A Partnership is a Business Relationship That is Based on Trust

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  A partnership is a business relationship that is based on trust. Discuss this statement in light of the partners’ duties and obligations under the Partnership Act No.16 of 2012.  INTRODUCTION. According to the Partnership Act No. 16 of 2012, a partnership is a relationship that exists between persons who carry on business in common with a view to making a profit. 1  Persons who have entered into a  partnership with one another are collectively called a firm.There are three specific elements of this definition which must be satisfied in order for a partnership to exist i.e. there must be;      A business;    Which is carried on by two or more persons in common;    With a view to profit Trust on the other hand is defined as a firm belief in the integrity, ability or character of a person or thing. It can also be defined as the act of placing confidence or reliance in a person or thing to do something or act in a certain manner. Within the context of partnerships therefore, the relationship between partners in a partnership is one that is characterized by each partner placing confidence or reliance in the other partners’ abilityto carry out their duties and obligations in the manner provided for under the Partnership Act and as agreed between themselves. Each partner is assumed to be of high integrityand good character. A high reliance is placed on trust with regards to the relationship between partners due to the nature of their relationship. The Partnership Act provides that each partner shall be an agent of the partnership for the  purpose of the business of the partnership. 2  It further provides that a partnership shall be liable for loss or injury caused by the wrongful act or omission of a partner to a person who is not a partner, if the partner was acting in the ordinary course of the business of the partnership; or acting with the authority of the partnership. 3  This shows that the acts of a partner can easily affect a partnership and thus trust between partners is an integral part of their relationship without which a partnership cannot survive. The importance of trust in a partnership is evidenced by the duties and obligations of partners provided under the Partnership Act No.16 of 2012which are: 1  Section 2, Partnership Act 2012 2 Sec7(3) Partnership Act 2012 3  Sec 21 Partnership Act 2012  1.   DUTY OF GOOD FAITH The Act provides that apartner has a duty to act in good faith towards the partnership and the other partners in the partnership, in relation to all matters affecting the partnership 4 .   Good faith is honest intent to act without taking an unfair advantage over another person. This duty is a continuing duty that arises starting with the formation of the partnership. It continues through the partnerships ongoing daily operations and ultimately through the partnerships sale and dissolution. Consequently if parties do not incorporate utmost good faith through an express agreement then law will imply it. As agents to each other, partners owe a duty of good faith to each other in relation to all partnership dealings and transactions this is a fiduciary duty 5 that forms a cornerstone of partnership law and under it a partner’s conduct .  Under this duty a partner shall:    Keep each of the other partners or their legal representatives informed of all matters affecting the  partnership;    Account to the partnership for any profits or benefits derived by the partner without the consent of the other partners from any business of the partnership or the use by the partner of the property of the  partnership, the name of the partnership or business connection 6 ;      Account to the partnership for any profits derived by the partner from a business carried on by the  partner without the consent of the other partners, which competes with and is of the same nature as the  partnership business 7 . The duty of good faith can only be achieved when there is trust and it also contributes to the growth of trust among partners. One can only act in good faith if there is trust between him/her and the other partners in a  partnership and acting in good faith enables the partners to develop a stronger sense of trust amongst them. If there is no trust among the partners there will always be suspicion of the other partners not acting in good faith, even when they do so, and this can lead to poor performance of the partnership and eventually dissolution of the partnership. 2.   DUTY OF DISCLOSURE ON FORMING OR JOINING A PARTNERSHIP  Partners have a duty of disclosure on forming or joining a partnership. 8  Disclosure is the act of releasing all relevant information pertaining to the partnership. All partners must disclose to each other fully upon forming the partnership. Full disclosure is especially important in the following circumstances: 4  Sec 10 Partnership Act 2012 5  A duty based on trust   6  Fiduciary duty not to make secret profits   7  Fiduciary Duty of Loyalty       When forming a partnership a person must disclose to prospective partners any matters that may likely influence their decision to form the partnership.    Before admission, an existing partner must disclose to a prospective partner anything known to them that would reasonably be expected to influence their decision to join.    Before entering into a partnership, a prospective partner must disclose all matters that may influence the decision of the existing partners to admit them.    Partners also have a duty to disclose anything involving a potential conflict of interest where they could personally benefit from a transaction with the  partnership. Partners involved in partnership affairs are expected to comply with a duty of disclosure. In order to make informed decisions, participating partners should make full disclosures about reasonably known risks and  potential benefits of a particular action. These disclosures relate to all partnership activities, including  partnership assets, operations, finances, debt, and contracts. As part of their duty of disclosure, relevant  partners should disclose any conflict of interest they may have relative to any partnership dealings or decisions. In order for the duty of disclosure to be discharged the following conditions must be met; first, the disclosure must be on all material facts; Secondly, the disclosure must be made in any event as soon as reasonable; Thirdly, the disclosure must be made to all the partners. This duty is also based on trust as each partner trusts that the other partners or prospective partners will disclose all relevant information and do so in an honest manner. The partners trust the other partners will not hide from them any relevant information likely to affect the partnership. The duty of disclosure is very important because one can only make a sound decision after having all relevant information, in this case, regarding the partnership. Failure to disclose any relevant information to a co-partner  before the formation of the partnership can easily lead to dissolution of a partnership. An example in this case can be if one is suffering from a terminal illness that may require him or her to be hospitalized for a long  period of time, failure to disclose this can be very tragic to a partnership. In this case a partnership may be affected due to absenteeism, which will translate to loss of business hours among other loses. The absence of a  partner particularly long-term absence cannot be ignored for it goes to the very root of a partnership. Such disclosure will only happen when there is trust. It may be that the partner in question did not trust the other  partners with such a sensitive issue for fear of embarrassment. This may be true but not healthy to the  partnership. Another example is the failure to disclose information like creditworthiness of an individual in the case of in coming partner or the stability of the partnership can not only be dangerous but also prejudicial to the parties in a partnership. 8  Sec 11 Partnership Act 2012  However, this duty may be waived in whole or part by agreement between prospective partners, or between the prospective partner and existing partners 3.   DUTY TO KEEP ACCOUNTING AND PARTNERSHIP RECORDS. The act provides that every partner shall have the responsibility to ensure that accounting records of transactions affecting the partnership in which he is involved are properly kept and the records are on request made available to the partnership or to any partner. A partner shall have the duty to cooperate with the person responsible for keeping records of the partnership or drawing up the accounts of the partnership on behalf of the partnership 9 . There needs to be trust among partners in order for them to keep proper accounting records as well as avail the same for inspection. This keeping of proper accounting records and availing them for inspection helps  promote trust among the partners in their daily dealings. As partners records are one of the tools through which the stability of the business is gauged. Without roper records decisions cannot be accurate and the economic stability of the partnership is jeopardized. 4.   DUTY TO SHARE PROFITS AND LOSSES The act furtherprovides that a partner is entitled to share equally in the profits of the partnership and is liable to contribute equally towards the losses incurred by the partnership in equal proportions 10 . A partner is not entitled to a share in the profits of the partnership and is not liable to contribute to any losses incurred by the partnership before he became a partner. The estate of a partner who dies is liable for debts and obligations incurred by the partnership after becoming  partner. This duty requires trust among partners so as to ensure that each partner contributes willingly towards losses incurred by the partnership and also to ensure proper and fair sharing of profits. 5.   DUTY IN MANAGEMENT OF PARTNERSHIP BUSINESS AND AFFAIRS. Section 15  of the Act provides that a partner is entitled to participate part in the management of the business of the partnership. Differences arising out of an ordinary matter connected with the business of the partnership shall be decided by the vote of a majority of the partners. Differences arising out of other matters connected with the business of the partnership shall be decided by the unanimous decision of all the partners. 9  Sec 16 Partnership Act 2012 10  Sec 12 Partnership Act 2012
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