Return to Contents Limited Liability Partnerships: True Partnerships? Jonathan Walker The Limited Liability Partnerships (Jersey) Law 1997 ("the Law") creates a new type of legal entity in Jersey: a partnership that is a separate legal person distinct from the partners of whom it is composed but which is not a body corporate. It is an entity which only comes into existence as a separate legal person and obtains the benefits of the Law upon registration under the Law. I shall consider whether a limited liability partnership can truly be characterised as a partnership for the purposes of Jersey law. There is no general partnership legislation in Jersey equivalent to the hip Act 1890 [1] in England and Wales which supplies a definition of partnership and sets out rules for determining the existence of a partnership. Partnership is however an established concept of customary law in Jersey. Customary law is a developing traditior example, Alan Binnington's article "Frozen in Aspic? The Approach of the Jersey Courts to the Roots of the Island's Common Law" [2] ). It has no finite range of sources, and no single authority can give a complete statement of the customary law on any subject, but when looking for a description of the fundamental idea of partnership for these purposes, Pothier's Traité du Contrat de Société in his commentary on the Coutume d'Orléans (1827 edition, from which all references in this article are taken), is an essential guide. Where partnership matters ome before the courts in Jersey, case law has tended to look to English law and English authorities for guidance rather than to the usual commentators in relation to customary law. In Cooley v Wood (with Hambros as party cited) [3], Le Cras, Lieutenant Bailiff stated: "There was no local authority put to the Court: the precedents relied on by the parties so far as relevant, are very old. In the circumstances the Court finds the law is not settled and adopts the approach set out by, it would seem, the English Partnership Act, 1890." To assist it in determining the liability of partners and former p in Golder v Le Quesne and Thacker [4] the Court turned for guidance to, amongst other authorities, the English law textbook, Lindley & Banks on Partnership. A consideration of contrats de société in this context is nevertheless valuable. The consonance of partnerships and contrats de société has been acknowledged in statute law in Jersey. Incorporating the rules of customary law applicable to partnerships into the Limited Partnerships (Jersey) Law 1994, Article 41 of that law calls partnerships "contrats de société" and the English authorities in relation to partnership matters have themselves referred to Pothier. Whilst cering the nature of partnership in Holme v Hammond [5] Cleasby B, describing Pothier as "a very accurate writer", adopted a translation (rendered by the author of an English textbook on partnership) of Pothier's description of partnership in his Traité and concluded: "that, in my opinion, explains the general nature of partnership". Holme v Hammond predates the English Partnership Act, but similar principles still apply in the United Kingdom for determining what is or is not a partnership. The Partnership Act defines partnerships as follows: "Partnership is the rel which subsists between persons carrying on a business in common with a view of profit" . [6] Pothier defines a contrat de société as follows: "Le Contrat de Société est un contract, par lequel du plusieurs personnes mettent ou s'obligent de mettre en commun quelque chose, pour faire en commun un profit honnête, dont ils s'obligent réciproquement de se rendre compte". [7] Pothier sets out four characteristics that are essential to a contrat de société: (i) that each of the parties brings or obliges itself to bring something to the arrangement; (ii) that the arrangement is established for the common benefit of each of the parties; (iii) that the parties propose, by the arrangement, to make a gain or profit in which each of the contracting parties can hope to have a share by virtue of what it has brought to the arrangement; and (iv) that the business which is the object of the arrangement and for which the contracting parties entered into the arrangement should be something lawful and that the profit which they propose to withdraw should be an honest profit. It will be seen that a limited liability partnership, satisfying the requirements for registration under the Law, exhibits all of the characteristics essential to a contrat de société The Law provides that a limited liability partnership can only exist where the features set out in Article 2(2) of the Law exist. Article 2(2) is in the following terms: "A limited liability partnership may be registered where persons who wish a business to be carried on with a view of profit have agreed (with or without other terms)- (a) that the business shall be carried on, following the registration date, in the form of a limited liability partnership; (b) that they shall each contribute effort and skill to the business as an agent of the limited liability partnership but not of each other, in accordance with Article 15; and (c) that the profits of the business shall be divided between them and that they shall each have an interest in the limited liability partnership property to the extent described in paragraph (6)." I will take the four essential characteristics of a contrat de société determined by Pothier in turn and consider how they relate to the requirements for registration of a limited liability partnership. "Il est de l'essence du contrat de société que chacune des parties apporte ou blige d'apporter quelque chose à la société; ou de l'argent, ou d'autre effets, ou son travail et son industrie" [8] The first requirement Pothier identifies is that each party to a contrat de société must bring something of value to the arrangement. Contributions need not necessarily be all of the same type; one partner may bring money or goods, another may contribute labour, but whatever is brought must be of some value ("appréciable"). In this regard Pothier contrasts a contrat de société with arrangements where only one person contributes. He gives as examples of those types of arrangement, gifts or arrangements whereby a party receives a share of profits without contributing anything of value. In a limited liability partnership each partner is similarly required to contribute to the arrangement but the requirement is more specific in that each is required to contribute effort and skill to the business, as set out in Article 2(2)(b). The more specific requirement in the Law reflects and acknowledges the definition of partnership in the English Partnership Act which requires the carrying on of a business in common. "il est de l'essence de ce contrat que la société soit contrac l'intérêt commun des parties". [9] The second characteristic of a contrat de société that Pothier identifies is that the arrangement must have been made with the intention that it should operate for the benefit of all the parties to it. An arrangement which envisages only one party benefitting is not a contrat de société but some other kind of arrangement such as a contrat de mandat. It is not however essential that each party should necessarily benefit in all circumstances but rather that they must have the opportunity, even if it is conditional. "Il n'est pas néanmoins nécessaire, pour la val contrat de société, que chacune des parties contractantes doive avoir, en quelque cas que ce soit, une part dans le profit de la société; il suffit qu'elle puisse espérer d'y avoir part; et on peut faire dépendre de la quantité à laquelle montera le profit de la société, comme d'une condition, la part que l'un des associés y aura." [10] In order for a limited liability partnership to be registered, the Law specifies that the persons involved must have agreed that the profits of the business shall be divided between them and that each person shall have an interest in the limited liability partnership property and, accordingly, that the arrangement is established for the common interest of all the parties. This communion of property and profits amongst the parties, essential to a partnership is, it may be noted, fundamentally different from the position of a shareholder in a company who has no interest in the property of that company until it is distributed. "Il est de l'essence du contrat de société q parties se proposent par le contrat, de faire gain ou profit, dans lequel chacune des parties contractantes puisse espérer d'avoir part, à raison de ce qu'elle a apporté à la société." [11] The third essential characteristic of a contrat de société described by Pothier links the first two essential characteristics by identifying that the benefit all the parties must hope to gain (second characteristic) as a result of what they have all contributed (first characteristic) must be as a result of the arrangement made between them (" par le contrat"). In order for an arrangement to be a contrat de société it is not necessarily enough that property simply be held in common even if the joint owners all share profits from the use of that property. Pothier expands on this in the premier appendice to his Traité. He distinguishes from contrats de société the type of communauté in relation to property which may arise between two or more people without there being any contrat de société or other agreement between them. Such a communauté may arise, for example, when several heirs inherit jointly or property is bequeathed jointly to legatees. Such an arrangement may be a type of quasi-contract but communauté is not the same as a contrat de société. He says: "la principale différence entre la société spèce de communauté, c’est que la société est un contrat, et que la communauté, qui en résulte, est formée par la volonté et le consentement des parties. Au contraire, cette espèce de communauté n’est pas un contrat, et elle se forme sans le consentement et la volonté des parties." [12] Further, if the contrat is to be a contrat de société and not some other type of contrat the agreement must intend that the first and second characteristics described earlier be present: that each of the parties should have the hope of sharing in any profit or gain and that the hope must derive from the contribution made by each of them. A limited liability partnership demonstrates this characteristic by virtue of the requirement that it may only be registered where there are persons who wish a business to be carried on with a view of profit and that it be carried on in the form of a limited liability partnership. As previously outlined, all parties, as a matter of law, have an interest in the profits and the property of the limited liability partnership. "Enfin, pour qu'un contrat de soalable il faut que l'affaire, qui fait l'objet de la société, et pour laquelle les parties contractantes s'associent, soit quelque chose de licite, et que le profit, qu'elles se proposent d'en retirer, soit un profit honnête". [13] Pothier explains in relation to this fourth essential characteristic of a contrat de société that a contrat de société established for an unlawful purpose is "nul". This is a characteristic of any contrat and, although essential is not a distinguishing characteristic of contrats de société. A limited liability partnership does not directly depend on the lawfulness of the business for which it is established for its existence. Its existence, as an entity created by the Law, depends on registration under the Law and the subsistence of the partnership. Whilst the Law is not concerned with requiring expressly that a limited liability partnership be established for a lawful purpose nothing in the Law is inconsistent with this fundamental idea: rather, it assumes it. Insofar as an agreement to carry on business would be "nul" if the business which is its subject were to be unlawful, so also, it follows, would be the registration by virtue of the requirement for the registration of a limited liability partnership that there be such an agreement. Whilst displaying all the characteristics identified by Pothier as essential to a contrat de société, a limited liability partnership also has the special characteristic that it has a separate legal personality distinct from the partners of whom it is composed. Other characteristics derive from this fact. The separate legal personality of a limited liability partnership is established by the Law. It states that: "a limited liability partnership is a legal person (other body corporate) distinct from the partners of whom it is for the time being composed". [14] The Law also provides that: "any change in the limited liabirtnership brought about by the admission, retirement or death of a partner, or by a partner other than an individual ceasing to exist, shall not affect the existence, rights or liabilities of that legal person." [15] An entity may have a separate legal personality but not be a body corporate. As a matter of English law, for example, the Partnership Act 1890 provides in section 4(2) that in Scotland a firm (which is not a body corporate) is a legal person distinct from the partners of whom it is composed. The Law expressly provides that a limited liability partnership is not a body corporate by including in Article 2(4) the words "other than a body corporate". Such a separate legal personality is also not inconsistent with partnership and does not imply that a limited liability partnership has perpetual succession. In not having perpetual succession a limited liability partnership is fundamentally different in character from a body corporate. Notwithstanding that a limited liability partnership is a legal person distinct from its members and despite its existence, rights and liabilities not being necessarily affected by changes in the partnership, like any general partnership a limited liability partnership depends for its existence and its existence as a separate legal person depends upon there being a partnership in existence. A limited liability partnership may only be registered in the first place where there is a partnership (as described earlier), and although the separate legal personality subsists in most circumstances until the registration of the limited liability partnership under the Law has been cancelled, if the limited liability partnership ceases to have two or more partners at any time so that the partnership ceases to exist, the limited liability partnership ceases to be a legal person (Article 25(4)(a) of the Law). Even though, therefore, the separate legal personality may survive changes in the partnership (subject to the partnership agreement, as provided for in Article 20 of the Law) it does not have a succession which is perpetual and may cease to exist for some external reason dependent on its partners (or lack of them) and have no succession at all. This characteristic may be contrasted with the characteristics of a company. The separate legal personality of a limited liability partnership would not survive the death of all or all but one of the parties. With the exception of limited life companies, introduced by the Companies (Amendment No 3) (Jersey) Law 1997, which may be wound up and dissolved on the happening of a contingent event, including the death of a member, the existence of a company is unaffected by the death of all of its shareholders. Limited liability partnerships may however be distinguished from limited life companies in that they do not have the other characteristics of a company and, further, whereas with a partnership (whether having limited liability or otherwise) it will cease to exist upon the death of all or all but one of the partners and the separate legal personality of a limited liability partnership would not survive, the separate existence of a limited life company survives the event until its winding up is completed and it is dissolved. Not only must there be a partnership for a limited liability partnership to come into being as a separate legal person, while it does exist it must depend upon its members for its continued existence. Under the Law it is a right of the partners to determine amongst themselves according to procedures created only by the partnership agreement when and how the partnership is to be dissolved except in the instance where termination is brought about automatically by there being fewer than two partners remaining. A partnership agreement is an agreement only between the partners. The legal person that is the limited liability partnership is not a party to it. The Law defines a partnership agreement in this way: "any agreement of the partners as to airs of a limited liability partnership and the rights and obligations of the partners among themselves". [16] It follows that the existence of a limited liability partnership is dependent upon and determined by its partners in accordance with procedures created only by agreement between the partners themselves. The exception outlined above where a partnership may come to an end on the occurrence of an event (there being fewer than two partners remaining) rather than by agreement amongst the partners, is a further incidence of the dependence of limited liability partnerships upon there being a partnership for continued existence. It is not inconsistent with the idea. The power of the partners contained in Article 20 of the Law to determine in the partnership agreement that the partnership should not be dissolved by any change in the persons who are partners in the partnership is also entirely consistent with the characteristic that a limited liability partnership depends for its existence as a separate legal person upon its members as it recognises that the partnership depends upon the partnership agreement. In relation to a limited liability partnership the Law provides that each partner is the agent of the limited liability partnership but is not the agent of the other partners in the partnership. Such an arrangement is consistent with partnership notwithstanding the exclusion of the mutual agency between all the parties. Mutual agency between partners themselves is generally a characteristic of partnership. The English Partnership Act provides that:
"every partner is an agent of the fir his other partners for the purpose of the business of the partnership". [17]
Mutual agency is not however fundamental to partnership. Agency follows from partnership and not the other way around. In Holme v. Hammond, at page 233 Cleasby B. said: "My view is that agency is deduced from partnership, rather than partnership from agency. But neither does partnership always imply this mutual agency." Indeed, although Pothier does consider questions of agency in relation to the "administration des biens et des affaires de la société" and in relation to responsibility for debts, mutual agency is not amongst the essential characteristics of a contrat de société identified by Pothier, as considered earlier. Mutual agency may perhaps better be considered as being an incident of partnership than a necessary characteristic. Furthermore, the agency of any partner is always admitted to be susceptible to being limited. Section 5 of the Partnership Act 1890, (the first part of which was set out earlier) continues: "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 partner." Pothier also notes that in order for a partner to be able to incur a liability which binds the other partners he must actually have authority and accordingly that there may be partnerships without such authority. "Pour qu’une dette soit une detiété, qui oblige tous les associés, il faut que celui, qui l’a contractée, ait le pouvoir d’obliger tous les associés". [18] In normal circumstances such authority is presumed. Considering the wording of a 1673 Ordinance relating to the power to commit other parties to debts, Pothier notes: "ne distinguant point s'il a ou non le pouvoir d'administrer, [l'Ordonnance] parait supposer que chacun des associés avoir ce pouvoir" but, significantly, adds "tant que le contraire nas connu". [19] Pothier continues in this regard: "la raison est, qu'étant d'usage s les sociétés de commerce, que les associés se donnent réciproquement le pouvoir de contracter et de faire les affaires de la société les uns pour les autres, celui, qui a contracté avec l'un des associés, a eu un juste sujet de croire que cet associé avait ce pouvoir lorsque la clause du contrat de société, qui lui ôte ce pouvoir, ne lui était pas connue, ni dans le public" . [20] It is apparent, therefore, that although mutual agency amongst partners may be expected, the extent of any such agency may be limited provided that the counterparty is aware of the position. The effect of the provisions in the Law in relation to agency is only a statutory limitation of powers that may in any event be limited by the partnership agreement. That limitation of authority is required by and is consequential upon the limitation of liability of partners in relation to the acts of other partners provided for by the Law and insofar as mutual agency is not an essential or defining characteristic of partnership but is merely presumed (subject to knowledge to rebut the presumption), the absence of mutual agency amongst the partners of a limited liability partnership is not inconsistent with the fundamental partnership characteristics of a limited liability partnership, and does not preclude a limited liability partnership from being a true partnership. Whilst mutual agency may be an indicator of partnership, the reverse is not necessarily true. Insofar, therefore, as a limited liability partnership must exhibit all the essential characteristics of a contrat de société in order to be registered and its special characteristics are not inconsistent with the characteristics of partnerships nor with contrats de société, as described by Pothier, a limited liability partnership should be considered to be a true partnership for the purposes of Jersey law. Jonathan Walker is a solicitor of the Royal Court and an associate with Mourant du Feu and Jeune, PO Box 87, 22 Grenville Street, St. Helier, Jersey JE4 8PX |
| Footnotes - (Top) [1] - 53 & 54 ct. c 39 [2] - Jersey Law Reolume 1, Issue 1 at page 21 [3] - 1993 JLR 24 age 28 [4] - 1993 JLR 344 at p46 [5] - (1872) L.R. 18 at 234 [6] - Section 1, Pact 1890 [7] - Pothier, op. cit. Article P raire [8] - Pothier, op. cit, chaemier, § III, para 8 [9] - Pothier , op. cit, chapitrier, § III, para 11 [10] - Pothier , op. cit, chapitre prem, para 13 [11] - Pothier , op. cit, chaper, § III, para 12 [12] - Pothier , op. cit, premier appedndicle premier para 182 [13] - Pothier , op. cit, chapitre premiera 14 [14] - Article 2 (4), The Limited Liability Paey) Law 1997 [15] - Article 2 (4) (d. [16] - Article 1 ( [17] - Partnership Act, 1tion 5 [18] - Pothier , op. cit, VI, para 98 [19] - Pothier , op. cit, chapitra 98 [20] - Pothier , op. cit, chapitre V8 |
