Partnership by Estoppel

In term of business, partnership that may arise where, in fact, no formal partnership agreement is

in effect. A person who by conduct or words represents, or allows him/herself to be represented,

as a partner in a firm is liable for the credit or loans obtained by firm on the basis of such

representation. Also called as presumption of partnership.

In term of laws, a partnership by estoppel is a doctrine or a legal concept that allows a court to

provide a remedy to a plaintiff such as awarding him monetary damages. Essentially, this doctrine

requires a plaintiff to prove that a defendant’s conduct caused the plaintiff to believe that

defendant was in a partnership, which resulted in the plaintiff’s damages. Originally, a partnership

by estoppel came from judicial decisions or the common law. Eventually, some jurisdictions

enacted laws codifying this doctrine. In other words, a legislative body passed a law defining the

legal elements of a partnership by estoppel.

A plaintiff has the burden of proving a partnership by estoppel. In most jurisdictions, he does this

by showing: that a defendant held himself out as a partner, or that the defendant consented to

others holding him out as a partner; that plaintiff knew of the defendant holding himself out as a

partner; that the plaintiff reasonably relied on the claimed partnership; and that plaintiff suffered

damages. If a plaintiff proves these elements, a judge may rule that there was a partnership by

estoppel. A plaintiff is then likely to recover damages from a defendant. The doctrine of a

partnership by estoppel developed from judicial decisions. As time passed, the legislative bodies

of some jurisdictions recognized this concept.

Partnership by estoppels; liability Section 16:

(1) When a person, by words spoken or written or by conduct, represents himself, or consents to

another representing him to any one, as a partner in an existing partnership or with 1 or more

persons not actual partners, he is liable to any such person to whom such representation has been

made, who has on the faith of such representation, given credit to the actual or apparent

partnership, and if he has made such representation or consented to its being made in a public

manner he is liable to such person, whether the representation has or has not been made or

communicated to such person, so giving credit by or with the knowledge of the apparent partner

making the representation or consenting to its being made;

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(a) When a partnership liability results, he is liable as though he were an actual member of the

partnership,

(b) When no partnership liability results, he is liable jointly with the other persons, if any, so

consenting to the contract or representation as to incur liability, otherwise separately;

(2) When a person has been thus represented to be a partner in an existing partnership, or with 1

or more persons not actual partners, he is an agent of the persons consenting to such

representation to bind them to the same extent and in the same manner as though he were a

partner in fact, with respect to persons who rely upon the representation. Where all the members

of the existing partnership consent to the representation, a partnership act or obligation results; but

in all other cases it is the joint act or obligation of the person acting and the persons consenting to

the representation.

Supporting Case: GRAVOIS v. NEW ENGLAND INSURANCE COMPANY

Plaintiffs, John Andre Gravois, Jr., and his companies, Mariner's Plaza, Inc., Belle Passe Towing

Corporation and John G. Marine, Inc., filed suit against defendant, New England Insurance

Company, the professional liability insurer of attorney Edward F. Wegmann. The policy issued by

New England covers Wegmann for his liability on malpractice claims made against him for his

own actions, and also for Wegmann's liability for acts of any former owner, partner, officer,

director or stockholder employee of Wegmann's firm.

Plaintiffs allege that Wegmann and Gravois' attorney, Geoffrey Longenecker, were partners in the

law firm of Wegmann and Longenecker during which time Longenecker devised a plan to divert

Gravois' and his companies' assets to himself. Plaintiffs further allege that Wegmann improperly

notarized a procuration that enabled Longenecker to borrow $4.5 million in Gravois' name, and

thus aided Longenecker to implement his scheme. Although Gravois did not admit the

genuineness of his signature on the procuration, he alleged that he had signed various documents

in blank at Longenecker's request, that he never appeared before Wegmann, or the two attesting

witnesses, and that Wegmann notarized the document in Gravois' absence.

In their petition for damages, plaintiffs seek recovery from New England on two grounds. First,

they seek recovery from New England for Wegmann's virile share of liability as Longenecker's

partner for the wrongful acts committed by Longenecker while Longenecker was a practicing

partner in the alleged law firm of Wegmann and Longenecker. Second, plaintiffs seek recovery on

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claims made directly against Wegmann for Wegmann's improper notarization of the procuration

used by Longenecker to defraud them.

In response to plaintiffs' petition, New England filed a motion for summary judgment, arguing

that a partnership did not exist between Wegmann and Longenecker, and also an exception of

prescription, contending that any claims plaintiffs may have had against Wegmann directly had

prescribed. The trial court partially granted New England's motion for summary judgment and

exception of prescription. Plaintiffs appealed.

Gravois employed Longenecker as the attorney for himself and his companies, Belle Passe

Towing and John G. Marine, Inc., in the late 1970's. As their attorney, Longenecker rendered

legal services to Gravois and his companies and soon thereafter started acting as their financial

advisor. In 1981, while Longenecker was sharing office space with Wegmann in the First N.B.C.

Building, he advised Gravois that he should use his cash assets to make certain financial

investments. Longenecker informed Gravois that the investments could be legally arranged so that

Gravois, Belle Passe Towing and John G. Marine, Inc. would not be personally liable for any

amount in excess of their initial cash contributions. Longenecker then incorporated Mariner's

Plaza, Inc. to serve as the legal vehicle through which Gravois, Belle Passe Towing and John G.

Marine, Inc. would make their investments. In the initial report filed with the Secretary of State's

Office, Longenecker named himself as Mariner's Plaza's incorporator, sole director, sole officer

and sole agent for service of process. Longenecker did not provide Gravois or his companies with

the original stock certificates representing their shares of Mariner's Plaza, Inc.

In reliance upon Longenecker's advice, plaintiffs entered into several contracts and business

ventures, including investments involving undeveloped real estate, office buildings and

thoroughbred horses. Plaintiffs also relinquished to Longenecker all personal, business and

corporate records.

In connection with the investments, Longenecker advised Gravois to sign several documents

which he said were legally necessary in order to facilitate the investments. One of the documents

which Gravois claims to have signed in blank was a procuration authorizing Longenecker to

endorse and guarantee, in Gravois' name, a loan to Mariner's Plaza, Inc. in the amount of $4.5

million. Longenecker allegedly completed the procuration, dated June 30, 1982, had Wegmann

notarize it and then used it, without Gravois' knowledge or consent, to obtain a $4.3 million loan

from Central Savings & Loan Association on July 2, 1982. Longenecker allegedly used part of the

loan proceeds to buy from Central Savings a piece of property located in St. Tammany Parish.

The remainder of the loaned funds was to be used in the development of the property. The initial

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purchase of the property was made in Mariner's Plaza, Inc.'s name, but Longenecker later

transferred the property to himself, without the knowledge or consent of Gravois.

In mid-1983, Central Savings informed Longenecker that the July 2, 1982 loan had to be

restructured because it had exceeded lending limitations for a single borrower in violation of

federal banking regulations. Central Savings requested that Gravois sign personally as a guarantor

on the $4.3 million promissory note of Mariner's Plaza, Inc. Gravois complied with the request to

restructure the loan and personally guaranteed the note on June 3, 1983. Shortly thereafter,

Gravois began receiving phone calls and written correspondence from Central Savings and other

lending institutions requesting past due payments on several loans. Alarmed over what he thought

were obligations on which he was not personally liable, Gravois contacted his accountant, John

Guidry. Gravois and Guidry met with the banks on different occasions to learn that Gravois was a

personal guarantor on several loans. Meanwhile, Guidry attempted to gather the various

documents in order to determine the extent of Gravois' indebtedness. In early September 1983,

armed with a synopsis of the financial documents, Guidry notified Gravois that he had a legal

problem, not an accounting one, and told him it would be wise to obtain an attorney. Gravois

contacted an attorney from Thibodeaux in September 1983. That attorney then retained counsel

from New Orleans to assist with the case. Gravois, his attorneys and Guidry met with

Longenecker on several occasions in an effort to ascertain the extent of Gravois' liability in order

to avoid bankruptcy and to determine if any of the investments were salvageable. Through the

course of these meetings, Longenecker was uncooperative, refusing to let them see documents,

records or corporate books, but at one meeting, in September, 1984, he informed them that

Gravois could be personally liable for at least $400,000 of the debts. On the advice of their new

counsel, on October 12 and 13, 1983, a shareholders' meeting of Mariner's Plaza, Inc. and a board

of directors meeting of John G. Marine and Belle Passe Towing were held for the sole purpose of

removing Longenecker from the board and as an officer of the corporations. Also, on October 17,

1983 Gravois executed documents revoking all of Longenecker's powers of attorney. Although

Gravois initially filed suit against Longenecker on October 9, 1984, he did not file suit against

New England for the alleged acts of Wegmann until March15, 1985.

In his reasons for judgment, the trial judge stated in part:

The issues to be considered are:

a). Did a partnership exist between Wegmann and Longenecker?

b). Did a partnership by estoppel exist?

The Court holds that no partnership existed between Wegmann and Longenecker and will grant

the Summary Judgment on this issue. The Court holds that there exist sufficient factual and legal

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dispute as to the acts, and damages flowing from the acts of Mr. Wegmann, and the Court will

deny Summary Judgment on these issues. The act of Mr. Wegmann would be governed by a

prescription of one year. The plaintiff, Mr. Gravois knew of the act of Mr. Wegmann in June of

1983 when he signed the endorsement of the note for $4,800,000.00, and again by October 1983,

when he revoked the procuration to Longenecker. The suit was filed against New England on

March 15, 1985. The Court will maintain the Exception of Prescription.

The plaintiffs urge on appeal that a genuine issue of material fact does exist as to whether

Longenecker and Wegmann were law partners at the time the alleged wrongful acts were

committed, and therefore, summary judgment was improper. Alternatively, they contend that

should we conclude that the trial court was correct in finding that Wegmann and Longenecker

were, in fact, not partners, New England is nevertheless liable due to the existence of a

partnership under the theory of partnership by estoppel.

In support of its motion for summary judgment, New England offered sworn affidavits from

Wegmann and Longenecker. Wegmann states in his affidavit that he and Longenecker were

never, at any time, law partners. He states that they agreed to share office space and office

expenses but not profits and losses. Wegmann further states that, on isolated occasions,

Longenecker referred cases to him or requested that he handle a case and, in those rare instances,

the two would share the fee or Longenecker would pay him the fee for handling the matter.

Wegmann swears that never did he represent Gravois nor any of his corporations, nor did he

derive any fees from Longenecker's representation of Gravois. In his affidavit, Longenecker also

swears that he and Wegmann were never law partners but simply agreed to share space and office

expenses. Longenecker states that while he shared office space with Wegmann, he entered into a

partnership with attorney John Musser and that they formed the firm Longenecker and Musser

which associated with it attorneys James Smith and Terry McCall. Longenecker also states that he

never represented to anyone that Wegmann was his law partner.

Plaintiffs presented a statement of contested facts and attached several exhibits to its

memorandum in opposition to defendant's motion for summary judgment. The attached exhibits

showed that Wegmann and Longenecker's office stationery bore the letterhead "Wegmann and

Longenecker", the office door was marked "Wegmann and Longenecker", and the telephone

directories for the years 1981 and 1982 list the law firm of "Wegmann and Longenecker."

Likewise, the Martindale-Hubbell legal directory for the years 1981, 1982 and 1983 identifies

Edward F. Wegmann and Geoffrey H. Longenecker as members of the firm. Wegmann and

Longenecker also obtained professional malpractice insurance from October 1981 through

October 1983 from policies issued to the firm "Wegmann and Longenecker" by National Union

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Fire Insurance Company. The 1982-1983 policy includes a renewal application dated August 9,

1982 which names "Wegmann and Longenecker" on the line designated for "name of firm." The

renewal application lists "Wegmann and Longenecker" as the "applicant" and indicates that the

entity is a "partnership." Wegmann signed the application.

The affidavits accompanying defendant's motion for summary judgment provide convincing proof

that Wegmann and Longenecker never contracted, agreed or intended to form a partnership.

Although plaintiffs' contradictory evidence demonstrated that Wegmann and Longenecker's

employment relationship had the appearance of a partnership, the evidence fails to raise a specific

factual issue relevant to the criteria necessary for the creation of a partnership. In the absence of

other supporting evidence to refute the Wegmann & Longenecker affidavits, such as a partnership

income tax return or a partnership financial statement, the trial court correctly concluded, that as a

matter of law, Wegmann and Longenecker were not partners.

Regarding plaintiffs' contention that Wegmann and Longenecker created a partnership by estoppel

by their outward manifestations of a partnership, the evidence fails to support this claim.

In my view, given the evidence on the motion for summary judgment, the issue seems

inappropriate for summary resolution. The affidavits and evidence presented either to support or

oppose the motion for summary judgment put forth many genuine issues of material fact which,

in my opinion, should be decided by the ultimate trier of fact. While the majority considers the

absence of certain evidence such as a partnership income tax return or a partnership financial

statement of some importance, I believe that the absence of such evidence merely goes to the

weight of the other evidence and whether the other evidence is sufficient to find the existence of a

partnership in a trial on the merits.

First Principle

The doctrine of ‘holding out’ (estoppels) may result in liability for any person who holds himself

out to be a partner, but it does not of itself transform such a person into a partner of the firm.

For example, a retired partner, although no longer a partner in the firm, may continue to

incur liability if he holds himself out as still being a partner, or suffers himself to be so

represented by, for example, permitting the firm to continue using old stationery bearing his name

as partner. George’s repeated appearances could be interpreted as a comeback and, if he were to

continue to involve himself in the business of the firm to such an extent that third parties believed

he had not really retired at all, he could incur liability under s 14 of the Partnership Act 1890. He

would be estopped, as against those persons to whom who he had represented himself to be a

partner, from denying his liability. It must be stressed that liability under s 14 is not by itself

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capable of raising the status of an individual to that of partner, and so it does not of itself incur

liability for the firm. This is because an agent’s authority to bind the firm, as opposed to merely

binding himself, does not rest upon a representation made by the agent; such representation must

be made by the principal. However, if the firm is aware of such a situation and does nothing to

dispel the appearance of authority, liability on the part of the firm may be unavoidable.

The scenario does not suggest that the partners in Great Expectations have acquiesced in George’s

behaviour, but to continue to tolerate his interference may give rise to liability in that they will be

estopped from denying his ability to bind the firm. Further, George may be able to go some way

to support an argument that he again occupies the position of partner, albeit without the proper

label, and should therefore benefit from the rights enjoyed by partners.

Supporting case: Tower Cabinet Co. v. Ingram (1949)(K.B.)

Case examines meaning of "knowingly suffers himself to be so represented" ("holding out"

principle)

Facts:

Tower Cabinet sought money from Merry’s Co. – the price of goods sold and delivered in

January 1948

Tower Cabinet brought action against Ingram – alleged he was a partner of Merry’s

January, 1946 – Ingram and Christmas form partnership under name of "Merry’s"

April, 1947 (dissolution of partnership) – parties agreed to dissolve partnership and

Ingram gave notice to firm’s bankers that had ceased to be a partner

Ingram arranged with Christmas to notify those dealing with the firm that he was no

longer associated with the firm, but Christmas did not put ad in newspaper

During 'the partnership' – firm’s notepaper had both names at the top and indicated that

both were partners

After 'dissolution' – new notepaper printed and only Christmas’ name put on as "Director"

January, 1948 (after dissolution) – Christmas send order to Tower Cabinet on old

notepaper with both names as partners

Note: Christmas did not have Ingram’s authority to use paper and its use was in direct

conflict with arrangements of dissolution

Tower Cabinet brought action against Ingram as a partner of the firm

Issue: Is Ingram liable under the "holding out" principle or as an "apparent partner" of the firm?

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Decision: Ingram not liable

Ingram did not by words or spoken or written or by conduct represent himself to be a

partner of the firm

Also – "…or who knowingly suffers himself to be so represented" – Ingram had NO

knowledge that Christmas used the old notepaper with his name on it

"Knowingly suffers" = does not refer to being negligent or careless in not seeing that all

the notepaper had been destroyed when he left

RATIO: Holding out principle – '''An individual will only be deemed to be "holding out as a

partner" (and therefore liable for the partnership’s debts/obligations) where the person "by words

or spoken or written conduct" represents himself to be a partner or "who '''knowingly suffers

'''himself to be so represented"

Second Principle

Section 16 Partnership Act 1961 says that the representation is not need to communicated to the

person represented him. For example: A tells B that he is a partner in the CDE firm, B tells this

fact to F and based on the fact F give a loan to CDE. A seem like already represent himself to F

that he is a partner in the firm CDE. Hence, A is liable to F as a partner to CDE.

Third Principle

Section 16 Partnership Act 1961 says that if A had represent himself as a partner to B and B

knows that the fact is false, B can’t take any legal action against A as a partner and A is not liable.

Dissolution of Partnership

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The Position in the UK and Malaysia

As we know, the Malaysian Partnership Act (1961) is based on the U.K.'s Partnership Act (1890)

as mentioned in the Civil Law Act (1956):

In all questions or issues which arise or which have to be decided in the states of West

Malaysia. ... with respect to the law of partnerships, ... the law to be administered shall be the

same as would be administered in England ... 24a

A "partnership business" is defined as below:

... the relation which subsists between persons carrying on a business in common with a view of

profit 24b

The relationship referred to is contractual and the contract may either be express or implied.

Thus a partnership may be dissolved mainly in three situations:

1. without an order by the Court.

2. by the Court order; or

3. by an order of arbitrator.

Dissolution Other Than By the Court

There are eight circumstances whereby a partnership business can be dissolved automatically

without an order by the Court. They are as follows:

(i) By Expiration of Period:

Section 34(1) of the Malaysian Partnership Act (1961) says: "Subject to any agreement between

the partners a partnership is dissolved: if entered into for a fixed term by the expiration of that

term".25

It is a common practice that a partnership may be for a fixed term (e.g. Five years, 10 years e.t.c.)

in which case it will automatically be dissolved once the fixed time expires. In a case whereby

both partners mutually agree to continue their partnership after the actual expiration of time.

9

Section 27 of the UK's Partnership Act provides that the rights and duties of the partners remain

the same as they were at the expiration of the term. 26 In Stekel v. Ellice:27

"E" was taken as salaried partner by "S" for a fixed period of 6 months. At the expiration of the

fixed period the parties decided to continue for a further sixteen months on the same term as

before. The question here was whether such continuation was valid or not.

It was held that s. 27 of the Act applied and the rights of the partners remain as they were at the

end of the fixed term.

(ii) By Termination of Single Adventure or Undertaking:

Section 34(1)(b) of the Malaysian Partnership Act says:

Subject to any agreement between the partners, a partnership is dissolved if entered into for a

single adventure or undertaking, by the termination of that adventure or undertaking.

A partnership, may sometimes be for a single adventure, such as to build a house or a block of

flats or to undertake a construction of a particular drain. In all these cases, the partnerships

terminate upon the completion of these buildings and constructions and cannot be dissolved by

notice before its completion.

(iii) By Notice:

A partnership can also be dissolved by any partner by giving a notice to the other partner(s) of his

or her intention to dissolve the partnership though that particular partnership agreement was

initially for an indefinite time.

Section 34(1)(c) of the Malaysian Partnership Act. says:

Subject to any agreement between the partners, a partnership is dissolved - if entered into for an

undefined time, by any partner giving notice to the other or others of his intention to dissolve the

partnership.

In the absence of any express agreement to the contrary, a partner may serve a notice of

dissolution to his partners. The dissolution however takes effect from the date stated in the notice

or the date of communication of notice should no date at all be mentioned in it. Moreover, unless

10

otherwise agreed by the partners, the notice must be served on all partners and once it has been

served, it cannot be withdrawn until and unless all the partners agree to it.28 In Low Pui Heng v.

Tham Kok Cheong & Ors.: 29

The plaintiff in this case was an illiterate old lady and the three defendants were her partners of a

firm. Without giving a notice to her the three defendants incorporated a company to take over the

business and assets of the firm as a going concern. The question here was whether in such a

situation the above said partnership could be dissolved or not?

The High Court held that the notice must be served to all partners, and as the defendants failed to

serve the notice, the dissolution did not materialise.

Similarly the Federal Court decided in Tan Mooi Liang v. Lim Soon Seng30 that a firm can be

dissolved by any partner by giving notice of his intention to do so to all of the other partners,

provided that there is no agreement to the contrary among them.

(iv) By Death:

Unless and until there is an agreement otherwise, a partnership business is dissolved by ... the

death of any of the partners, the dissolution takes effect from the date of the death.31 Section

35(1) of the Malaysian Partnership Act, provides:

Subject to any agreement between the partners, every partnership is dissolved as regards all the

partners by the death... of any partner. 32

In a circumstance whereby it is provided that on the death of a partner, the business may be

continued by the representative of the deceased partner, the dissolution will not take place as seen

in Pearce v. Chamberlain. 33

(v) By Bankruptcy:

A partnership can also be dissolved on the ground of bankruptcy of any partner unless there is an

agreement to the contrary. Section 35(1) of the Malaysian Partnership Act provides:

Subject to any agreement between the partners, every partnership is dissolved as regards all the

partners by the ... bankruptcy of any partner34

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It is also important to note the remark made by Cussen J in Lee What Kay v. Official Assignee

[1941] MLJ 25:

Bankruptcy does not itself effect dissolution but is a ground on which the Court may order

dissolution. The partnership continues to exist until an order of dissolution is made. 35

However, the operation of dissolution commences from the date of the bankruptcy. 36 Moreover,

the estate of a bankrupt is not liable for any debt incurred thereafter. 37

(vi) By Charge

As regards to the circumstances whereby a partner charges his or her share to secure a separate

judgment debt, this will operate to dissolve the partnership at the option of the other partners.

Hence it is not an automatic one.

Section 35(2) of the Malaysian Partnership Act provides:

A partnership may, at the option of the other partners, be dissolved if any partner suffers his share

of the partnership property to be charged under this act for his separate debt 38

Thus a mere charge of the property of the partnership is not a ground of dissolution of partnership

unless all the other partners agree to dissolve it. The option of the partners, however, must be

exercised within a reasonable time as in Anderson v. Anderson [1857] 25 Bear, 190. Scarf v.

Jardine [1882] 7 app. at 345, 360-361, and see Re Longlands farm [1968] 2 AER 552.39 It is

again pointed out that the ground of a charge to dissolve the partnership is subjective and not

automatic.

(vii) By Express Clause:

Any circumstances like handicap or other physical incapacity, insanity, incompatibility of

temperament or dishonesty (be it outside or inside the business) may by an express clause in the

articles be a ground for dissolution of the partnership without the intervention of the Court. In

Peyton v. Mindham.40 a clause in a medical partnership deed stated:

In the event of either partner being incapacitated from performing his fair share of the work of the

practice for more than 9 consecutive months for a total of more than 300 days during any period

of 24 calendar months or if he becomes lunatic or committed any gross or persistent breach of the

12

clause herein contained or shall willfully neglect the practice or do suffer anything whereby the

interest of the partnership shall be or shall be in danger of being seriously injured or prejudiced or

if his name shall be removed from the medical register .... it shall be lawful for the other by notice

to determine the partnership.

Even though the provisions for the abovesaid circumstance are not expressly mentioned either in

the Malaysian nor in the U.K.'s Partnership Act but the above said circumstances can be business

based on the doctrine of judicial precedent as the decision in Peyton v. Mindham.

(viii) By Illegality:

Sometimes a partnership may become illegal by various means. In such circumstances that

partnership will automatically be dissolved and thus the partners are unable to carry out the

business of the firm. Section 36 of the Malaysian Partnership Act, says:

A partnership is in every case dissolved by the happening of any event which makes it unlawful

for the business of the firm to be carried on or for the members of the firm to carry it on in

partnership.41

For instance, "A", a solicitor in a partnership is subsequently struck off the roll by the disciplinary

tribunal. In such a situation the partnership is automatically dissolved. In Hudgell Yeates & Co. v.

Watson.42, the fact that one of the partners failed to renew his practising certificate rendered the

partnership illegal under s. 34 of the U.K.'s Partnership Act, and the partnership was

automatically dissolved.

There are some other circumstances whereby a partnership becomes illegal:

(a) Whereby any partner become an enemy of the other partners, and

(b) Whereby the purpose of forming the partnership is illegal.43

Thus, Buckly J in Dungate v. Lee44 said:

A contract of partnership is illegal if the purpose for which it is intended to be performed is illegal

or if it is the intention of the parties that it should be attained in an illegal way ...45

Dissolution by Court Order

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The courts which have original jurisdiction in England and Wales to dissolve a partnership

business are the High Court, the County Court and, in the case of insanity of a partner the Court

of Protection, which has the power to delegate the jurisdiction on behalf of a patient for a

dissolution of a partnership business of which he is a member or his committee [24] or next friend

or person having title to intervene as by any other partner. The enforcement of a dissolution of a

firm, the action must be begun by writ and not by originating summons.46

There are circumstances whereby a partnership business may be dissolved by Court order. They

are as follows:

(i) Mental disorder:

Section 37(a) of the Malaysian Partnership Act, provides:

On application by a partner, the Court may decree a dissolution of the partnership: when a partner

is found lunatic or is shown, to the satisfaction of the Court, to be permanently of mind ...47

The mental disorder of the partner must be of a permanent character48 and not a temporary one.

When the Judge, after considering medical evidence, is satisfied that the patient is incapable by

reason by his mental disorder of managing his property and affairs, he may exercise his power of

decree of dissolution.49 But if the Court believes that there is a hope for the discovery of the

mental disorder of the partner, the Court may not dissolve that partnership, as seen in Jones v.

Noy 50.

Mental Disorder is however only a ground for dissolution due to the permanent incapacity of the

insane partner to relieve him from his duties, but it does nor per se dissolve the partnership,51 as

seen in Wrexham v. Hudleston52.

(ii) Permanent Incapacity:

Although mental disorder affords the most common illustration of the application of this

principle, the principle is not confined within such circumstances. Thus the Court may dissolve a

partnership business when a partner becomes in any other way permanently incapable of carrying

on his part of the partnership business.53 Section 37(b) of the Malaysian Partnership Act

provides.

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On application by a partner the Court may decree a dissolution of the partnership when a partner

suing becomes ... permanently incapable of performing his part of the partnership contract 54.

In Whitwell v. Arthur [1865] 35 Bear.140, the plaintiff sought a dissolution of his partnership

with the defendant in consequence of the latter being incapacitated by a paralytic attack from

carrying on his duties as a partner, and would have obtained a dissolution had not the medical

evidence shown that the defendant's health was improving, and that his incapacity was perhaps

only temporary.

(iii) Conduct Prejudicial to the Business:

It is also a ground for a Court to dissolve a partnership business when a partner has been guilty of

any conduct as in the opinion of the Court is prejudicial to the business.

Section 37(c), provides:

On application by a partner the Court may decree a dissolution of the partnership when a partner

other than the partner suing, has been guilty of such conduct as, in the opinion of the Court regard

being had to the nature of the business is calculated to prejudicially affect the carrying on of the

business. 55

Thus, in Essell v. Hayward56 it was held that one of the partners had become guilty of a criminal

breach of trust, thus the co-partner had the right to have the partnership business dissolved.57

It is to be noted that the conduct of which complaint is made need not necessarily be connected

with the partnership business, but it is necessary that it should be of such a nature, as, having

regard to the particular business or firm.58

(iv) Breach of Partnership Agreement:

It is also a ground for the Court to dissolve a partnership when a partner purposely commits a

breach of the partnership agreements, or such a conduct committed by any partner relating to

partnership business that it is impossible for his co-partners to carry on the business with him.59

Section 37(d) of the Partnership Act provides:

On application by a partner, the Court may decree of dissolution of the partnership ... when a

partner, other than the partner suing, willfully or otherwise so conducts himself in matters relating

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to the partnership business that it is not reasonably practicable for the other partner or partners to

carry on the business in partnership with him.60

To invoke the above said ground, the partner must prove that the breach was done purposely and

not merely trivial.61 The Court also may dissolve the partnership on the ground of state of

animosity among the partners which destroys the basis of mutual confidence62 or neglect to

account for money received63 or payment of private debts with money received by the firm64 or

refusal to account and taking away the firm's books.65

(v) Poor business:

In every partnership, the expectation of profit is implied. Eventually if it is observed that the

partnership business can only be carried on at a loss, the attainment of the common end, with a

view to which there was partnership formed has become impossible.

Thus in such circumstances the Court may decree a dissolution of the partnership business.66

Section 37(e) of the Malaysian Partnership Act says:

On application by a partner the Court may decree a dissolution of the partnership ... when the

business of the partnership can only be carried on at a loss.67

Every partnership business is initially formed with the view of profit. If eventually the business

becoming poor and losing money continuously, then any partner can apply for a dissolution.

However, if the poor situation of the business is only of a temporary nature and not a permanent

one or if the firm suffers a setback due to poor management or sickness of a partner, then in such

a circumstance the Court may not grant the decree of dissolution as seen in Handyside v.

Campbell68.

(vi) The Dissolution Being Just and Equitable:

The Partnership Act empowers the Court to dissolve a partnership in any circumstance whereby

the Court deems it just and equitable to do so.

Section 37(f) of the Malaysian Partnership Act provides:

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Whenever in any case circumstances have arisen which in the opinion of the Court, render it just

and equitable that the partnership be dissolved.69.

It is quite impossible to specify all the circumstances and situations which would enable the Court

to decree a dissolution of a partnership business on the wide ground that it is just and equitable.

But on the analogy of a similar provision in s. 222 of the Companies Act 1948, (U.K.), the words

would probably be held not to be limited to circumstances "ejusdem generis" with the other

ground set out in s. 35(f) of the Partnership Act. (U.K), and s. 37(f) of the Partnership Act

(Malaysia), on which the Court may order a dissolution70 as in Ebrahimi v. Westbourne Galleries

Ltd.71

It is also to be noted here that even though the Court has been empowered to dissolve a

partnership business in any circumstance whereby the Court deems it just and equitable the Court

out not to fetter itself by any right rules72 and any case or circumstance whereby it is no longer

reasonably practicable to attain the object with a view to which the partnership was formed or to

carry out the partnership agreement according to its terms. (see Harrison v. Tenanant.) 73

Dissolution by Order of Arbitrator

Sometimes, there may be an arbitration clause in the partnership deed which provides that all

matters in dispute between the partners must be referred to arbitration. Thus the arbitrators are

empowered to dissolve the partnership, as in Russel v. Russel [1880] 14 Ch. 471.74

In Belfield v. Bourne75 a deed of partnership states that "if during the continuance of the

partnership or at any time afterwards any difference should arise in regard to the contraction of

any of the articles herein contained, or to any division, act or thing to be made or done in

pursuance hereof, or to any other matter or thing relating to the said partnership or the affairs

thereof the difference should be referred to the arbitration". In this case one of the partners

claimed the return of a paid sum, while the other partner applied for the action to be stayed and

the matter to be referred to arbitration.

It was held that the application should be granted based on the terms of the partnership deed and

thus the arbitrator had the power to award a dissolution.76

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But any award made by the arbitrator can still be challenged in the Court on the question of law.

The chancery Division, in Olver v. Hillier77 held that the action would not be stayed because the

power to dissolve a partnership business was expressly given to the Court and not to the arbitrator

under s. 35(d) and (f) or the Partnership Act. (U.K), which was the ground for dissolution

contended for.

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References:

1. http://law.onecle.com/michigan/449-partnerships/mcl-449-16.html

2. http://www.businessdictionary.com/definition/partnership-by-estoppel.html

3. http://www.wisegeek.com/what-is-a-partnership-by-estoppel.htm

4. MYLAWBOX – Articles THE GROUNDS OF DISSOLUTION OF PARTNERSHIP (The

Position of Islamic Law and the Laws of Some Selected Countries) Mohd Masum Billah ,

Business, Islamic,Malaysia

5. http://scholar.google.com.my/scholar_case?case=6548185401044810165&q

John Andre GRAVOIS, Jr., Mariner's Plaza, Inc., Belle Passe Towing Corporation and John G.

Marine, Inc. v NEW ENGLAND INSURANCE CO. No. 88-CA-2234, Court of Appeal of

Louisiana, Fourth Circuit. November 30, 1989.

6. http://www.law-wiki.com/wiki/Osgoode_Business_Associations

7. Slide from Chapter 2: Undang-undang perkongsian

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