Joint liability of partnerships

This article just provides an overview of the law in this area. You should talk to our Disputes Team for a complete understanding of how it may affect your particular circumstances.

Charles Abraham, Head of Disputes highlights the issues surrounding liability to owners of businesses that trade as a partnership.

A recent court decision provides a stark warning to owners of businesses that trade as a partnership.

The court ruled one partner was liable to a third party for the breach of a fiduciary duty (A fiduciary duty is a legal duty to act solely in another party's interests) by another partner even though the other partner's breach of obligation occurred after that person had resigned from the partnership.

In this instance, the innocent partner could not escape liability arising from acts that were sufficiently closely connected with the acts that the defaulting partner had been authorised to do as part of the business, as they were regarded as being done in the ordinary course of the partnership business. The partners were also held to be jointly and severally liable for the claimant's costs in pursuing the claim and appeal.

The message is choose your partners carefully. You will be liable for their conduct during the time the business relationship exists and in some circumstance potentially after the end of the relationship.

Joint and several liability in partnerships

The partners in a business are jointly and severally liable for a breach of duty by one partner. The key point is the connection between the wrongful conduct and the conduct which the partner was authorised to do and, in particular, whether the connection is strong enough that the wrongful conduct could be regarded as done by the partner while acting in the ordinary course of the business of the partnership.

What is a fiduciary relationship?

Fiduciary ('fi-doo she-er e') Relationship : where one person places complete confidence in another in regard to a particular transaction or one's general affairs or business.

A fiduciary relationship arises where two parties agree that one party will act on behalf of or for the benefit of the other in circumstances that give rise to a relationship of trust and confidence. To determine whether a relationship is fiduciary exists, the substance of the relationship must be examined in light of its commercial context and all the obligations that are undertaken.

Actions to take

Document the basis of the relationship and the duties and obligations of the partners. Make no mistake if the business fails the partners will fall out and if the business succeeds the time will come when the partners fall out - a well drafted partnership agreement at the start of the relationship will set out what happens in such circumstances.

If you have any queries in relation to this post, please contact our Head of Disputes, Charles Abraham on 0113 201 0405.