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As a matter of commercial sensibility, partners in a general partnership usually create a partnership agreement. This agreement sets out the terms of the partnership and specifies each partner’s ability to enter transactions and other commercial agreements. Situations may arise where one partner signs a contract without the consent of other partners, but the partnership must nonetheless honour. This article will explain how one partner can bind the partnership and enter into agreements without the other partners’ consent. It will also examine some remedies if a partner has entered into an unauthorised transaction.
Partnerships and the Law of Agency
The law of agency plays an important role in partnerships. Typically, the law takes the default position that each partner acts as an agent on behalf of the partnership (the principal). By entering into an agreement, one partner binds the other partners to the agreement. This is because a partnership is not its own legal entity.
There is no problem when a partner enters into an agreement with the knowledge and consent of the other partners. However, issues can arise if other partners are unaware of the transaction or do not consent.
Where the Partners Consent to the Transaction
Suppose a partnership agreement contains a provision requiring all partners to obtain unanimous consent for transactions involving more than £40,00. If you decide to purchase new premises for £50,000, you are technically in breach of the partnership agreement. However, all partners might agree that it was a good deal after the fact.
By entering into the £50,000 deal, you have exceeded your authority to act as an agent of the partnership. Strictly speaking, you did not have the authority to enter the agreement. However, if all partners consent to the transaction, the partnership can ratify the agreement as if you did have the authority.
Fortunately, the law has no problem allowing your business to ratify the £50,000 agreement. Accordingly, your partnership can simply go ahead and perform the transaction as if you all had consented all along.
Where the Partners Do Not Consent
Unfortunately, situations can arise where partners do not consent to certain deals. Taking the above example, suppose you entered into the £50,000 contract, but the premises was overvalued by £25,000.
This rule applies if an objective person would answer yes to either of the following two questions:
- Is this the sort of agreement expected for a business of this kind in its usual course of business?
- Is this the sort of action that a partner acting alone would usually make on behalf of the partnership? Or is this something that a reasonable person would expect all partners to sign off on?
If your partnership routinely bought and sold property, the partnership would have a hard time arguing that it should not be bound by your actions. However, if the partnership was a retail business selling healthcare products, the partnership may be able to argue that your actions were outside the usual scope of its business. Ultimately, it would depend on the facts.
Likewise, your firm will not be bound where the other party to the transaction actually knew that you did not have the authority to enter into the agreement. Additionally, if you are not actually a partner, and the other party knew this, your partnership would not be bound.
Remedies for an Unauthorised Transaction
While the other partners might be bound by the agreement, they can make a claim against you. The extent of available options will depend on the partnership agreement.
Many partnership agreements have a provision that allows the other partners to seek an indemnity from a partner that acts beyond the scope of their powers or breaches a term of the partnership.
Therefore, as your partnership agreement has a provision restricting partners from entering into transactions worth more than £40,000, you will be in breach. Accordingly, you may have to personally account to the partnership, such as by making good on the damages.
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Key Takeaways
A partner in a general partnership has broad powers to bind the other partners to the agreements, even if the other partners do not consent to the transaction. If a transaction is not unusual, the law will require the partnership to honour the agreement in most cases. However, if the counterparty to the agreement knows that the partner did not have the authority to act as they did, then the partnership may be able to rescind the agreement. A well-drafted partnership agreement will entitle the other partners to indemnify the partnership from the offending partner.
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Frequently Asked Questions
Agency law governs the ability of one person (the agent) to act on behalf of another (the principal) and enter into agreements on their behalf.
Provided the transaction was not an unusual agreement and the other party had no reason to doubt your partner’s authority, yes. Your partnership may have to honour the agreement.
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