Individual human persons can trade or practice in a business or profession. Most such prac-tices are small, but this is not necessarily so. Some individuals can operate wealthy and multinational enterprises, whether or not they employ a lot of people.
Under a sole tradership or practitionership, as the name suggests, one person is fully responsible for putting in the capital and expertise of the business. If the business should fail that person is fully liable for the debts of the business and is subject to the rules of bankruptcy.
Many traders and practitioners prefer to trade under a ‘business name’ that is in gen-eral, a name which does not consist solely of the surname and initials of the trader or professional. For example, a business called ‘High Street Fashions’ must be operating under a business name. First, this is clearly not the name of a real person, and second it cannot be the name of a company as it does not end in ‘Limited’, ‘Ltd’, ‘public limited company’ or ‘plc’.
If a trader or a professional chooses to operate under a business name then he/she must comply with the Business Names Act 1985. The main controls under the Act are that the name of the owner of the business must be stated on all business letters, written orders, receipts and invoices etc. and must be stated prominently at all premises from which the business is carried on. The reason for this requirement is that, to use the above example, High Street Fashions does not exist as a legal entity, and cannot therefore sue or be sued. It follows that the name of the owner must be disclosed to facilitate claims being made by and against the business. In addition, the Act contains a number of controls over the use of certain names and words as explained below. Examples of business names are
‘Computer 2004’, ‘Smith and Company (Solicitors)’ and ‘Indian Palace’. In each of these examples it is impossible to know whether the owner is a sole trader, a partnership, a pri-vate or a public limited company merely by looking at the name. A sole trader may use the word ‘company’ in his or her business name. It follows that the name of the owner must be obtained by looking at business letters or notices displayed on business premises.
A sole practitioner’s main duty ( like any other business or practice) is to his own client or customer, with whom he has a contract. As seen in Section 3.1.2, there are implied terms in the contract. The practitioner impliedly promises to use such skill as he has professed, and to exercise such professional care as is reasonable. He or she can be liable to his or her client for all loss, financial and otherwise, which may fairly and reasonably be considered as arising naturally, according to the usual course of things, from the breach; and for any fur-ther loss which may reasonably be supposed to have been in the contemplation of the par-ties when the contract was made, so that the practitioner in effect took responsibility for it;
see Hadley v. Baxendale in Section 4.2.5.
A practitioner can also, exceptionally, incur liability to someone other than his client.
A claim against a sole practitioner by a person other than his or her client would most com-monly be made in tort. As seen in Section 1.3, the law of tort enables a person who has no contractual relationship with a sole practioner (or trader) to bring an action against that person. The claimant must be able to show that the practitioner/trader acted in breach of a legally recognised duty of care which was owed to the claimant and that the breach caused the claimant loss or injury. As regards purely financial loss, such a tortuous duty would probably only be owed if the practitioner had accepted responsibility for specific acts or statements to specific persons. In White v. Jones (1995), a solicitor was instructed to draft a will for his client. The solicitor delayed, and the client died before the will was completed.
The two claimants, who should have benefited from the will, received nothing. They recov-ered damages from the solicitor, even though they were not his clients. See also cases such as Smith v. Eric S Bush. The courts will not, however, recognise any duty to a potentially large or undefined number of people; see Caparo Industries plc v. Dickman. These cases are discussed in Chapter 1, and should be referred to again now. Since 1999 it has also been possible for
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a person who was not a party to the original contract to enforce a term of the contract in his own right. To take advantage of this rule the claimant must show that the contract expressly provides that he can enforce the term, or that the term purports confer a benefit upon him (see the Contracts (Rights of Third Parties) Act 1999).
It is becoming increasingly common for the activities of all traders and professionals to be regulated by law. As seen in the chapters dealing with contract law, statue implies terms into contracts for the sale of goods and services and restricts the ability of traders to exclude these terms through such legislation as the Unfair Contract Terms Act 1977.
To ensure that traders keep to the rules, bodies such as the Ofice of Fair Trading are given powers to prosecute offenders. Many professionals are of course, regulated by their own professional bodies which commonly issue rules to their members relating to professional conduct. In addition Acts of Parliament and statutory instruments set down rules con-cerning particular professions. For example, the Insolvency Act 1986 and the Financial Services Act 1996 provide respectively that all insolvency practitioners such as liquidators, and all financial advisers must be ‘fit and proper persons’ that is, they must be qualified. It is still possible of course, to come across fraudulent or incompetent traders and profes-sionals depending on how effectively their activities are policed by the authorities entrusted to enforce the rules.
6.1.2 Partnerships (and some comparisons with companies)
The Partnership Act 1890 s.1 defines a partnership as ‘the relation which subsists between persons carrying on a business in common with a view to profit’. Generally, there must not be more than twenty partners; otherwise the Companies Act 1985, s.716, requires that it register under that Act. Normally, therefore partnerships (often called ‘firms’) will be fairly small, but this is not always the case. For example, companies are ‘persons’ within the above definition, and large companies can therefore be partners (see Stevenson & Sons Ltd v. AG fr Cartonnagen Industrie (1918) for instance). Equally importantly, the upper limit of twenty does not apply to solicitors and accountants qualified to act as auditors. Some large firms of solicitors have several hundred partners, and are billion pound enterprises with offices throughout the world. Large firms of accountants have many more partners, and are correspondingly even more wealthy and powerful.
No formalities are required to form general partnerships, no documentation and no reg-istration. This is in marked contrast to the documentation and registration requirements for company formation. In practice, larger firms often do have formal partnership agreements which add to, and vary, the provisions of the Partnership Act. The reason for this is that the Partnership Act 1890 applies to every partnership agreement whether written or oral. Many of the Acts’ provisions apply, unless they are excluded by the agreement. For example, the Act provides that partners shall share profits equally. In cases where partners are bringing in different amounts of capital or expertise, equal shares may not be appropriate and the partners will need to agree specific profit sharing arrangements. ‘Expulsion clauses’ pro-vide; a further example. Suppose that A, B and C are in partnership and have no written partnership agreement. C is proving to be a very unsatisfactory partner in that he often fails to turn up for work and when he does turn up, he is rude to customers and is causing the firm to lose money. As there is no written partnership agreement, it would be practically impossible for A and B to expel C. As a result they are left with the choice of dissolving the whole partnership, (which means that the business would have to be closed down, all
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the assets sold and all creditors paid off ), or offering C sufficient money to persuade him to leave. This is so because the Partnership Act is silent on the expulsion of partners. It follows that if A, B and C had entered into a written partnership agreement, the lawyer who drafted the agreement could have ensured that an expulsion clause was included to cover the above situation. If so A and B would have been able to give C notice of expulsion and paid him his share of the partnership. The business could then have carried on without hav-ing to be dissolved. Partnership agreements are not open to public inspection, unlike the memorandum and articles of association of a registered company.
For a partnership, the only publicity requirements arise if it chooses to use a ‘business name’, different from the true surnames, with or without additional names or initials, of all of the partners. There are other permitted additions such as ‘& Sons’, or an ‘s’ at the end of the surnames of all of the partners (‘Smiths’).
If there are several partners (more than three or four usually), they will usually choose a
‘firm name’. This may be an artificial name (‘Mobile Valeting’), or it may comprise the names of one or more of the senior partners. Additions such as ‘Company’ or ‘& Co.’ are allowed by the Companies Act, but not ‘limited’ or ‘Ltd’ or ‘plc’. The firm can then trade in its firm name, and sue or be sued in it; but all partners are liable for its debts, etc. (see later).
The names of all partners must be shown beside letterheads, except for firms with more than twenty partners, where no names need be given (but if one is given then all must be).
A firm must display all partners’ names at its business premises, and written disclosure must be given on request to those doing business with the firm. Under the Business Names Act 1985, artificial names which are offensive or falsely suggest connection with another busi-ness are prohibited. Other names can only be used with appropriate consents: ‘Royal’
requires Home Office consent; names suggesting local or central government connections require DTI approval, as do various other potentially misleading words, ranging from ‘inter-national’ to ‘insurance’; ‘charity’ requires permission from the Charity Commissioners.
Breach of these provisions is a criminal offence by each partner; but partnership contracts are valid and the partnership can carry on business, although if the other party to a contract defaults, the contract is unenforceable without leave of the court.
When operating under a firm name, partners must also beware the tort of ‘passing-off ’.
This would occur if their chosen name and the nature of their business was so like those of a competitor that third parties might be deceived. If Mr A and Mr B choose to call their retail shop ‘Woolworths’, the owners of the well-known Woolworths store could obtain an injunction against A and B.
External regulation of a partnership business other than by professional bodies, is virtu-ally non-existent. Apart from the names of partners, no formal general records need be kept, although the Inland Revenue might ask to see accounts. There is nothing comparable to the requirements for annual returns, audits, etc., for corporate bodies (see later), although there are special requirements for some professional partnerships such as solicitors.
Partnership property belongs to the partners jointly. If more than four partners own or lease partnership land, legal title to the land must be vested in not more than four trustees (and for practical purposes at least two); these will usually be senior partners, who hold the land on trust for all the partners.
In theory a partnership can be dissolved very easily. Unless the partners agree otherwise in advance, it is dissolved by expiration of the time, or completion of the specific task for which it was initially made. If, as is usual, the partnership is entered into for an undefined time, it can be ended by any partner giving notice to all the others. Unless otherwise agreed, every partnership is automatically dissolved by the death or bankruptcy of any partner.
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All of this can be very inconvenient, particularly as regards the partnership property, which is one reason why these provisions are often excluded or varied by a partnership agreement.
Compare the ease with which shares in a company can be transferred without affecting the continuity of the enterprise.
Agency and partnerships
Partners are, in effect, mutual agents. By the Partnership Act s.5, every partner is the agent of the firm and his partners for the purpose of the partnership business. The firm is bound by what he does on its behalf if the act is one for carrying on in the usual way business of the kind carried on by the firm. If the partners try to restrict the usual authority of one of their number, they may still be bound if what he does on their behalf appears to be normal.
An outsider cannot be expected to know what has occurred inside the partnership. The firm is therefore bound if a partner is acting within his apparent authority, even if this involves a breach of his actual instructions. However, the firm will not be bound if the outsider either knows that the partner is exceeding his authority, or does not know or believe him to be a partner; an outsider who is not deceived cannot rely on apparent authority.
If one partner commits a tort or crime in the course of the business, the firm (i.e. his fellow partners) will be liable, similarly, if the act was within the offending partner’s actual or apparent authority.
Liability of partners for debts of the firm
Each partner may be sued and held liable for the full amount due under any of the firm’s contracts. By s.9, partners are liable jointly, and therefore if one partner has to pay the full amount he can recover appropriate shares from his fellow partners – but some of these may no longer be solvent or available. By s.12 the partners are similarly jointly and severally liable for torts for which the firm is responsible. Again, each partner can be individually liable for the full damages awarded against the firm. The gravity of this position can be seen from cases such as ADT Ltd v. BDO Binder Hamlyn (1995), where a ( large) firm of accountants was held liable in tort for damages of £65m (plus substantial costs). Admittedly, the firm had insured itself against liability, but the actual policy covered much less than this. Any partner could be held personally liable for the full amount.
In this context, the importance of limited liability for company shareholders can hardly be overemphasised; see Section 6.2.2. A shareholder in a limited company is not liable for debts of the corporation.
In partnerships, even non-partners can sometimes be personally liable for debts of the firm. This can occur, for example, if a retiring partner fails adequately to publicise his retire-ment, especially to clients who know him. More generally, any person may be personally liable for a debt of the firm if he has by his words, spoken or written, or conduct represented him-self as being a partner, or allowed himhim-self to be so represented, and persons who have been deceived have given credit to the firm because they believed him to a partner (s.14).
By the Limited Partnerships Act 1907, it is possible for some of the partners to have limited liability, but this Act is not much used. Some of the partners (at least one) must be unlimited, and the unlimited partner(s) effectively run the firm. Limited partners must not take any active part in management, although they may inspect the accounts. The firm must be registered by filing documents with the Registrar of Companies. The death, insan-ity, or insolvency of a limited partner does not end the partnership. The limited partner simply contributes a stated amount of capital, has no further liability, and takes little further part.
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Internal relations of partners
As between themselves, partners are governed by provisions in the Partnership Act, but as mentioned earlier they are free to vary or exclude many of these. Unless otherwise agreed, every partner may take part in management of the partnership business. This contrasts radi-cally with the position in limited companies (which sometimes have millions of members);
see later. As between themselves, partners do owe some statutory duties of good faith, whereas shareholders owe few if any such duties to each other. The main contrast with companies, however, is the relative ease with which partners can vary their internal relations, as compared with the fairly formal procedures required for changing the memorandum and articles of a company. Moreover, a partnership agreement is private, whereas the company documents are not.
Note: Further essential characteristics of companies are discussed in Section 6.2.