Partnership law in Tanzania [definitive guide]

Today I’m going to talk about partnership law in Tanzania.

Partnership law in Tanzania

The law which governs partnership in Tanzania is Part X of the Law of Contract Act (LCA), Cap 345.

Among other things, this law provides for the meaning of partnership, the formation of partnership, duties, and rights of partners, partnership property, dissolution of the partnership, etc.

Here you will learn

• Meaning of Partnership
• Formation of Partnership
• Types of Partners
• Duties and Rights of Partners
• Partnership Property
• Expulsion of Partners
• Dissolution of Partnership
• Effects of the Dissolution of Partnership

let’s get started

Meaning of Partnership

A partnership is defined under section 190 of Cap 345 to mean “the relation which subsists between persons carrying on business in common with a view of profit”.

Persons who have entered into a partnership with one another are called collectively as “firm” and the name under which their business is carried on is called the ‘firm’ name. [S 190 (2)]

Formation of Partnership

A partnership is formed/created by an agreement among the prospective partners [s. 191 (1)].

The agreement can either be oral or written.

The written agreement for the formation of a partnership is known as a partnership agreement or partnership deed or deed of partnership

The law expressly disqualifies the minor from being a partner in a firm. [s.211] as far as partnership arises from an agreement the following persons are also disqualified; persons of unsound mind, bankrupt, etc.

Types of Partners

There are various types of partners: –

General Partner

This is a standard type of partner who has a right to participate in the management of the partnership and the right to share in the profit as well as being liable to the liabilities of the partnership to the fullest extent of his personal assets unless there is an agreement between himself and the other partner(s) that he should not.

For example, the partnership agreement may say that some junior partners are not required to order goods or sign cheques.

Sleeping/dormant partner

A partner who puts money into the firm but wishes not to have an active role in the management of the firm. However, he has the right to share the profits and respond to the liabilities of the firm.

If he does take part in the management of the firm he would cease to be a dormant partner and become a general partner.

Limited partner

This partner has a right to share the profits of the partnership but has no right to participate in the management of the firm. His liability to contribute is limited to the amount of capital originally he agreed to contribute.

Quasi-partner/partner by holding out (estoppel)

This is not a partner by agreement but cannot be precluded from denying that he is a partner due to his previous conduct and statement.

The usual way in which this happens in practice is when a person allows his name to appear on the firm’s letter heading, or on the lists of partners for inspection, whether that person is or is not a full partner, he may be sued by a client or creditor who has relied on the fact that he was a partner.

However to become a partner by holding out (or estoppels) the person held out must know that he is being held out as a partner and if he knows it he must be shown that he consents to it.

The person who is held out is liable to a client or a creditor who has relied on him being a partner.

However, in HUDGELL, YEATES, AND CO V WATSON (1978), the court said that the true or actual partners could also be liable to such a client if they themselves were responsible for the holding out or knowingly allowed holding out to take place.

The Salaried partner

This is quite common today, at least in professional practices of, for example, solicitors and accountants to offer a young assistant a salaried partnership without the assistant putting any money into the firm as the general (equity) partner does.

Normally these salaried partners are paid a salary just as an employee is with tax and national insurance deducted from it.

They are not partners for the purpose of dissolving the firm. If they want to leave they do so by serving out their notice or getting paid instead.

Duties and Rights of Partners

Duties of partnership are divided into two categories, i.e Duties and Rights between partners themselves/inter see and Duties and Rights  between partners and third party

Duties and Rights between partners themselves/inter see

1. A partner has to take care of the property, rights, goodwill, and interest in property acquired by a partnership. [s. 195 (1)].
2. To carry on the business of partnership for the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives [s.192 Cap 345]
3. Fiduciary duty as expounded under section 196 of Cap 345
4. [s.194] in absence of contrary agreement the following rights and obligations prevail
   take part in the management of the partnership business
5. Any differences in ordinary matters are decided by a majority of all partners. But no change in the nature of the business of the firm without the consent of all partners
6. every partner has a right to have access to and to inspect and copy any of the firm’s books.
7. all partners are entitled to share equally in the capital and profits of the firm’s business and must contribute equally towards its losses
8. be indemnified by the firm on payment made and personal liability incurred when working for the firm.
9. Indemnify the firm for any loss he has caused.

Duties and Rights between Partners and Third Parties

Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership, and the acts of every partner did act for carrying on business in the usual way of the kind carried on by the firm bind the firm and his partners. [s. 201(1) SEE s. 201 (2) the acts where a partner will not be regarded as an agent unless there is express authority customs or usage.

Has a duty to act with due diligence and skill when dealing with third parties.

S. 204 –Every partner is liable to compensate third persons in respect of loss arising out of penalty incurred by wrongful act or omission of any partner acting in the ordinary course of business of the firm or with the authority of the other partners. MELITA MEYASI V NBC 1977 LRT NO. 42

S. 202 any act executed in the firm name in a manner showing intention to bind a firm is actually binding on the firm and all partners.

Partnership Property

All property and rights and interests in a property originally brought into the partnership stock or acquired by purchase or otherwise, on account of the firm, or for the purpose and in the course of the partnership business, including the goodwill of the business, are a partnership property and must be held by the partners for the purposes of the partnership and in accordance with the partnership agreement, or failing such agreement the provisions of section 195 (1) of the Law of Contract Act

Properties that may be employed in partnership business belong to the following categories;

• Property that belongs to the partners as a firm – this is partnership property
• Property that belongs to the partners as co-owners but is not partnership property
• Property that belongs to individual partners

It is therefore important to determine which category of the property employed by the partnership belongs.

In MILES V CLARKE (1953) 1 ALL E.R 779 C carried on business as a photographer at premises of which he owned the lease for seven years from 1948.

In 1950, he and M who was a freelance photographer entered into a partnership in which all the profits were shared equally. M brought with him his personal connection. The partners quarreled, and a dispute arose as to whether the following items constituted partnership property:-

• the consumable stock-in-trade
• The personal connection brought by each partner
• The lease of the premises
• The furniture, fittings, and equipment of the studio

It was held that no more agreement between the parties should be supposed then was absolutely necessary to give business efficacy to the relationship between the parties.

Accordingly, since the only agreement was to the share of profits, only the consumable stock-in-trade should be regarded as partnership property.

Unless the contrary intentions appear, property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired on account of the firm section 195 (2) of Cap 345, however, such a purchase is not conclusive evidence because a contrary intention may be revealed by surrounding circumstances.

For example, if the property is bought out of the firm’s money and conveyed to one partner to whom the price is debited as a loan from the firm.

There is evidence that the property is not bought on the account of the firm. It is therefore not partnership property.

Where land or any heritable interest therein has become partnership property, it shall, unless the contrary intention appears, be treated as between the partners (including the representative of the deceased partner), and also as between the heirs of the deceased partner and his executors or administrators, as personal or moveable and no real or heritable estate Section 195 (3) of Cap 345.

Expulsion of Partners

The law is to the effect that the partner will be expelled by other partners from the firm if the power to that effect has been conferred by agreement. s. 199 LCA.

If the expulsion is challenged in court the judge must see that the majority expulsion clause has not been abused.

It must be shown the complaint which is said to allow expulsion is covered by the expulsion clause;

For example, in SNOW v. MILFORD, the court decided that “adultery of a banker all over Exeter” was not a ground for his expulsion because it was not within the wording of the expulsion clause. This dealt only with financial frauds which would discredit the banking business.

That the partner expelled was told what he had done wrong and given a chance to explain. In BARNER v. YOUNG a partner who was living with a woman to whom he was not married continued to do so after becoming a partner.

There was nothing to show that this was damaging to the firm business. Even so, he was expelled by his fellow partners who refused to tell him why they were doing so. The court held that his expulsion was unlawful and ineffective.

That those who exercised the powers of expulsion did so in all good faith.

For example, in BLISET v. DANIEL (1853) a partner was expelled but he had done nothing to hurt a firm, but the partnership agreement said that a majority of partners could buy out another. The motive of the other partners was just to get a bigger share of property and profits.

The court held the expulsion not effective as was done in bad faith.

Dissolution of Partnership

There are two ways through which an existing partnership may come to an end that is Extra-Judicial Dissolution of Partnership and Judicial Dissolution of Partnership.

Extra-Judicial Dissolution of Partnership.

Extra-Judicial Dissolution of Partnership takes place in the following situations;

1. If entered for a fixed time, by the expiration of that time [s.212(1)(a)]
2. If entered for a single venture or undertaking, by the termination of that venture or undertaking [s.212 (1)(b)] see FLORENT RUGARABAMU V. HASSAN MAIGE GORONGA [1988] TLR 243.
3. If entered into for an undefined time, by the partner giving notice to the other or others of his intention to dissolve the partnership [s.212(c)]
4. On the death or the bankruptcy of any partner [s.213].
5. On the happening of any event which renders the business illegal [s.214].

Judicial Dissolution of Partnership

Judicial Dissolution of a Partnership occurs when partners apply for an order in the court of law under the following grounds:

When a partner becomes of unsound mind.

A partner becomes incapable of performing his part of partnership contacts. The situation must be permanent.
In WHITEWELL v. ARTHUR (1865) a partner was paralyzed for some months; he had recovered when the court heard the petition and it could not grant a dissolution.

Partnership agreement often contains express clauses which allow dissolution after a stated period of incapacity. In PEYTON v. MINDHAM (1972) the time for incapacity allowed by the clause was nine months.

When a partner has been guilty of misconduct, which goes to the root of the business.

This can be illustrated by the case of ESSEL V HAYWARD (1860) where a solicitor partner misappropriated 8000 pounds of trust money in the course of his duties as a partner.

This was a ground for dissolving a partnership for a fixed term. It may be outside conduct like a criminal act that ultimately makes the partner be convicted of fraud or misconduct.

When a partner wilfully and persistently commits a breach of the partnership agreement or conducts himself in such a manner that it becomes difficult for others to carry the business with him.

When the business of the partnership can only be carried out at a loss. If this is temporary the court will not grant dissolution as was in the case of HANDYSIDE v. CAMPBELL (1901) a sound business was losing money because the senior managing partner was ill. He asked the court for dissolution; the court did not grant it as the other partners would manage it.

Notice of Dissolution of partnership

On dissolution of partnership or retirement of a partner, any partner any notify the same and may require the other partner or partners to concur for that purpose in all proper and necessary acts if any, which cannot be done without his or her concurrence. Section 217 of Cap 345

As unless proper notice of dissolution is given partners may be estopped from denying liability for debts contracted in the firm name by their former co-partners, it is necessary that proper notification should be made in every case.

An advertisement as was said in RAMBAI & CO. (UGANDA) LTD. V LALJI RATNA AND ANOTHER (1970) E. A 106 (U) in the Gazette shall be notified as to persons dealing with the firm before the date of the dissolution or change so advertised.

In GOLDFARB V BARTLETT AND KREMER(1919) 122 L.T 588 the question was whether the notice of dissolution given to a continued partner after the dissolution of the partnership binds the partners who had retired from the partnership.

The judge said there seems to be no express reported decision on the point … there are observations in WOOD v. BRADDICK (1808) that tend to the conclusion that a retiring partner is bound by the notice given to the continuing partner.

In Notes to Chalmers’ Bills of Exchange, (8thedition, p. 182) it is stated that notice to one partner after dissolution is sufficient.

Effects of the Dissolution of Partnership

After the dissolution of the partnership the authority of each partner to bind the firm and the other rights and obligations of the partners continue so far as may be necessary to wind up the affairs of the firm and complete transactions initiated before dissolution.

The case of GULAMALI WALJI HIRJI v. MRS SHABAN WALJI AND ORS (1972) HCD 230; the case reiterates section 218 of the LCA that on the dissolution of the partnership relationship to complete winding up, and complete transaction began before the dissolution; also the time to have a full account of a partnership in accordance with section 192 of the LCA

The right of the partners with regard to the property where the partnership is dissolved

1. Losses must be paid out of profit, then out of capital, and finally if necessary, by the partners themselves in the proportion in which they agree to share the profit
2. The assets of the firm must be applied in the following order;
   1. The debts and liabilities of the firm to nonpartners
   2. Paying to each partner rateably what is due from the firm to him for advances as distinct from capital
   3. Paying each partner rateably what is due from the firm to him in respect of capital.
3.  In event of there being a residue, it is divided into the partners in the proportion in which profits are divided.
4. Similarly, if the assets are not sufficient to repay the partners’ capital in full, the deficiency must be borne by the partners in the same proportion as the profits would be divided [GARNER V MURRAY (1904) 1 Ch. 57]

Payment of the firm debts

Where there are joint debts due to the firm and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of debts of the firm, and if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him.

The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm. Section 225 of Cap 225

Goodwill in a dissolution of a partnership

The assets include not only the stock–in–trade and book debts, furniture, tools, machinery, etc, but also intangible, but often very valuable, property, called goodwill. It is saleable property.

Goodwill is public approbation that has been won by the business, and that, is considered a marketable thing; it is the probability of the customers or clientele of the firm resorting to the person(s) who succeed in the business as a going concern.

The value of the goodwill of a dissolved partnership as a saleable commodity is considerably decreased by the rule laid down in the case of TREGO v. HUNT (1896) AC 7 namely, that the sale of it does not prevent the vendor from carrying on the competing business with the purchaser, but quondam partners may be restrained by injunction from soliciting any person who was the customer of the old firm.

The vendor may be prohibited from carrying on business under the name of the old firm or from representing themselves as the continuing old firm, (Underhill, Principles of Law of Partnership, Butterworth (1966) p 121-123)