Recap…

Are relations between a partnership and the outside world

governed by the law of partnerships, or something else?
 Agency?
 Contract?
 Delict?
 Criminal law?
All of the above?
 Crime
• As the partnership is not an entity, it cannot commit a
crime.
• But a crime committed by a partner while carrying on or
furthering the interests of the partnership can be imputed
to the other partners by s.332(7) of the Criminal
Procedure Act.
This means that the actions of one partner, if done in
connection with the partnership's business or to further its
interests, may be attributed to the partnership as a whole or
to the other partners.
Is this Constitutional?

• Compare: S v Coetzee 1997 (3) SA 527 (CC) on s.332(5).

S v Coetzee 1997 (3) SA 527 (CC)
• The primary issue was whether it was constitutional to hold directors criminally liable
for the actions of the company without proof of personal fault or intent.

Legal Issues:

• The constitutionality of imputing criminal liability to individuals without proving

personal guilt (mens rea).

• Whether section 332(5) infringes on the right to a fair trial as enshrined in the South
African Constitution.

The Court held that:

• holding individuals criminally liable for actions committed by others without proof of
personal fault was inconsistent with the constitutional right to a fair trial.

• Section 332(5) was found to be unconstitutional because it allowed for the imputation
of liability without establishing personal culpability.

• The Court declared section 332(5) of the Criminal Procedure Act unconstitutional to the
extent that it permitted the imputation of criminal liability without proof of personal
fault.
To note…
• Each of these legal principles (agency, contract,
delict crime) addresses different aspects of the
partnership's interactions with third parties, and
they collectively provide the legal framework for
the partnership's operations and responsibilities.
UNIT 4 Relations between partners and
third parties
PART B
Area of focus
Exploring the relationship between partners and third parties
• Authority of partnerships
• Personal debt in a partnership

Outcome
1. Discuss the authority of partners to act on behalf of the partnership
2. Explain the implications of a partner acting outside their authority
and binding the partnership in transactions
3. Discuss the legal position of personal debt of a partner to a
partnership and some enforcement mechanisms for debt recovery
by creditors.
 The authority of partners to act
on behalf of the partnership
The authority of partners to act on behalf of the
partnership arises and operates within the context of:
• the partnership agreement, and
• the laws governing partnerships in the relevant
jurisdiction.

Meaning???
Key points regarding the authority of partners in a partnership:
1. Partnership Agreement:
• It may specify the scope of each partner's authority, the types of transactions
they can engage in on behalf of the partnership, and any limitations on their
authority.

2. Implied Authority
• In the absence of an explicit agreement, partners usually have implied
authority to conduct ordinary and customary business transactions that are
necessary for the partnership's operation.
• These could include signing contracts, making purchases, and conducting day-
to-day business activities.
• Implied authority is based on the assumption that certain actions are
necessary for the partnership to function effectively.
3. Apparent Authority
• Partners may also have apparent authority, which arises
when a partner's actions lead a third party to believe
that they have the authority to act on behalf of the
partnership, even if that authority was not explicitly
granted.
• If the partnership allows a partner to represent the
business to the public or engage in certain transactions,
the partnership may be bound by those actions, even if
they exceed the partner's actual authority.
Example of Apparent Authority
Partnership: "Smith & Johnson Associates" with Mr. • Ms. Anderson signs a contract with
Smith and Mr. Johnson as partners.
Ms. Roberts for a project.
• Mr. Johnson, responsible for client relationships,
is away on a business trip. • When Mr. Johnson returns, he
• Potential client, Ms. Anderson, visits the office realizes the contract exceeds Ms.
during Mr. Johnson's absence. Roberts' actual authority.
• Mr. Johnson's assistant, Ms. Roberts, meets Ms.
Anderson and handles the meeting. Ms Anderson • Ms. Roberts believed she had
had previously run into Ms Roberts and Mr apparent authority because of her
Johnson together in various business settings. interactions with clients and the
• Ms. Roberts has seen Mr. Johnson negotiate and partnership's allowance.
sign contracts before and has been actively
involved in contract negotiations. • The partnership may be bound by
• Based on Ms. Roberts' actions and past the contract because Ms. Anderson
interactions with Mr. Johnson, Ms. Anderson reasonably believed Ms. Roberts had
believes Ms. Roberts has the authority to act on the authority to represent the
behalf of the partnership.
partnership.
4. Change in Authority
• Changes to the authority of partners must be done in
accordance with the partnership agreement.
• If the partners want to alter the scope of authority or
add new partners with varying levels of authority, they
would need to amend the partnership agreement and
follow the necessary legal procedures.
Implications of a partner acting
outside their authority and
binding the partnership in
transactions
When a partner acts outside their authority and binds the
partnership in transactions, it can have significant
implications for both the partner who acted and the
entire partnership.
Some of the key implications:
a. Liability of the Partner:
• When a partner exceeds their authority and enters into
a transaction on behalf of the partnership, they may be
personally liable for any obligations or liabilities that
arise from that transaction. This means the partner's
personal assets could be at risk if the transaction leads
to financial losses or legal disputes.
b. Liability of the Partnership:
• In certain circumstances, the partnership itself may be held liable
for the actions of the partner, even if they acted outside their
authority. This can happen if the partner's actions fall under the
concept of "apparent authority."
• If the partner's conduct led a third party to reasonably believe
they had the authority to act on behalf of the partnership, the
partnership might be bound by the transaction. This can lead to
the partnership being responsible for fulfilling the obligations
created by the unauthorized transaction.
c. Impact on Relationships
 Acting outside of authority can strain relationships among partners. Other
partners may feel betrayed or concerned about the risks the unauthorized
action has exposed them to. This can lead to conflicts and undermine trust
within the partnership.
d. Legal Disputes
 Unauthorized transactions may result in legal disputes with third parties
involved in the transaction.
 If the partner lacked the authority to act on behalf of the partnership, the
third party may seek remedies against both the partner and the partnership.
e. Financial Consequences
 Unauthorized transactions can lead to financial losses for the partnership,
especially if the transaction was not in the best interest of the business.
 This can negatively impact the partnership's profitability and stability.
f. Reputation Damage
 If unauthorized transactions come to light, they can harm the partnership's
reputation. Clients, suppliers, and other stakeholders may view the
partnership as unreliable or untrustworthy.

g. Potential Dissolution
 In severe cases where the unauthorized actions cause significant harm to
the partnership or its reputation, it could lead to the dissolution of the
partnership.
 Partners may decide to part ways due to the breach of trust and the
difficulties caused by the unauthorized transaction.
• To mitigate the risks of partners acting outside their authority,
partnerships should take the following steps:
a. Clearly define the scope of each partner's authority in the
partnership agreement.
b. Establish a process for obtaining unanimous consent or specific
approvals for major decisions.
c. Educate partners about their responsibilities and limitations.
d. Regularly communicate and update partners about the
partnership's activities and decisions.
e. Consider obtaining liability insurance to protect against
unexpected liabilities.
The legal position of personal debts of a
partner to a partnership
Personal debts
• If a partner incurs personal debts (ie. not connected
with the partnership’s business), can that partner’s
creditor(s) seize and sell partnership assets in order to
recover the debt owed by the partner?
• In many jurisdictions (eg, USA, UK) the answer is NO,
because there is specific legislation which prohibits this.
United States:
• In the United States, the principle of separating a partner's personal debts
from partnership assets is a well-established legal concept.
• The Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act
(RUPA) have been adopted by many states to govern partnership law.
• Under these acts, a partner's personal creditors generally cannot seize and
sell partnership assets to satisfy the partner's individual debts unrelated to the
partnership's business.
• The creditor's remedy is typically limited to obtaining a charging order, which
allows the creditor to place a lien on the debtor partner's share of profits and
distributions from the partnership.
• This means that when the partnership distributes profits to the debtor partner,
the creditor can intercept those distributions to satisfy the debt.
United Kingdom:

• In the United Kingdom, the principle of protecting partnership assets from a

partner's personal debts is also well-established.
• The Limited Liability Partnerships Act 2000 and the Partnership Act 1890
govern partnership law in the UK.
• Like in the US, a partner's personal creditors generally cannot seize
partnership assets to recover debts not connected with the partnership's
business.
• Instead, the creditor's remedy is typically limited to obtaining a court order to
charge the partner's share of profits and distributions from the partnership.
• Similar to the US, this means that the creditor can intercept the distributions
due to the debtor partner.
SA position….
• SA courts have wavered about how to deal with this issue. There
are 3 basic scenarios:
a. Partnership assets cannot be seized by the personal creditor of
a partner: Standard Bank v Wentzel & Lombard 1904 TS 828 at
838.
b. Partnership assets can be seized and sold by the personal
creditor of a partner – practical difficulties in doing this.
c. The individual partner’s share of the partnership assets
can be attached and sold, but not the assets
themselves: Bothma v Windsor 1996 (2) SA 75 (T).
The position in Bothma appears to be where SA law
currently stands, but it is unsatisfactory from all
perspectives:
The sheriff may struggle to sell an undivided share in
partnership assets in order to realise cash for the
creditor.
The share in the assets may realise much less than its
real value, leaving the other partners with a new co-
owner (de facto partner) who has bought into the
partnership at a discount.
The debtor partner may be prejudiced because their
share of the partnership assets sells at a discount.
How are partnership debts and
obligations enforced against partners
and the partnership by third parties?
Partnership debts and obligations can be enforced against both individual partners and the
partnership by third parties through various legal mechanisms.

Some common approaches include:

1. Garnishment
 creditors may be able to garnish a partner’s share in profits to recover debts owed by the
partner.
 If a partner has personal debts or obligations, and the creditor obtains a court judgment
against the partner, they may seek a garnishment order to recover the debt from the
partner's share of partnership income.

Example: Partnership: "Smith & Johnson Legal Associates" with partners Mr. Smith and Mr
Johnson
 Mr. Smith incurs personal debts (e.g., medical bills) and faces a court judgment.
 Creditor seeks a garnishment order from the Court to recover debt from Mr. Smith's share of
partnership profits and distributions.
 Court grants the garnishment order.
 Partnership withholds a portion of Mr. Smith's share and pays it directly to the creditor to
satisfy the debt.
 Garnishment remains in effect until the debt is fully satisfied according to court instructions.
2. Execution of Partner's Interest
In certain cases, if a partner's debt remains unpaid, the creditor
may seek a court order to execute on the partner's interest in
the partnership.
This could involve selling the partner's interest to satisfy the
debt.

3. Priority of Debts
In cases where multiple creditors are seeking repayment from
the partnership, there may be rules governing the priority of
debts, specifying which debts should be satisfied first.
4. Surety Agreements or Personal Guarantees
Sometimes, partners may provide personal guarantees or
surety agreements, making them personally liable for certain
partnership debts or obligations.
In such cases, the creditor can pursue the partner's personal
assets to satisfy the debt.

5. Judgments
If the creditor sues and obtains a judgment against the
partnership, they can use various legal mechanisms to enforce
the judgment, which may include seizing partnership assets or
obtaining charging orders against individual partners.
6. Piercing the Partnership Veil
If the partnership is not structured correctly or if there has been
misconduct, a court may "pierce the partnership veil," which
means the court treats the partnership as an extension of the
individual partners' personal assets.
This may occur in cases of fraud, misrepresentation, or other
wrongful conduct.
The piercing of the partnership veil is an exception to the
separate legal personality of a partnership (entity theory) such
that when the partnership veil is pierced, the form of the
partnership is disregarded,
A court looks at the substance behind the entity, removing the
usual protection provided to the partners due to the concept of
separate legal personality.