Business Associations

Ch. 2. Partnership

Chapter 2 Partnership 2.1 Introduction Partnership law in Hong Kong is contained principally in the Partnership Ordinance (PO) and the Limited Partnerships Ordinance (LPO). No nationality or residency requirements exist in either of these ordinances. PO follows the English Partnership Act 1890 and LPO follows the English Limited Partnerships Act 1907. PO is the principal ordinance dealing with general partnerships. Limited partnerships are governed by LPO. The provisions of PO apply to limited partnerships except so far as they are inconsistent with the provisions of LPO. PO is a codifying statute, and the rules of equity and of common law applicable to partnership continue in force, except so far as they are inconsistent with the express provisions of the Ordinance. 2.2 Definition and Nature ofPartnership 2.2.1 Unlike a company, a partnership is not a separate legal identity. The relationship of partners is essentially contractual. Partnership is defined as the relation which subsists between persons carrying on a business in common with a view of profit; PO s3(1). 2.2.2 To constitute a partnership there must be a valid agreement, and a business which is being carried on in common with a view of profit. 2.2.3 A partnership is formed by contract, which may be in writing, oral or under seal. It may arise from a course of dealing. Usually the partnership agreement takes the form of a deed setting out the conditions of the partnership and the terms upon which it is to be conducted. The general rules of contract governing formation, capacity, mistake, misrepresentation, duress, undue influence and 28 Business Associations illegality apply; Contracts. But the law looks to the substance and not to the form. It does not give conclusive or decisive significance to the description or the label which the parties have chosen to put upon their relationship. In Chan Sau-kut & others v. Gray & Iron Construction & Engineering Co. (a firm) [1986] HKLR 84, the contract between the parties provided that 'this agreement shall not constitute a partnership agreement between the parties hereto.' Hunter, J. decided that on its true construction the agreement created a partnership; there was a community of interest, and a business in common with a view to profit. 2.2.4 PO defines 'business' as including every trade, occupation, or profession . 'To carryon business' means to conduct some form of commercial enterprise systematically and regularly with a view to profit. Implicit in this definition are the features of continuity and system. A business is carried on only where there is some degree of management or control. It is perfectly possible to have a partnership in respect of one particular deal, transaction, or adventure. But it must be the present carrying on of a business. Thus promoters of a company who were merely working together to form a company by ordering goods and opening the bank account were not partners, if they had no intention of trading prior to incorporation, Keith Spicer Ltd. v. Mansell [1970] 1 All ER 462. 2.2.5 It is essential for the business to be carried on by or on behalf of all the partners. All the partners need not take an active role in management , but the persons carrying on business must be doing so as agents for the other partners so that they can bind the others. 2,2.6 A share of the profits must be contemplated for a partnership to be established. 'Profit' means net profit, namely, the difference between the gross returns and the outgoings of the business; Re Spanish Prospecting Co. Ltd. [1911] 1 Ch 92. Thus associations for cultural, charitable or religious purposes are excluded from the ambit of partnership law, as they are not formed to make profit. 2.2.7 'Persons' may be individuals or corporate bodies such as limited companies. Thus a partnership may consist of two or more companies or a mixture of companies and individuals. Partnership 29 2.3 Rules for Determining the Existence ofPartnership PO s4 sets out the rules for determining the existence of partnership. Apart from the rules, a court must, in deciding whether a partnership exists or not, consider the intentions of the parties involved and the contract they have made. (1) Joint or part ownership does not of itself create a partnership; (2) The sharing of gross returns does not of itself create a partnership ; (3) The receipt of a share of...