20240807 BSCI1211 - SU 1_SS1.1 to 1.3 Law 2024.pptx

BSCI 121 PARTNERSHIPS Study Unit 1 Study Section 1.1 to 1.3 https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcRCbcPHO1EjlmPE5li4vZ7Xdeeezm-SR_dgkg&s  Study material The prescribed textbook for the Law...

BSCI 121 PARTNERSHIPS Study Unit 1 Study Section 1.1 to 1.3 https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcRCbcPHO1EjlmPE5li4vZ7Xdeeezm-SR_dgkg&s  Study material The prescribed textbook for the Law section/pillar of this module is: Davis, D & Geach, W. 2021. Companies and other business structures in South Africa. Oxford University Press. 5th edition. Study Section 1.1: Partnership as a legal concept and business form Prescribed textbook - Chapter 17 (Paragraphs 17.1 to 17.5) Study Section 1.2 & 1.3: Internal and external relationships Prescribed textbook - Chapter 17 (Paragraphs 17.6 to 17.10)  Learning outcomes On completion of this Study Section you should be able to: Study Section 1.1 Partnership as a Legal Concept and Business Form Outcomes 1) name the general features of a partnership; 2) explain the contribution of Roman Dutch Law to our law of partnerships; 3) describe the legal nature of a partnership; 4) name and describe the different types of partnerships; 5) explain the difference between and the meaning of the essentialia and the naturalia of a partnership agreement; 6) explain the concept of a partnership fund; 7) apply the rules applicable when answering the question whether a specific asset belongs to a partnership or to a partner in his personal capacity;  Basic principles of Study Section 1.1 O1. General Features of a Partnership: A partnership is an agreement between two or more people to share profits and losses. Each partner contributes money, property, labor, or skill. Partners share management responsibilities. The partnership is not a separate legal entity from its partners. O2. Contribution of Roman Dutch Law to Partnership Law: Roman Dutch Law influenced the development of partnership laws, emphasizing mutual consent, shared profits, and joint management. It introduced concepts of partnership contracts and fiduciary duties among partners O3. Legal Nature of a Partnership: A partnership is a contractual relationship. It does not have a separate legal personality from its partners. Partners are jointly and severally liable for the debts and obligations of the partnership O4. Types of Partnerships: There are two significant ways of categorising a partnership: 1) Universal partnership / particular partnership Universal Partnership: The Latin term for an ordinary partnership is “Societas universorum bonorum." This term is used in Roman-Dutch law, which significantly influences South African partnership law, to describe a partnership where the partners agree to pool all their assets and liabilities for mutual benefit. Particular Partnership: More temporary and focused arrangements in terms of which partners contribute their resources for a particular defined purpose only and share only in profits from that particular project together. Universal Partnership Key characteristics are: 1. Comprehensive Asset Pooling: All assets and liabilities of the partners, both current and future, are included in the partnership. This includes personal property, investments, and any other forms of wealth or debt. 2. Shared Ownership: Partners share ownership of all assets, irrespective of who originally owned them before entering into the partnership. 3. Profit and Loss Sharing: Partners share in the profits and losses generated from the combined assets. This sharing is usually proportionate to the agreement stipulated between the partners. 4. Mutual Consent: Such partnerships require the explicit consent of all partners to pool all their goods. It is a highly trust-based relationship due to the extensive sharing of personal assets. 5. Legal Framework: This type of partnership is governed by both the common law principles of partnership and specific provisions under South African law. It is similar to the general principles of partnership but extends to all goods and assets of the partners. 6. Dissolution: Upon dissolution of the partnership, the assets and liabilities are typically divided according to the terms of the partnership agreement or, in the absence of such terms, according to equitable principles. Example: Universal partnership Universal Partnership – Cohabitation Universal partnerships occur when parties cohabit and share income and/or assets without marriage. These partnerships are based on an implied agreement that meets all the requirements of a partnership. Despite the absence of a formal agreement, the parties' conduct can be interpreted as forming a universal partnership. See Schrepfer v Ponelat 2) Ordinary Partnership // Extraordinary partnership Extraordinary Partnerships: Silent Partnership / Anonymous Partnership A silent partnership is a type of partnership in which certain partners (known as silent or sleeping partners) contribute capital to the business but do not participate in its day-to-day management. Key characteristics are: 1. Capital Contribution: Silent partners invest capital into the partnership and share in the profits and losses proportionate to their investment. 2. Limited Involvement: Silent partners do not take part in the management or operational decisions of the business. Their role is purely financial. 3. Liability: Depending on the jurisdiction and specific terms of the partnership agreement, silent partners may have limited liability, which is restricted to the amount of their investment. However, in general partnerships, they might still have unlimited liability unless the partnership is structured as a limited partnership. 4. Profit Sharing: Silent partners are entitled to a share of the profits agreed upon in the partnership agreement despite not being involved in the management. 5. Confidentiality: Often, silent partners prefer to keep their involvement in the business confidential – the identities of certain partners are not disclosed to third parties. These silent/anonymous partners are not known to outsiders and are only liable to the other partners for their contributions in terms of cash, labor, or other assets. They do not bear liability towards third parties, meaning third parties are unaware of their existence. Extraordinary partnership Partnerships en Commandite: Also known as limited partnerships, these involve partners who have limited liability towards third parties. A partner en commandite is only liable up to the amount of their contribution to the partnership. For example, if Mr. X contributes R100,000, he is only liable for partnership debts up to that amount. These partners are entitled to profits as specified in the partnership agreement but do not participate in the day-to-day management. Typically, the partnership operates under the name of one partner, with the partner en commandite remaining undisclosed to third parties. The partnership agreement must clearly outline these arrangements.  In Practice In practice, we usually work with the concept of a Business Partnership. As seen in our study outcomes, a partnership is a formal arrangement between two or more individuals or entities to manage and operate a business and share its profits and losses. Thus, the partnership is based on a partnership agreement, which can be oral or written. This agreement outlines the terms and conditions, including profit-sharing ratios, responsibilities, and other operational details. From the different examples provided, we may categorise any of the partnerships as a business partnership when it is explicitly agreed to, between the partners, to be used as a form of business. Thus, the day-to-day operations are for business purposes and partnership are managed according to the partnership agreement. Partners must act in good faith and the best interests of the partnership. Decisions are typically made collectively, and profits and losses are distributed as per the agreement. O5. Essentialia vs. Naturalia of a Partnership Agreement: Essentialia: Fundamental terms necessary for forming a partnership (e.g., profit-sharing ratio, duration). Naturalia: Default terms implied by law unless expressly excluded by the agreement (e.g., duty of good faith). O6. Partnership Fund: A partnership fund consists of contributions made by partners and the profits generated by the partnership. It is used for the partnership’s business operations and to cover liabilities. O7. Determining Asset Ownership: Assets belong to the partnership if acquired for partnership purposes. Personal assets remain individual property unless contributed to the partnership. The partnership agreement and usage of the asset are key determinants.  Application of Knowledge Handout 1  Study material The prescribed textbook for the Law section/pillar of this module is: Davis, D & Geach, W. 2021. Companies and other business structures in South Africa. Oxford University Press. 5th edition. Study Section 1.1: Partnership as a legal concept and business form Prescribed textbook - Chapter 17 (Paragraphs 17.1 to 17.5) Study Section 1.2 & 1.3: Internal and external relationships Prescribed textbook - Chapter 17 (Paragraphs 17.6 to 17.10)  Learning outcomes Study Section 1.2 and 1.3: Internal and External Relationships Outcomes 1) describe a partner’s reciprocal fiduciary duties and apply the rules in a case study; 2) describe a partner’s duty towards his or her contribution and sharing of profits and losses; 3) discuss whether a partner has a right to compensation and to use the partnership’s assets; 4) discuss the division of partnership assets; 5) describe and apply in a case study the right to participate in the management of a partnership; 6) describe a partner’s duty to take care; 7) name and describe the action whereby a partner may enforce his or her rights; 8) name and discuss the requirements to bind a partnership by contract; 9) apply the rules regarding contractual liability in a case study; 10)name and explain the instances where a partnership will be bound by a contract concluded without authority; 11)indicate which relations may be established; 12)explain when a partner’s act will give rise to delictual or criminal liability by the partnership.  Basic principles of Study Section 1.2 and 1.3 O1. Describe a partner’s reciprocal fiduciary duties and apply the rules in a case study: Partners owe each other duties of loyalty and care, which means they must act in the best interest of the partnership and avoid conflicts of interest. For example, a partner cannot engage in competing business activities that harm the partnership. O2. Describe a partner’s duty towards his or her contribution and sharing of profits and losses: Partners are obligated to contribute capital or assets as agreed upon and share profits and losses according to the partnership agreement. If not specified, profits and losses are shared equally. O3. Discuss whether a partner has a right to compensation and to use the partnership’s assets: Partners are generally not entitled to compensation for services rendered to the partnership beyond their share of profits unless otherwise agreed. They may use partnership assets for business purposes but must account for personal use. O4. Discuss the division of partnership assets: Partnership assets are divided according to the terms of the partnership agreement or, in the absence of such an agreement, equally among partners after settling all liabilities and obligations. O5. Describe and apply in a case study the right to participate in the management of a partnership: All partners typically have an equal right to participate in the management unless the partnership agreement specifies otherwise. For example, in a case where one partner is excluded from decision-making, they can challenge this based on their management rights. O6. Describe a partner’s duty to take care: Partners must act with the care that a reasonably prudent person would exercise in a similar situation, ensuring they make informed decisions and avoid negligent conduct. O7. Name and describe the action whereby a partner may enforce his or her rights: A partner can file a legal action, such as a lawsuit for breach of the partnership agreement or a demand for an accounting, to enforce their rights and ensure fair treatment. O8. Name and discuss the requirements to bind a partnership by contract: A partnership can be bound by a contract if the partner has actual or apparent authority to enter into the agreement on behalf of the partnership. Actual authority is explicitly granted, while apparent authority is based on the reasonable perception of third parties. O9. Apply the rules regarding contractual liability in a case study: If a partner acts within their authority, the partnership is liable for the contract. For instance, if a partner contracts with a supplier and it’s within the scope of their authority, the partnership must fulfill the contract terms. O10. Name and explain the instances where a partnership will be bound by a contract concluded without authority: The partnership may still be bound if the partner had apparent authority or if the other partners ratified the contract. Apparent authority occurs when the partnership's conduct suggests that the partner had authority. O11. Indicate which relations may be established: Partnerships can establish various relationships, including those with third parties, such as clients, suppliers, or creditors. They can also enter into joint ventures or alliances with other businesses. O12. Explain when a partner’s act will give rise to delictual or criminal liability by the partnership: The partnership may be liable for wrongful acts (delictual liability) committed by a partner in the course of the partnership's business, such as fraud or negligence. Criminal liability may arise if a partner engages in illegal activities with the partnership's knowledge or consent.  Application of Knowledge Handout 1