Discuss about the Business Law for Partnership Act.
The provided statement has been explained by Ashhurst J in Lickbarrow v Mason (1787) 2 Term Rep 63, HL at 70, which states that in case of any instance, when two innocent persons are affected due to the activity of a third person, then the person who has helped that particular third person in conducting such activity should be liable under the Section 14 of the Partnership Act of 1982. In case of a partnership firm, the partners will also be liable to pay the amount that has been received by any of the partners. In this regard, the liability is applicable even to the partners about whom the creditor is unaware.
The objective of the paper is to analyze the validity of the provided statement in respect to the definition of partnership by estoppels/holding out as mentioned in the Partnership Act of 1982. In accordance with the paper objective, focus has been predominantly given to know the definition of partnership by estoppel and holding out for which relevant court cases have also been studied to know the advantages and disadvantages with the partnership by estoppels as well.
Definition and Clear Identification of the Requirements of a Partnership by Estoppel/Holding Out
In case a person, suppose X has been falsely being represented as a partner by Y, in presence of a third a party Z, wherein X did not deny the fact, then the law will held X as liable to repay all the liabilities or credit that are to be repaid to Z. In this case, X is partner as per the definition provided by estoppel. Estoppel arises due to transactions that involve oral communication. It is not necessary to consider that the creditor always have knowledge regarding the fact that the person has been represented falsely as partner, as the same person can also be considered as partner by holding out.
Apparently, the requirement for partnership by estoppel is that there must be a third party, who has given credit or consignment to the partnership firm. The third party must consider a person as partner from whom he/she can claim back the liability. The person who is considered falsely as a partner should have provided a written consent or oral agreement that makes him to be considered as a partner. It is also possible that the activities of the person were of a manner that led him/her to be considered as a partner by the third party. In this situation, the law must declare the existence of a partner by estoppel/ holding out. The partner according to estoppel is responsible for meeting up the liabilities of the firm and in case the liabilities do not arise, then it is mandatory to make consent to repay back the liabilities by the false partner(s). Besides, in case more than one person is considered as partners by estoppels, then they all are responsible to repay the liabilities to the creditor.
In case of partner by holding out, the partners are generally aware of the false representations, still do not take any action . However, in case the person declares to the thirds party in advance that he/she is not a partner, then no estoppel liability arises. Thus, in this context it can be stated that the most important requirement for partnership by estoppel is that there must be an existing firm with which a creditor has performed transaction.
Critical Examination of the Requirements of a Partnership by Estoppel/Holding Out
The requirements for partnership by estoppel have certain benefits as well as limitations. The benefit is that the creditor, who has given any consignment to the firm, is entitled to get his/her money back, which further provoke the estoppel partner to be careful in future about repeating such kind of occurrences. In this regard, an ideal example can be elaborated i.e. Leonard v. Brewer, No. 01-12-01057-CV, 2013 WL 6199572 (Tex. App.–Houston [1 Dist.] Nov. 26, 2013, St, no pet., in which Stephen Brewer was held liable for not paying the amount of promissory note, that was signed by the Brewer on the behalf of BW Office. There was a possibility in this case that the Brewer’s activities were of a kind that led the third party, Leonard to consider him as a general partner. The partnership by estoppel makes it mandatory for the partners to come into a discussion, as no argument can be provided to prove the absence of partnership.
On the other hand there are certain limitations in the partnership of estoppel based on which it can be criticized, as in certain circumstances the nature of interaction between two parties can make a third party to recognize that the two parties are engaged in a partnership contract. In this case, the partner by estoppel is also liable to pay the dues of the third party even if he/she has forgotten the mentioned interactions. In the similar note, a case between Chavers v. Epsco, Inc.98 S.W.3d 421 (Ark. 2003), a problem had to faced by Chavers Welding and Construction (CWC) due to the partnership by estoppels, wherein it was found that the Epson Inc., provided services pertaining to human payroll to CWC on credit. The proprietor of the company was Gary Chaver and his daughter Reggie Chavers and son Mark Chavers served as employee of CWC. The representation of Mark and Reggie was of a kind that led Epson to conclude that they were partners of CWC. On the basis of the rules on partnership by estoppel, the court gave verdict in favor of Epson that made Reggie and mark jointly pay an amount of $80,360.92 to the company. Thus, partnership by estoppel can be regarded as unfair because mere perception on behalf of the third party cannot be a basis of considering a partnership contract. The partnership by estoppel does not focus on the presence of evidences in partnership deeds that should be considered by courts while giving judgments.
Concerning the partnership of holding out, the individual has knowledge regarding the fact that he/she is being perceived as a partner by a third party though he/she is actually not. It gives a benefit to creditors, as they can get claim for payment from the partner by holding out, in case the actual partner fails to meet the obligations. The holding out partner cannot refuse from the obligations, since he/she did not deny this fact before even after being aware of it. The O'Brien & Gere Engineers, Inc. v. Taleghani, 525 F. Supp. 750 (E.D. Penn. 1981) on the other hand reveals that partnership by holding out not only focuses on paying the obligations of the creditors, but also the tax liabilities to the local and state government as well. This clearly represents the extra burden on the partners, who have been holding out .
Based on the discussion, it can be affirmed that the statement of Arthur J is being supported in some grounds as well as has been disagreed in certain cases. The advantage of partnership by estoppel/holding out can be elaborated based on the fact that it provides an opportunity to the creditors to claim their obligations, if the actual partner fails to do so. This however does not support the theme of the quoted sentence, as the actual partners do not suffer in case of such situations. The non-partner is unaware of the fact that the actual partner has represented him/her in the partnership deed, which influences the creditors to sue the former in case of non-payments of due. Thus, this is regarded as invalid fact, as the main responsibility of repayment of dues lies with the actual partner.
The Section 14 of the Partnership act of 1982 states about the duties that a partner of estoppel has towards the creditors. The nature of interaction of the non-partners with the actual partners leads third parties to misrepresent the fact of partnership deed. In this case, the non-partner either knows the entire matter or is unaware of it. The court however compels the partner by estoppel to repay back the dues to the third parties. From a different perspective, it is also possible that the actual partner falsely represents the name of the non-partner in the partnership deed.
The requirements that are very essential for partnership of estoppel and holding out are that there must be creditor, who has performed transactions with a firm that has supported certain obligations and a non-partner must exist, who interacts with the real partner(s) and the creditor(s). The concept of the two types of partnership discussed in the paper has both benefits as well as limitations. Partnership by estoppel and holding out gives a benefit of assurance to the creditors that they can get back the obligations even if the actual partner fails to do so. However, the limitation is that the actual partners at times takes undue advantages of the unawareness of the non-partners and represent them, as partner in front of the creditor.
A Articles/ Books/ Reports
Bishop, Carter G., ‘The New Limited Partner Liability Shield: Has the Vanquished Control Rule Unwittingly Resurrected Lingering Limited Partner Estoppel Liability as Well as Full General Partner Liability?’. Bishopmacrofinal.Doc 667-717.
Emerson, Robert, W., Business Law (Barron's Educational Series, 2009).
Michigan Legislature, ‘Uniform Partnership Act (Excerpt)’ (2016). 449.16 Partnership by Estoppel; Liability 1.
Miller, Elizabeth S., ‘Case Law Update: A Survey of Recent Texas Partnership and LLC Cases’ The University of Texas School of Law 1-315.
Macleod, John and James Devenney, Consumer Sales Law: The Law Relating to Consumer Sales and Financing of Goods (Routledge, 2009).
New South Wales Government, ‘Partnership Act 1892 No 12’ (2012). New South Wales 1-63.
NIOS, ‘Partnership’ (2000). Types of Partners 71-80.
O’Conner, Pamela Anne, ‘Security of Property Rights and Land Title Registration Systems’ (2003). Barrister and Solicitor (Vic) 1-281.
Tulsian, P., C., Busi. & Corp. Law For Pe-Ii (Tata McGraw-Hill Education, 2007).
Flora, Colin E., The Unintentional Business Partnership & Liability for New Post-Dissolution Obligations (2013) <https://www.pavlacklawfirm.com/blog/2013/03/01/the-unintentional-business-partnership-liability-122714/>
Lardbucket, Partnerships: General Characteristics and Formation <https://2012books.lardbucket.org/books/legal-basics-for-entrepreneurs/s25-partnerships-general-character.html >
Magrath LLP, Holding Out” under S14 of the Partnership Act 1890 <https://www.magrath.co.uk/company-commercial-list/holding-out-under-s14-of-the-partnership-act-1890 >
Missouri Legislature, Missouri Revised Statutes (2015) <https://www.moga.mo.gov/mostatutes/stathtml/35800001601.HTML >