UGANDA CHRISTIAN UNIVERSITY

MAIN CAMPUS/KAMPALA CAMPUS

DEPARTMENT OF MERCANTILE LAW

BACHELOR OF LAWS DEGREE

BUSINESS ASSOCIATIONS II, LECTURE NOTES PREPARED BY

KYEYUNE ALBERT COLLINS1

COURSE UNIT: BUSINESS ASSOCIATIONS II

Volume SIX: PARTNERSHIP LAW AND PRACTICE

Date: March 2022

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LLM (Mak), MITPL (Umu), MPA (Umi), LLB (Ucu), Dip LP. (LDC), Commissioner for Oaths, Notary
Public, Insolvency Practitioner, Lecturer/Professional Advisor (LDC), Certificate in Trial Advocacy Africa
(JAA) & Justice Advocacy- Uganda (NITA), Senior Partner Mukiibi & Kyeyune Advocates.

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1.0 What is a partnership?

A partnership is defined under Section 2 of the Partnerships Act, 2010 as the relationship that
exists among persons numbering between 2 and 20 who carry on a business together with the
aim of making profits. However, where a partnership is formed for the purpose of carrying on a
profession, the number of professionals, which constitutes the partnership shall not exceed fifty2.

The relationship between or among members of any company or association which is registered
as a company under the Companies Act or any other Act relating to the registration of joint stock
companies; or formed or incorporated by or in pursuance of any other written law, is not a
partnership within the meaning of this Act.

Note that a Partnership is different from a company because while a company is separate from
its owners and can hold property and sue or be sued in its name, a partnership is not a
legal entity of its own; partnership property is held by the partners exclusively for purposes
of the business. Also, when a partner dies, the partnership is dissolved (unless the Partners
agreed otherwise) which is not the case with a company 3. Note that death under Section 35 of
the Partnership Act, 2010. Still a partnership cannot exist in perpetuity.

Note that a partnership is not limited to a direct association between human beings but may also
include an association between other entities, such as corporations or even partnerships
themselves. A joint venture—sometimes known as a joint adventure, co-adventure, joint
enterprise, joint undertaking, syndicate, group, or pool—is an association of persons to
carry on a particular task until completed. In essence, a joint venture is a “temporary
partnership.”

1.1 Types of Partnerships:

2
Section 2(2) of the Partnership Act, 2010.
3
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their
mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools,
governments or combinations. Organizations may partner to increase the likelihood of each achieving their mission
and to amplify their reach. A partnership may result in issuing and holding equity or may be only governed by a
contract.

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There are two major types of partnership; a general partnership and a limited liability
partnership. The limited liability partnership is more like a Limited Liability Company.

In the case of a Limited Liability Partnership, only one of the Partners is liable for the debts of
the partnership. The rest of the partners are only liable to the extent of their capital contribution
to the partnership. In General Partnership, however, all Partners are fully liable for the
partnership’s debts.

1.1.1 General Partnership:

A general partnership is a partnership with only general partners. Each general partner must
actively participate in managing the business and any partner may sign a contract on behalf of
the partnership. The partners must agree to major decisions, acting as a corporate board of
directors.

Because general partners actively participate, they all must take personal responsibility for the
liabilities of the business and for debts incurred by other partners. If one partner is sued, all
partners are held liable. A partner's personal assets may be taken by a court or creditor. General
partnerships are the least desirable for this reason.

1.1.2 Limited Partnerships:

A limited partnership includes both general partners and limited partners. In many cases, there is
one general partner who manages the business and a number of limited. A limited partner does
not participate in the day-to-day management of the partnership and his/her liability is limited to
his investment in the business.

In many cases, the limited liability partners are merely investors who do not wish to participate
in the partnership other than to provide capital and to receive a share of the profits. Because
partners don't participate in management, they are considered passive investors. This means they
can't take partnership losses off their income tax return if they don't have other income to offset
it.

1.1.3 Considering Liability in Partnerships:

The general partnership is similar to a sole proprietorship in the liability of owners. In both cases,
the owner or owners have full liability for the debts of the business and for their actions. That's
why new partnership types were set up to limit the liability of one partner for the actions of other
partners. Limited liability in general means that the liability of any one partner is limited to that
person's investment in the partnership.

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In a limited partnership, limited partners have limited liability because they don't participate in
management decision-making. General partners don't have limited liability because they are
active in making decisions - and being liable for them.

1.1.4 Limited Liability Partnerships (LLP)4:

A limited liability partnership (LLP) is different from a limited partnership or a general

partnership but is closer to a limited liability company (LLC). In the LLP, all partners have
limited liability. LLP's are often formed by groups of professionals who want to pool their
resources and save money by sharing space.

An LLP combines characteristics of partnerships and corporations. As in a corporation, all

partners in an LLP have limited liability, from errors, omissions, negligence, incompetence, or
malpractice committed by other partners or by employees. Of course, any partners involved in
wrongful or negligent acts are still personally liable, but other partners are protected from
liability for those acts5.

1.2 Types of Partners.

Partners can be described as follows:

a) A general partner – that is, he/she is a partner in the fullest sense and participate in the
day to day management of the affairs of the Partnership.

b) Limited partners, these are those who invest in the partnership but who have no
participation in day-to-day operations and who are not usually considered to have
liability.

c) An active partner – that is, he/she is a partner who actively participates in the day to day
management of the business and is known to the world as a partner.

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Limited liability partnerships (LLP) retain the tax advantages of the general partnership form, but offer some
personal liability protection to the participants. Individual partners in a limited liability partnership are not
personally responsible for the wrongful acts of other partners, or for the debts or obligations of the business.
Because the LLP form changes some of the fundamental aspects of the traditional partnership, some state tax
authorities may subject a limited liability partnership to non-partnership tax rules. The Internal Revenue Service
views these businesses as partnerships, however, and allows partners to use the pass through technique. Existing
partnerships that wish to take advantage of LLP status do not need to modify their existing partnership agreement,
though they may choose to do so. In order to change status, a partnership simply files an application for registration
as a limited liability partnership with the appropriate state agency. All states require disclosure of the partnership's
name and principle place of business. Some states also require, among other things, identification of the number of
partners, a brief description of the business, a statement that the partnership will maintain insurance and written
acknowledgment that the limited liability status may expire.
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In recent years, the limited liability company has become more common than the general partnership and the
limited partnership, because it has more limited liability for the owners (as the name suggests). But there are still
cases in professional practices in which some partners want to be limited in the scope of duties and they just want to
invest, having the liability protection of being in a limited partnership.

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 d) A dormant partner – sometimes called as the sleeping partner, that is, a partner who
takes no active part in the management but is nevertheless liable as a partner.
d) A quasi partner – that is, a person who, in fact, is not a partner but who is liable for
debts of the partnership as a consequence of holding out, that is causing people to believe
he is a partner.

e) A salaried partner – commonly found in professional firms, may receive a fixed

remuneration irrespective of profits or fixed salary every month plus a small percentage
of the profits. The firm is fully responsible for his/her acts.

1.3 Formation of a partnership:

The formation of a partnership requires a voluntary "association" of persons who "co-own" the
business and intend to conduct the business for profit. Persons can form a partnership by written
or oral agreement, and a partnership agreement often governs the partners' relations to each other
and to the partnership. The term person generally includes individuals, corporations, and other
partnerships and business associations. Accordingly, some partner-ships may contain individuals
as well as large corporations. Family members may also form and operate a partnership, but
courts generally look closely at the structure of a family business before recognizing it as a
partnership for the benefit of the firm's creditors.

Certain conduct may lead to the creation of an implied partnership. Generally, if a person
receives a portion of the profits from a business enterprise, the receipt of the profits is evidence
of a partnership. If, however, a person receives a share of profits as repayment of a debt, wages,
rent, or an ANNUITY, such transactions are considered "protected relationships" and do not lead
to a legal inference that a partnership exists.

It is important to note that in as much as a partnership at law can be formed orally; it is prudent
practice that for evidential purposes and in the wake of modern practice, a partnership be made
in writing. This will even help in clearing the ambiguities that may result into unnecessary
disputes.

1.3.1 4. Mandatory registration.

Section 4 (1) of the Partnership Act, 2010 provides that; A firm carrying on business in
Uganda under a business name which does not consist of the true surnames of all partners
who are individuals and the corporate names of all partners which are corporations without
any addition other than the true first names of individual partners or initials of the first
names; and the corporate names of all partners which are corporations, shall register its name
under the Business Names Registration Act.

(2) Where any persons operate a business as a partnership in contravention of subsection(1),

every party to the business commits an offence and is liable on conviction, to a fine not
exceeding twenty currency points and to an additional fine not exceeding five currency points
for each day for which the offence continues after the expiration of fourteen days.

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In essence if persons want to conduct under a partnership using a name not being their
surnames then registration is mandatory. Otherwise they will risk being held liable under
section 4 (2) of the Partnership Act.

1.4 Tests of Partnership Existence:

Because it is frequently important to know whether a partnership exists (as when a creditor
has dealt with only one party but wishes to also hold others liable by claiming they were
partners, a number of tests have been established that are clues to the existence of a
partnership of a partnership: “the association of two or more persons to carry on as co-
owners a business for profit” The three elements are (1) the association of persons, (2) as
co-owners, (3) for profit.

1.4.1 A relationship that exists between or among persons:

This element is pretty obvious. A partnership is a contractual agreement among persons, so the
persons involved need to have capacity to contract. But the partnership Act does not define the
word person or persons. However, in general application of the law a person has been defined as
an individual, corporation, business trust, estate, trust, partnership, association, joint venture,
government, governmental subdivision, agency, or instrumentality, or any other legal or
commercial entity”. In this case for a partnership to subsist, the relationship has to be between
two or among persons as one person cannot form a partnership.

1.4.2 Conducting a business in Common:

If what two or more persons own is clearly a business—including capital assets, contracts with
employees or agents, an income stream, and debts incurred on behalf of the operation—a
partnership exists. A tougher question arises when two or more persons co-own property. Do
they automatically become partners? The answer can be important: if one of the owners while
doing business pertinent to the property injures a stranger, the latter could sue the other owners if
there is a partnership.

Co-ownership comes in many guises. The four most common are joint tenancy, tenancy in
common, tenancy by the entireties, and community property. In joint tenancy, the owners hold
the property under a single instrument, such as a deed, and if one dies, the others automatically
become owners of the deceased’s share, which does not descend to his heirs. Tenancy in
common has the reverse rule: the survivor tenants do not take the deceased’s share. Each tenant
in common has a distinct estate in the property. The tenancy by the entirety and community
property (in community-property states) forms of ownership are limited to spouses, and their
effects are similar to that of joint tenancy. Suppose a husband and wife who own their home
as tenants by the entirety (or community property) decide to spend the summer at the
seashore and rent their home for three months. Is their co-ownership sufficient to establish
that they are partners? The answer is no. To establish a partnership, the ownership must
be of a business, not merely of property.

1.4.3 Sharing of Profits

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There are two aspects to consider with regard to profits: first, whether the business is for-profit,
and second, whether there is a sharing of the profit.

While co-ownership does not establish a partnership unless there is a business, a business by
itself is not a partnership unless co-ownership is present. Of the tests used by courts to
determine co-ownership, perhaps the most important is sharing of profits. This means that
associations/relationships formed not for profit making like clubs, groups cannot subsist as
partnerships. Even if a relationship does not actually make profit, the mere fact that it was
formed for purposes of making profit is enough in itself. What is important is the capacity to
make profits.

Note that a partnership can exist orally and without any paper work (orally). But to
ascertain the existence of a partnership the above three tests have to subsist in such a
relationship.

1.4.6 Other Factors:

Courts are not limited to the profit-sharing test; they also look at these factors, among others: the
right to participate in decision making, the duty to share liabilities, and the manner in which the
business is operated

1.4.6.1 Creation of Partnership by Estoppel:

Ordinarily, if two people are not legally partners, then third parties cannot so regard them. For
example, Ernest and Vivian own equal shares of a house that they rent but do not regard it as a
business and are not in fact partners. They do have a loose “understanding” that since Ernest is
mechanically adept, he will make necessary repairs whenever the tenants call. On his way to the
house one day to fix its boiler, Ernest injures a pedestrian, who sues both Ernest and Vivian
Since they are not partners, the pedestrian cannot sue them as if they were; hence Vivian has no
partnership liability.

Suppose that Ernest and Vivian happened to go to a lumberyard together to purchase materials
that Ernest intended to use to add a room to the house. Short of cash, Ernest looks around and
espies Derrick, who greets his two friends heartily by saying within earshot of the salesman who
is debating whether to extend credit, “Well, how are my two partners this morning?” Messrs.
Ernest and Vivian say nothing but smile faintly at the salesman, who mistakenly but reasonably
believes that the two are acknowledging the partnership. The salesman knows Derrick well and
assumes that since Derrick is rich, extending credit to the “partnership” is a “sure thing.” Messrs.
Ernest and Vivian fail to pay. The lumberyard is entitled to collect from Derrick, even though he
may have forgotten completely about the incident by the time suit is filed.

Partnership by estoppel has two elements: (1) a representation to a third party that there is in fact
a partnership and (2) reliance by the third party on the representation. Chavers v. Epsco, Inc., for
an example of partnership by estoppel.

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2.1 Relations of partners to outsiders:

Every partner is an agent to the firm and his other partners for the purpose of the business of the
partnership, and the acts of every partner who does any act for carrying on the ordinary
course of business of the firm bind the firm and his partners, unless the partner so acting has in
fact no authority to act for the firm in the particular matter, and the person with whom he is
dealing either knows that he has no authority or does not know or believe him to be a partner6.

The above mentioned section states that each partner in an agent to other partner. Each partner
when contracting with outsiders are agents and principals at the same time. There are four
elements which must be satisfied for the act of the partner to bind the firm and other partners to
wit;

a) The act must be done in relation to the partnership business.

b) The act done must be in the ordinary course of business.
c) The act must be done in the capacity as a partner and not as an individual person.
d) However, if the person with whom he is dealing either knows that he has no
authority or does not know or believe him to be a partner.

Besides an act or instruments relating to the business of the firm and done/executed in the firm-
name, or in any other manner showing an intention to bind the firm, by any person thereto
authorized, whether a partner or not, is binding on the firm and all the partners7.

A father and son were partners in a firm. The firm was in financial difficulties. They were being
pressed by the creditors and they had no money to pay back the creditors. The son assigned book
debts to the creditors. The son did this without informing the other partner i.e the father. Later
the firm was declared bankrupt and the trustee sought to set aside the agreement stating that it
was executed by the individual. Court held that the agreement was bonding because it was
an instrument relating to the business of the firm and there was some intention to bind the
firm.

When 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 authorized
by the other partners; but this section does not affect any personal liability incurred by an
individual partner. See section 6 and 7 of the partnership Act, 2010.

This section explain that if a partner uses the fund of the firm for his personal purposes which is
not connected with the ordinary course of business, then the other partners will not be liable for
his act, but if it was authorized by the other partners therefore all the partners can be made liable.

6
Section 5 of the Partnership Act, 2010 and the case of British Homes Assurance Corporation v Peterson [1902] 2
Ch 404.
7
See Section 6 of the Partnership Act, 2010 and Re Briggs & Co (1906).

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If it has been agreed between the partners that any restriction shall be placed on the power of any
one or more of them to bind the firm, no act done in contravention of the agreement is binding on
the firm with respect to persons having notice of the agreement. See section 8 of the
Partnership Act, 2010.

2.2 Liability of Partners:

Every partner is liable jointly with the other partners for all debts and obligations of the firm
incurred while he/she was a partner. See section 9 of the Partnership Act, 2010. If a partner
dies, his estate becomes severely liable for the debts and obligations in so far as they remain
unsatisfied but subject to the prior payment of his separate debts.

If a partner who is not authorized to act on behalf of the firm for any transaction, and the third
party knows about it, and if the third party goes on to contract with the unauthorized partner, the
other partners cannot be held liable for his unauthorized act.

2.3 Incoming Partners:

When a person is admitted as a partner into an existing firm he immediately assumes the liability
of a partner but he will not be liable for anything done before he became a partner except by
special agreement. See Section 19 of the Partnership Act 2010. Although the special agreement
is enforceable by any of the parties to it, creditors of the old firm do not have any right under it
against the incoming partner. Therefore any debts contracted before he joined the firm are to be
shouldered by his co-partners alone. However, the Partnership Act does not impose any
restriction or prohibit any incoming partner from concluding an agreement whereby he holds
himself liable to the firm’s creditors for debt contracted while he was the partner of the firm.

2.4 Retiring Partners:

When a partner retires from the firm, he remains liable for the partnership debts incurred before
his retirement. This is clearly stated in Section 19(2), which says that ‘a partner who retires from
the firm, he remains liable for the partnership debts incurred or obligations incurred before
retirement’.

However a ‘retiring partner may be discharged from any existing liabilities by an agreement to
that effect between himself and the members of the firm as newly constituted and the creditors,
and this agreement may be either express or inferred as a fact from the course of dealing between
the creditors and the firm as newly constituted. Where the debts incurred after a partner’s
retirement, he is still liable to persons who deal with the firm after a change in its constitution
unless he has given express notice to such persons that he is no longer a partner.

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In Phillips Singapore Private ltd v Han Jong Kwang & Anor [1989] 2 MLJ 323, it was held
that the mere fact of registration of retirement in the Registry of Business will not give notice to
a third party of that party.

2.5 Rights and duties of partners in the Absence of Agreement:

a) All partners are entitled to share equally in the capital and profits of the business and
must contribute equally to losses.

b) Every partner may take part in the management of the firm.

c) No partner is entitled for any remuneration while acting as a partner.

d) No person may introduce a partner with the consent of other partners.

e) No partner is entitle to the interest on capital before the ascertainment of the profits.

3.0 Dissolution of Partnership:

Partners are at liberty to fix the duration of the partnership. Where no fixed term has been agreed
upon for the duration of the partnership, any partner may terminate the partnership at any time on
giving notice of his intention to do so to all the other partners – section 28(1).

3.1 By agreement:

The partnership articles may fix the duration of partnership, and the partnership is terminated on
the expiry of the period. The partners may mutually agree to dissolve the partnership at any time.

3.2 By operation of law:

Expiration. If the partnership it entered into for a fixed term. (s.34 (1)(a)) or for a single
adventure or undertaking (s.34 (1)(b) ), the partnership is dissolved on the expiration of the fixed
term or termination of the adventure or undertaking.

Notice. If the partnership is entered into for an undefined time, any partner may determine the
partnership at any time by notice to the partners (s.34 (1)(c)). Such a partnership is a partnership
at will and may be determined at any time on notice. The partnership is dissolved as from the
date mentioned in the notice as the date of dissolution. If no date is mentioned, it is dissolved
from the date of the communication (s.34 (2)).

Death or bankruptcy: see Section 35 of the Partnership Act, 2010.

Every partnership is dissolved as regards all the partners by the death or bankruptcy of any
partner.

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3.3 By charging on shares:
Where a partner suffers his share of the partnership property to be charged with payment of his
personal debt, the other partners have the option of dissolving the partnership (s.35 (2)).

3.4 By supervening illegality. See Section 36 of the Partnership Act, 2010.

If an event occurs which makes it unlawful for the business of the firm to be carried on or for the
members of the firm to carry on in partnership, the partnership is dissolved (s.36).

3.5 Dissolution by the Court:

The courts by virtue of section 37 of the Partnership Act, 2010 may dissolve a partnership on the
application by the other partner.

a) Partner’s mental incapacity:

The court may dissolve the firm when a partner becomes insane by virtue of section 37 (a). The
partner concerned must be unable to perform his duties, because of mental disorder, of managing
his property and affairs. The insanity must be of permanent nature, otherwise there can be no
grounds to dissolve the partnership.

b) Partner’s physical incapacity:

According to section 37(b) Partnership Act, 2010. The incapacity must be permanent. In
Whitwell v Arthur (1865) 35 Beav 140, a partner was paralyzed for some months. By the time
the case reached the court the partner had recovered and the court did not grant the dissolution.

c) Conduct Prejudicial to the business:

Section 37(c) Partnership Act, 2010 provides that a partnership may be dissolved when a partner
is found to be guilty of any misconduct. This situation will be considered by the courts as
‘affecting prejudicially the carrying on of the business. Moral misconduct is not enough unless,
in the view of the court, it is likely to effect the business. In snow v Milford (1868) 18 LT 142,
a partner’s massive adultery all over Exeter was not regarded by the court as sufficient grounds
for dissolution under the section.

d) Breach of agreement:
The court may dissolve a partnership by section 37(d) partnership Act, 2010 when one partner
breaches the partnership agreement either willfully or persistently. Here the word willful means a
serious breach inflicting damage to the business or on the firm. However, the court will not
interfere if the breach was a minor one and has no impact on the business of the firm. Thus
occasionally bad tempered or behaving rudely will not suffice.
Note: No partner can force dissolution by his own default.

e) Business carried on at a loss.

This is provided by section 37(e) Partnership Act 2010. if the business of the partnership can
only be carried on at a loss that it can be petitioned to the court to dissolve the partnership. As we

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 know the essential of having a partnership is in order for two or more people to get together in
the common view of making profits. If this purpose is defeated then it is proper for the courts to
dissolve the partnership.

f) On Just and equitable ground.

According to section 37(f) Partnership Act, 2010, the court may dissolve the partnership if it is
just and equitable to do so. In re Yenidje Tobacco Co Ltd 2 Ch 426, company dissolution
based upon the fact that the company was in reality a partnership, that deadlock between the
partners is enough for dissolution, even though the business is prospering.

A partnership is a business arrangement in which two or more people own an entity, and
personally share in its profits, losses, and risks. The exact form of partnership used can give
some protection to the partners. A partnership can be formed by a verbal agreement, with no
documentation of the arrangement at all. However, there may be subsequent disagreements
among the owners at a later date, so it makes sense to create a written document that states
how certain situations are to be handled. This partnership agreement should at least cover
the following topics:

 The rights and responsibilities of each partner;

 Whether partners are designated as general partners or limited partners;
 The proportions of partnership gains and losses to be apportioned to each partner;
 Procedures related to the withdrawal of funds from the partnership, as well as any
limitations on these withdrawals;
 How key decisions are to be resolved;
 Provisions regarding how to add and terminate partners;
 What happens to partnership interests if a partner dies;
 What steps to follow to dissolve the partnership;
 The proportions of residual cash paid out to the partners in a liquidation;
In addition to the partnership agreement, the partners must engage in a number of
other formation activities that are common to all types of businesses. These actions
include:
 Register the business name;
 Obtain an employer identification number;
 Obtain any licenses required by governments where the partnership plans to operate;
 Open a bank account in the name of the partnership;
 File an annual informational return with the Internal Revenue Service .

Areas for further reading:

1. Part VI of the partnership Act. 2010 on limited liability partnerships. If partners

want to protect themselves from unforeseen risks then they have to form a limited
liability partnership.

2. Section 10 to 13 of the partnership Act, 2010. On liability of a minor. Note that a

minor can become a partner in a partners but his/her liability is limited.

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3. See section 22 and 23 on partnership property.

4. Admission of a partner. It is possible but contractual.

5. A partnership can not survive the partners. See section 35 of the partnership Act,
2010.

6. Section 19 of the Partnership Act, on incoming partners (those admitted) but also
their liability.

7. Section 10 of the partnership Act on admission of a minor partner.

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