3.4 Partnership Decision-Making and Authority

Partnership disputes in practice are rarely about the definition in section 1. They are about who could sign the lease, who could hire a consultant, and who is still on the hook after someone "left last Christmas". FLK1 asks for procedures and authority under the Partnership Act 1890, common provisions in partnership agreements, and a working contrast with LLPs. Apparent authority, holding out, and liability to third parties sit at the centre of that functioning knowledge.

Agency and usual authority: section 5

Section 5 is the engine. Every partner is an agent of the firm and of the other partners for the purpose of the business of the partnership. The acts of a partner who does any act for carrying on in the usual way business of the kind carried on by the firm bind the firm and the other partners, unless two facts are both true: the partner in fact had no authority for that matter, and the person dealing with them either knew they had no authority or did not know or believe them to be a partner.

That is a third-party protection rule. Internally, the partners may have agreed that only A signs cheques above £5,000. Externally, if B signs a £20,000 order that is in the usual way of this kind of business, the firm is bound unless the supplier knew of the limit or did not think B was a partner. Usual way is judged by the kind of business, not by the secret minutes. Selling a firm's only warehouse may fall outside the usual way of a trading partnership; ordering stock, engaging ordinary employees, or giving a receipt for a partnership debt will usually fall inside. Section 6 stops a partner from binding the firm by using the firm's credit for a private purpose where the third party knows it is private. Section 7 deals with admissions and representations about partnership affairs.

Restrictions, notice, and section 8

Section 8 completes the picture. If the partners have agreed to restrict a partner's power to bind the firm, the restriction does not bind a person dealing with the firm who has no notice of the agreement. Notice is the difference between an internal governance rule and an external defence. Putting the restriction in a partnership deed that the supplier has never seen is not notice. Telling the supplier in writing, or dealing on standard terms that state who may sign, can be.

Apparent (ostensible) authority in the common-law sense overlaps with s.5. A representation, typically by the firm or by partners with actual authority, that a person may do this kind of act, relied on by the third party, can bind the firm even if internal authority was missing. For SQE1, apply s.5 first, then ask whether the third party had notice, then whether holding out under s.14 creates liability for someone who is not (or is no longer) a partner.

Internal decision-making: sections 19, 24 and 25

Section 19 says the mutual rights and duties of partners, whether agreed or supplied by the Act, may be varied by consent of all partners, and consent may be inferred from a course of dealing. If there is no contrary agreement, section 24 supplies the default operating system:

• Partners share equally in capital and profits and contribute equally to losses (s.24(1)).
• The firm must indemnify a partner for payments and personal liabilities incurred in the ordinary and proper conduct of the business, or in anything necessarily done for the preservation of the business or property (s.24(2)).
• A partner who makes an advance beyond agreed capital is entitled to 5% interest (s.24(3)); there is no interest on capital before profits are ascertained (s.24(4)).
• Every partner may take part in management (s.24(5)).
• No partner is entitled to remuneration for acting in the partnership business (s.24(6)).
• No person may be introduced as a partner without the consent of all existing partners (s.24(7)).
• Differences as to ordinary matters may be decided by a majority; a change in the nature of the partnership business needs all partners (s.24(8)).
• Books are kept at the place of business and every partner may inspect and copy them (s.24(9)).

Section 25 is the expulsion rule: no majority can expel a partner unless an express expulsion power has been agreed. There is no implied right to vote someone out because they are difficult. Partnership at will (s.26) can be dissolved by notice. Those defaults are why a two-page "we'll sort the paperwork later" email is a professional-negligence seed.

Common partnership-agreement provisions

A competent agreement does not copy s.24 and stop. It usually covers:

• Capital accounts and interest, if any, on capital (displacing s.24(4)).
• Profit-sharing and drawings, including what happens if drawings exceed profit.
• Decision-making: a managing partner for day-to-day matters; a list of reserved matters (borrowing above a threshold, charging partnership property, starting litigation, admitting a partner, changing banking arrangements) that need unanimity or a specified majority.
• Signing and banking authority, matching what third parties will be told.
• Admission, retirement, death, and bankruptcy, including valuation of an outgoing share, payment by instalments, and whether the firm continues rather than dissolving.
• An expulsion clause with grounds, a fair process, and often a restrictive covenant. Without it, s.25 blocks majority expulsion.
• Garden leave, non-solicit, and confidentiality — contract, not the 1890 Act.
• Insurance, including professional indemnity run-off.
• Dispute resolution (mediation, then arbitration or court).
• Tax information duties, while remembering that tax computation is a different FLK1 heading.

Advise clients that an agreement binds the partners inter se. It is not, without more, notice to the world. If you want a restriction to work against suppliers, you must communicate it (s.8).

Holding out, retirement, and third-party liability

Section 14 is holding out. Everyone who, by words or conduct, represents themselves, or knowingly suffers themselves to be represented, as a partner in a particular firm is liable as a partner to anyone who, on the faith of that representation, has given credit to the firm. The name left on the letterhead, the website biographies, and the receptionist's "I'll put you through to one of the partners" are how s.14 is tried in real life. A retired professional who knows their name is still on the notepaper and does nothing is in the danger zone.

Section 36 deals with apparent members after a change. A person who deals with the firm after a change in constitution is entitled to treat all apparent members as still being members until they have notice of the change. An advertisement in the London Gazette is notice to persons who had not dealt with the firm before the date of the change. It is not sufficient notice to existing customers. Those who dealt with the firm before need actual notice. A solicitor who gazettes a retirement and then tells the client "you're off the hook with the old landlord" has not finished the job.

Incoming partners are not liable for old debts merely by admission (s.17). Outgoing partners remain liable for debts incurred while they were partners unless the creditor agrees to a novation. Combine s.17 with s.36: even after retirement, new credit given by an old customer who was never told can still attach to the retiree as an apparent partner.

Mini-scenario: the silent retiree

Jordan retires from a three-partner design firm on 1 March. The website still lists Jordan as a partner in June. An existing client, never notified, instructs the firm in May and is not paid for a disbursement the firm promised to meet. Gazette publication occurred on 8 March. The client had dealt with the firm for years. Gazette notice does not fix the existing client. Section 36 keeps Jordan in view as an apparent member until actual notice. Section 14 may also apply if Jordan knew the website was wrong and suffered the representation to continue.

Contrast: LLP decision-making and authority

An LLP is a body corporate. Third parties normally contract with the LLP. Members are agents of the LLP (Limited Liability Partnerships Act 2000, s.6(1)), but the LLP is not bound if the member in fact had no authority and the third party knew that or did not know or believe they were a member (s.6(2)). The structure echoes s.5, with one decisive difference: success on the agency analysis produces a claim against the LLP's assets, not automatic unlimited liability of every member. Members can still be liable for a personal guarantee, for their own tort if they assumed a personal duty, or if they have been held out as 1890 Act partners of a firm that is in law an LLP — a misdescription that marketing teams create when they call LLP members "partners" on the website without clarifying the vehicle.

Internally, the LLP agreement is king. In default, the 2001 Regulations look familiar: equal share in capital and profits, every member may take part in management, ordinary matters by majority, no change in the nature of the business and no new member without consent of all, inspection of books, and no expulsion unless agreed. Designated members (at least two, unless a sole remaining member on a temporary basis) sign and file accounts, appoint auditors where required, and notify Companies House of changes. They are not 1890 Act partners; they are the LLP analogue of certain company-officer functions.

Mini-scenario: who does the landlord sue?

A four-member LLP takes a lease of studio space. One member signs as "member, for and on behalf of the LLP", with actual authority. Rent falls into arrears. The landlord's primary claim is against the LLP. The members' houses are not in the pot unless they gave guarantees, signed as individuals, or a holding-out case treats them as partners of a 1890 firm (which this vehicle is not). If the same facts involved an unincorporated partnership, s.9 would put the partners' personal assets in view from the first unpaid quarter.

That contrast is the point of the topic. Get the vehicle right, apply s.5 or s.6 to authority, then apply s.14 and s.36 if the stem is about someone who appeared to be a partner. Do not borrow company veil language to rescue 1890 Act partners, and do not treat LLP members as jointly liable for rent merely because they still use the word "partner" on a business card.