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THE ESSENTIALIA OF PARTNERSHIPS

30 Mar

The essentialia of a partnership were set out in the case Joubert v Tally and Company 1915 some time ago.  The four essential elements are:

1)     Each partner contributes something to the partnership, whether it be money, skills or labour.

2)     The business should be carried on for the joint benefit of the partners

3)     The objective of the partnership should be to make a profit

4)     The contract between the parties should be a legitimate contract.

The contribution made by each partner does not necessarily have to be of a monetary nature.  As long as such contribution has commercial value, it is acceptable.

With reference to the second element, “business” is defined as “anything which occupies the time, attention and labour of a person for the purpose of profit”.  Whether the business activity is of an indefinite nature or aimed at completing a single, particular project, a partnership can exist.  The concept of “joint benefit” illustrates that a partnership can only exist if all the members thereof benefit from the business activities of such a partnership.  Therefore it is deduced that each partner must share in the profits as well as in the losses of the partnership.  One partner cannot benefit from the profits while another is responsible for all the losses.  The latter concept is, after all, not recognised in South African law.

In the case Ally v Dinath 1984 (2) SA 451 (T) it was reported that the following would suffice as “carrying on business to make a profit”:

1)     a pure economic/financial profit motive

2)     a joint effort in order to save costs

3)     to provide for the livelihood and comfort of the parties and their children

4)     the purpose to accumulate an appreciating joint estate

The above clearly excludes charitable and welfare institutions as well as sports clubs from the partnership list.

The agreement concluded by the parties to a partnership must be valid.  The agreement must contain the essentialia of a partnership.  Furthermore, the parties involved must have the intention to establish a partnership.  Should the agreement not be indicative of the nature of the relationship between the parties, the subsequent conduct of the parties can be referred to. This may very well paint the true picture of the parties’ intention.

Although the parties may agree, whether it be by verbal agreement or in writing, on certain formalities concerning the parties and the relationship between them, should the essential formalities not be complied with, no partnership would have been established.

In South African law, a partnership is viewed according to the aggregate theory of partnership, which means that a partnership is regarded as a collection of individuals and not an entity.  Therefore, a partnership does not enjoy legal personality, as it is the individual partners in their personal capacities who are co-owners of assets and jointly and severally liable for losses.

One of the exceptions to the lack of legal personality of a partnership is in the case of insolvency of the partnership estate.  According to Section 13(1) of the Insolvency Act 24 of 1936, if the partnership estate is sequestrated by a court, the personal estate of every partner will simultaneously be sequestrated.

With regards to the personal liability of the individual partners the following applies:  each of the partners is jointly and severally liable for all partnership debts.  The case of Geldenhuys v East and West Investments (Pty) Ltd 2005 (2) SA 74 (SCA) is relevant in this instance.  The facts of the case in short are that the appellant, an attorney, was ordered by the court to pay his previous landlord a sum of R36 761.10 in respect of arrear rental.  The attorney’s partner had settled a larger amount with the landlord.  The question which then arose was to what extent the appellant was liable?  The court ruled that the partners could be held jointly and severally liable for the full amount of the disputed debt and therefore the landlord could, and should, sue both the partners.  Subsequently, judgement was given against both partners.

During the existence of the partnership, the partners are co-debtors and jointly and severally liable for all partnership debts.  Creditors must sue all of the partners and cannot institute action against only some of the partners.  However, as soon as the partnership is dissolved, this rule falls away and the creditors may seek satisfaction for their claims from the individual assets of any of the partners.

 
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Posted by on 30/03/2012 in Content

 

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