 4 Doug KB 278, 99 ER 880.    [Back]

Note 69    See paras 10.29 – 10.30 below.    [Back]

Note 70    1890 Act, s 24(2).     [Back]

Note 71    For example, under the default regime, if partner A pays a partnership obligation, the firm will be under an obligation to indemnify him. If the firm is not then able to do so, A may seek contribution from B and C. A, B and C can later seek indemnity from the firm when the firm has the wherewithal to pay. But A will not be able to use the personal liability of B and C for partnership obligations (see para 6.59 above) to obtain an indemnity from them.    [Back]

Note 72    See Chitty on Contracts (28th ed 1999) Para 44-109, Snell’s Equity (30th ed 2000) para 29-20 and in Scotland, Gloag and Irvine, The Law of Rights in Security, Heritable and Moveable, Including Cautionary Obligations (1897) pp 836-839.    [Back]

Note 73    See the draft Bill, cl 34(2) and (4) and paras 8.79 - 8.81 below.    [Back]

Note 74    Such an indemnity may be implied where the firm’s assets are assigned to the “new” partnership: see Gray v Smith (1889) 43 Ch D 208, 213 andLindley & Banks, para 10-247.    [Back]

Note 75    Joint Consultation Paper, para 10.41.    [Back]

Note 76    The incoming partner may incur liability for prior debts if at the same time as or after the new partner joins the partnership an old partner leaves the partnership and under the default rules the partnership grants an indemnity to the outgoing partner.     [Back]

Note 77    We think that this is a misunderstanding of our proposals, as the retention of the s 17(1) principle will protect the private assets of the incoming partner.     [Back]

Note 78    Thus if a partnership has entered into a contract before a person becomes a partner and has not fully performed the contract, the incoming partner does not incur secondary liability under the contract merely by joining the firm. In the absence of any special feature in the contract, the partners who were partners at the date the contract was entered into would have secondary liability for damages incurred by the firm for breach of the contract which occurred after the incomer had joined. But if the breach of contract involved also negligence or another tort or delict, the incoming partner could have secondary liability in respect of that tort or delict.    [Back]

Note 79    See para 6.78 below.    [Back]

Note 80    See Gray v Smith (1889) 43 Ch D 208, 213 andLindley & Banks, para 10-247. If the former partner withdrew before the incoming partner joined the partnership, the indemnity may not be a liability for which the incoming partner is personally liable; but if the partners gave the indemnity when the incoming partner had joined the firm, he may be personally liable for that debt.    [Back]

Note 81    Where there is no overlap between the membership of the old partnership and the new partnership the prudent course may be to buy the assets of the old partnership but leave the liabilities with the former partners of the old partnership.    [Back]

Note 82    Further it is notable that the rules of court in England appear to envisage that the “old” partnership’s assets may in some way be traced in the hands of the “new” partnership. CPR, Sched 1, RSC, O 81, r 5(1) provides: “where a judgment is given or order made against a firm, execution to enforce the judgment or order may, subject to rule 6, issue against any property of the firm within the jurisdiction”. In English law the use of the partnership name in litigation is simply a convenient expression for the partners entitled or liable as the case may be as partners when the cause of action accrued. See Ex parte Young [1881] 19 Ch D 124, Ellis v Wadeson [1899] 1 QB 714. By recognising the right to execute against partnership property at the date of judgment the rule appears to envisage a form of enforcement which could affect the economic health of the “new” partnership and thus the interests of the incoming partner.     [Back]

Note 83    UPA, s 17 provided that a person admitted as a partner “is liable for all the obligations of the partnership arising before his admission … except that his liability shall be satisfied only out of partnership property.”    [Back]

Note 84    The indemnity is discussed in more detail in paras 8.69 – 8.73 below.     [Back]

Note 85    This replicates the existing law: where the partners enter into a contract after the incoming partner has joined the partnership he is liable on the contract. Thus where the partners of a “new” partnership give an indemnity to a former partner after the incoming partner has joined the firm, the incomer is in English law one of the contracting parties and in Scots law has subsidiary liability for the debt so incurred. The incoming partner’s personal assets are therefore available to meet the former partner’s indemnity.    [Back]

Note 86    See the draft Bill, cl 23(7): “For the purposes of this Act, a partnership obligation which results from (a) breach of a duty in tort or delict (including quasi-delict), (b) breach of trust or (c) breach of a fiduciary duty, is to be treated as having been incurred at the time of the act or omission that gave rise to the breach.” In this subsection we refer to both breach of trust and breach of fiduciary duty as a trustee may be in breach of a duty, such as a duty of skill and care, which is not a fiduciary duty. See Bristol & West Building Society v Mothew [1998] Ch 1, 16 – 18, per Millett LJ.     [Back]

Note 87    1890 Act, s 17(2).    [Back]

Note 88    1890 Act, s 17(3).    [Back]

Note 89    1890 Act, s 36(2).    [Back]

Note 90    Hamerhaven Pty Ltd v Ogge [1996] 2 VR 488. See also Tower Cabinet Co Ltd v Ingram [1949] 2 KB 397, (CA).    [Back]

Note 91    1890 Act, s 14(1). See discussion of liability arising out of holding out in paras 6.89 – 6.106 below.    [Back]

Note 92    See paras 6.96 – 6.106 below.    [Back]

Note 93    See para 6.106(6) below.    [Back]

Note 94    Treitel, The Law of Contract (10th ed) (1999) p 142 suggests that there is a problem in treating a discharge of an outgoing partner as a contract in English law where the outgoing partner is not replaced by an incoming partner unless (as one case suggests) one treats as invented consideration the fact that the creditor benefits from the release of the outgoing partner. The supposed benefit is that a remedy against a single debtor might be easier to enforce than one against several, all of whom are solvent. We do not find this explanation convincing and prefer to remove the need for valuable consideration.    [Back]

Note 95    See paras 6.82 and 6.83 above.    [Back]

Note 96    We proposed the extension of the protection given by s 14(2) of the 1890 Act from a deceased partner to all outgoing partners. See para 6.93 below.    [Back]

Note 97    This involved extending the effect of s 14(2) of the 1890 Act from the deceased partner to all outgoing partners.    [Back]

Note 98    Viz Nationwide Building Society v Lewis [1998] Ch 482.    [Back]

Note 99    See for example RUPA, s 308. Provisions based on s 14 of the 1890 Act also remain in the partnership statutes in the various Australian jurisdictions and in New Zealand - see Higgins & Fletcher, The Law of Partnership in Australia and New Zealand (8th ed 2001) p 186f.     [Back]

Note 100    The requirement to give notice of retirement to a person who had previously dealt with the firm (1890 Act, s 36(1)) is derived from the rule of agency that a principal must give notice to a third party of revocation of an agent’s authority in order to remove the agent’s implied authority or apparent authority to bind him. See Lindley & Banks para 13-44 and Bowstead & Reynolds paras 8-008 and 8-048. Section 14 (holding out) on the other hand is based on estoppel or personal bar and requires detrimental reliance.     [Back]

Note 101    We recognise that the Gazette can now be read on-line and that this may increase access to it, but we think that the point remains valid.    [Back]

Note 102    RUPA, s 703(b). See Hillman, Vestal and Weidner, The Revised Uniform Partnership Act (2003 ed), pp 296-299.     [Back]

Note 103    See paras 6.60 – 6.65 above and 10.29 – 10.30 below.    [Back]