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Home -> Essel R. Dillavou -> Principles Of Business Law -> CHAPTER III

Principles Of Business Law - CHAPTER III

1. CHAPTER I

2. CHAPTER II

3. CHAPTER III

4. BOOK I CHAPTER I

5. CHAPTER II

6. CHAPTER III

7. CHAPTER IV

8. CHAPTER V

9. CHAPTER VI

10. CHAPTER VII

11. CHAPTER VIII

12. BOOK II CHAPTER I

13. CHAPTER II

14. CHAPTER III

15. CHAPTER IV

16. BOOK III CHAPTER I

17. CHAPTER II

18. CHAPTER III

19. CHAPTER IV

20. CHAPTER V

21. CHAPTER VI

22. CHAPTER VII

23. CHAPTER VIII

24. CHAPTER IX

25. CHAPTER X

26. BOOK IV CHAPTER I

27. CHAPTER II

28. CHAPTER III

29. CHAPTER IV

30. CHAPTER V

31. CHAPTER VI

32. CHAPTER VII

33. CHAPTER VIII

34. CHAPTER IX

35. CHAPTER X

36. CHAPTER XI

37. CHAPTER XII

38. CHAPTER XIII

39. BOOK V CHAPTER I

40. CHAPTER II

41. CHAPTER III

42. BOOK VI CHAPTER I

43. CHAPTER II

44. CHAPTER III

45. CHAPTER IV

46. CHAPTER V

47. BOOK VII CHAPTER I

48. CHAPTER II

49. CHAPTER III

50. CHAPTER IV

51. BOOK VIII CHAPTER I

52. CHAPTER II

53. CHAPTER III







CHAPTER III

RIGHTS AND DUTIES OF PARTNERS
AMONG THEMSELVES

Relations of Partners to One Another

Sec. 17. In general. The rights which a partner has as against
his copartners, as well as his duties to them, may in a very large
measure be defined by the partnership agreement. The amount of
his investment, his right to interest thereon, and the share of the
profits to be credited to him, along with his right to share in the
management of the business or to receive compensation for such,
are matters one might well expect to see controlled by the articles
of copartnership. When the agreement is silent on these matters,
the rules found in the following sections control.

Sec. 18. Partner's rights to indemnity and contribution. If
any partner, in the pursuit of the partnership business, makes any
payments or advances beyond his capital for the aid of the partner-
ship, he is entitled to contribution for such advances. If a partner
makes a loan to the partnership, he is a creditor of the firm and is
entitled to contribution with interest from the date of such loan.
For example, a partner would have a right to contribution for ex-
penses legitimately incurred in the pursuit of the partnership busi-
ness.

The right to indemnity arises where a partner, through negli-
gence or lack of diligence, has caused a loss to the firm. The part-
ner at fault must indemnify the other partners. This liability
generally arises when a partner has done some act, in violation of
the partnership agreement, which has caused a partnership loss.

Sec. 19. Sharing of profits and losses. Subject to an agree-
ment among themselves, each partner has a right to share equally
in the profits of the enterprise. Likewise, each partner is under a
duty to contribute equally to the losses, in the absence of a different
agreement, whether such losses be capital losses or otherwise. Cap-
ital contributed to the firm, in the absence of an agreement to the
contrary, is a debt owing by the firm to the contributing partners.
If, on dissolution, there are not sufficient assets to repay each part-
ner his capital, such amount is considered as a loss, and must be met
like any other loss of the partnership.

Occasionally articles of copartnership specify the manner in
which profits are to be divided, but neglect to mention possible

242



RIGHTS AND DUTIES OF PARTNERS 243

losses. In such cases, the losses are borne in the same proportion
that profits are to be shared. In the event that losses occur when
one of the partners is insolvent and his share of the loss exceeds the
amount owed him for advances and capital, the excess must be
shared by the other partners. They share this unusual loss, with
respect to each other, in the same ratio that they share profits.

Sec. 20. Partner's right to interest. Contributions to capital,
in the absence of an agreement, are not entitled to draw interest. 1
The partner's share in the profits constitutes the earnings upon his
capital investment. In absence of an expressed provision for the
payment of interest, it is presumed that interest will be paid only
on advances above the amount originally contributed as capital.
Advances in excess of the prescribed capital, even though credited
to the capital account of the contributing partners, are entitled to
draw interest.

The Uniform Partnership Act provides in Section 18 that a part-
*ner who, in aid of the partnership, makes any payment or advance
over the amount of capital which he agreed to contribute shall be
paid interest from the date of the advance. A partner is entitled
to interest on capital contributed by him only from the date when
repayment should be made.

Unwithdrawn profits remaining in the firm are not entitled to
draw interest. Such unwithdrawn profits are not considered ad-
vances or loans by the mere fact that they are left with the firm.
However, custom, usage, and circumstances may show an intention
to treat such unwithdrawn profits as loans to the firm.

Sec. 21. Right to participate in management. In the absence
of an agreement, all partners have equal rights in the management
and conduct of the firm business. The partners may, however, by
agreement, place the management within the control of one or more
partners. The right to an equal voice in the management and con-
duct of the business is not determined by the share that each part-
ner has in the business.

In the absence of an agreement, in regard to ordinary matters
arising in the conduct of the partnership business, the opinion of
the majority of the partners is controlling. 2 If the firm consists of
only two persons, and they are unable to agree, and the articles
of partnership make no provision for the settlement of disputes,
dissolution is the only remedy.

The majority cannot, however, against the consent of the minor-
ity, change the essential nature of the business by altering the part-
nership agreement or by reducing or increasing the capital of the

1 Grant v. Smith, 1902, 70 App. Div. 301, 75 N.Y. Supp, 82; p. 672.

2 Clark et al. v. State Valley Ry. Co., 1890, 136 Pa. St. 408, 20 Atl. 562; p. 672,



244 BUSINESS ORGANIZATIONS PARTNERSHIPS

partners; or embark upon a new business; or admit new members
to the firm.

There are certain acts other than those enumerated above which
require the unanimous consent of the partners, in order to bind the
firm, namely: (1) assigning the firm property to a trustee for the
benefit of creditors; (2) confessing a judgment; (3) disposing of
the good will of the business; (4) submitting a partnership agree-
ment to arbitration; (5) doing any act which would make impos-
sible the conduct of the partnership business.

Sec. 22. Partner's right to be compensated for services. It is
the duty of each partner, in absence of an agreement to the con-
trary, to give his entire time, skill, and energy to the pursuit of the
partnership affairs. No partner is entitled to payment for services
rendered in the conduct of the partnership business unless an agree-
ment to that effect has been expressed or may be implied from the
conduct of the partners. A surviving partner is entitled to rea-
sonable compensation for his services in winding up the partner-
ship affairs.

Sec. 23. Right to information and to inspection of books.
Each partner, whether active or inactive, is entitled to full and com-
plete information concerning the conduct of the business and may
inspect the books to secure such information. 3 The partnership
agreement usually provides for a bookkeeper, and each partner is
under a duty to give the bookkeeper whatever information is nec-
essary efficiently and effectively to carry on the business. It is
the duty of the .bookkeeper to allow each partner access to the
books, and to keep them at the firm's place of business. No part-
ner has a right to remove the books without the consent of the other
partners. Each partner is entitled to inspect the books and make
copies therefrom, provided he does not make such inspection or
copies to secure an advantageous position, or for fraudulent pur-
poses.

Sec. 24. Fiduciary relation of the partners. Section 21 of the
Uniform Partnership Act provides: Every partner must account to
the partnership for any benefit, and hold as a trustee for it any
profits gained by him without consent of the other partners from
any transaction connected with the formation, conduct, or liquida-
tion of the partnership, and account for any use by him of the part-
nership property. This duty also rests upon representatives of de-
ceased partners engaged in the liquidation of the affairs of the
partnership.

The partnership relation is a personal one, and each partner is
under duty to exercise good faith, and to consider the mutual wel-

8 Eatz v. Brewington, 1889, 71 Md, 70, 20 Atl. 139; p. 673.



RIGHTS AND DUTIES OF PARTNERS 245

fare of all the partners in his conduct of the business. 4 If one part-
ner attempts to secure an advantage over the other partners, he
thereby breaches the partnership relation, and he must account for
all benefits that he obtains. Where a partner, in the transaction of
the partnership business, obtains a secret commission from a third
person without the consent of the partners, he must share such
commission or profit with his partners. A partner cannot buy
commodities for the firm at one price and sell them to the firm at
another price. Likewise, one partner cannot sell his interest in the
partnership to another partner without disclosing all facts concern-
ing the value of the interest sold. One partner cannot use infor-
mation secured by him in the pursuit of the partnership business
for any purpose which would compete with the firm, without ac-
counting to the firm for any profits obtained by the use of such in-
formation. Neither may a partner, while a member of a firm, en-
gage in a competing business, unless such conduct is approved by
the other members of the firm.

Sec. 25. Partner's right to an accounting. The partners' pro-
portionate shares of the partnership assets, or profits, when not de-
termined by a voluntary settlement of the parties, can only be as-
certained by a bill in equity for an accounting. A partner cannot
maintain an action at law, against other members of the firm, upon
the partnership agreement, because, until there is an accounting
and all the partnership affairs are settled, the indebtedness between
the firm members is undetermined. 5 Therefore, in order that a
partner may determine his interest in the firm, he is entitled to an
accounting in equity. Partners ordinarily have equal access to the
partnership books, and there is no reason why they should be sub-
ject to formal accountings to determine their interest. However,
each partner is entitled to a complete accounting in a proper case
in equity, in order to show the financial condition of the firm. An
accounting will not be permitted to settle incidental matters of dis-
putes between the partners, however, unless the disputes are of such
a grievous nature as to make impossible the continued existence of
the partnership. 6

In all cases a partner is entitled to an accounting upon the dis-
solution of the firm. In addition he has a right to a formal ac-
counting without a dissolution of the firm in the following situa-
tions :

1. Where there is an agreement for an accounting at a definite
date.



4 Kaufer v. Rothman, 1926, 78 N.J. Eq. 467, 131 All. 581; p. 674.

6 Jones et al. v. Cade, 1922, 94 So. 255, 19 Ala. App. 27; p. 674.

6 Lord et al. v. Hull, 1904, 178 N.Y. 9, 70 N.E. 69, 102 Am. St. Rep. 484; p. 676,



246 BUSINESS ORGANIZATIONS PARTNERSHIPS

2. Where one partner has withheld profits arising from secret
transactions.

3. Where one partner has been expelled from the firm.

4. Where there has been an execution levied against the interest
of one of the partners.

5. Where one is in such a position that he does not have access
to the books.

6. Where the partnership is approaching insolvency and all par-
ties are not available.

Upon an agreement between themselves, the partners may make
a complete accounting and settle their claims, without resort to a
court of equity.

Review Questions and Problems

1. A and B entered into a partnership for the purpose of conducting a
grocery business. A invested $10,000 and B $5,000. At the end of the
first year, no profits had been made and all capital had been lost. A
desires to recover $2,500 from B. In the absence of any agreement con-
cerning the division of profits and losses, is he entitled to recover?

2. A advances to a partnership, for a period of sixty days, the sum of
$19,000 in addition to his agreed capital Is he entitled to interest on
the advance?

3. Are unwithdrawn profits remaining in the firm entitled to interest?

4. A, B, and C are partners. A and B desire to move to a new loca-
tion, but C objects to the plan. May A and B bind the firm to a lease on
the new location without the consent of (7?

5. Name four occasions upon which a partner may have an accounting
without dissolution. Has he always a right to an accounting at the time
of dissolution?

6. A and B were partners in the conduct of a hotel. Considerable
money had been spent by the firm in furnishing and equipping the build-
ing, which was leased from a third party. Shortly before the lease was
to expire, A obtained a new lease in his own name. May he be compelled
to hold the lease for the benefit of the firm?

7. A was a partner in a retail grocery business and acted as the pur-
chasing agent for the firm. He was also a partner in a certain milling
industry. He purchased flour from the mill for the grocery, purchases
which, because of his interest in the mill, netted him $500 during the
year. Assuming that his partners were unaware of his interest in the
mill, but later ascertained the true facts, should A be allowed to retain
his profits?

8. A and B have been partners for a number of years. Upon A J 8 death,
B spent considerable time in winding up the partnership affairs. Is he
legally entitled to compensation for his services?




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