Disentangling JOA’s and Partnerships

By Gizel Thomas-Roberts

PARTNERSHIP

Definitions and Explanations

Section 1(1) of the Partnership Act 1890 provides as follows:

“Partnership is the relation which subsists between persons carrying on a

business in common with  a view to profit.”[1]

Based on this definition, three conditions must exist for there to be a partnership. 

·     Existence of a business- Per section 45 of the Act, “business” includes ‘every trade occupation, or profession”. This means that almost any class of activity can be regarded as a business for the purpose of the Act. There is to be no assumption that for a business to exist there must be actual trading activity taking place.

In Khan v. Miah[2] the parties had decided to open a restaurant together and to that end had acquired premises and were in the process of converting and fitting them out. They had also entered into a number of other contractual commitments and had advertised the restaurant in the local press. However, they fell out before the restaurant had actually opened. The House of Lords held inter alia that a business was being carried out and that they were partners therein. The ultimate test is whether the parties have done enough to be found to have commenced the joint enterprise in which they had agreed to engage.

·           Two or more persons carrying on a business in common-  For a partnership  to exist there must be evidence that two or more persons are carrying on a business. This means that where a group of persons carry on business not on their own behalf but on behalf of a third party, they will be regarded as partners.[3] To the contrary, where a business is run by one or more persons on behalf of themselves and others, a partnership may be held to exist.[4] Persons are inclusive of bodies corporate or unincorporated bodies and it must be noted that of recent ‘corporate partnerships have gained much popularity as mode for companies to pool their resources for particular projects, for example oil exploration or tax benefits.

·           With a view to make a profit- At the very heart of partnerships lie that profit maximisation motive. It is however, where the profit motive appears subsidiary to other purposes or hidden from plain sight that questions can arise posing difficulty. In cases such as these, it is normal to ask whether there is any genuine factual view to making a profit. Therefore it has been held that where a partnership is formed with some other predominant motive such as tax avoidance, but there is also a real, albeit ancillary, profit element, it may be permissible to infer that the business is being carried on ‘with a view of profit.’[5]

Corporations , Unincorporated Companies and Limited Liability Partnerships – a distinction

It must be noted that that the Partnership Act 1890 excludes from its definition inter alia, corporations and Limited Liability Partnerships. The significance goes to the very heart of the comparison between JOAs and partnerships and will be illustrated further.

There is no doubt that a corporation is an artificial person created most times by an Act of Parliament. This artificial person is further endowed with various capacities inclusive of the ability to acquire rights and incur liabilities. These corporations are composed of individuals whose rights and obligations are in no way the same as those of the corporation. In addition, the rights and obligations of the corporation are neither enforceable against the individuals within the company either jointly or separately, only collectively in keeping with the principle of the company as having a separate legal entity.

On the other hand, with partnerships the converse is true. The partnership is not an entity distinct from the persons comprising it and in the same breath the partners cannot collectively acquire rights or incur any obligations. This means that the ‘rights and liabilities of a partnerships are the rights and liabilities of the partners and are enforceable against by and against them individually.[6]

Regarding unincorporated companies it was Lord Lindley who identified the distinctions that are fundamental between them and partnerships. He opined inter alia that...

... ‘a partnership consists of a few individuals known to each other, bound together by ties of friendship and mutual confidence and who, therefore, are not at liberty without the consent of all to retire from the firm and substitute other persons in their places; whilst a company consists of a large number of individuals not necessarily nor indeed usually acquainted with each other at all...’[7]

The Limited Liability Partnership is itself a creature of statute. It was introduced by the Limited Liability Partnerships Act 2000. The issue here is that notwithstanding its name the LLP is considered a body corporate enjoying the dual nature of separate legal personality and unlimited capacity. This though will not classify it as a partnership under the Partnership Act 1890. This is because the members of the LLP act as agents of the LLP and not each other’s agent and they are not in general liable for the debts and obligations.

JOAs are they partnerships or not...?

The foregoing arguments appear lopsided and at times one is of the view that there is too much overlap between the definitions of both JOA and partnerships. The following list represents the major similarities and dissimilarities between both.

·           Partnerships are creatures of statute having gotten their guidance from the Partnership Act 1890. JOA’s on the other hand are contractual in nature. However this view can be challenged by the views expressed in Lindley & Banks on Partnership. The writers are of the view that

“Partnerships though oftentimes referred to as contracts can be more accurately described as a relationship resulting from a contract”.[8]

In Hurst v. Bryk[9], Lord Millet opined that ...while partnership is a consensual arrangement based on agreement, it is more than a simple contract....it is a continuing personal as well as commercial relationship”.

·           Partnerships sole purpose is that of profit maximisation. With a JOA the partners’ front burner focus is that of risk sharing and as such profit maximisation can be seen as subsidiary but not anathema to the agreement.

·           There is no joint and several liability for the participants of the JOAs as this will see the defeat of the risk sharing motive. Partners in a partnership are jointly and severally liable.

·           JOAs provide for separate lifting and separate disposal of the petroleum won and save. This suggests some level of independence and ‘individuality on the part of partners. With partnerships there is limited scope for such levels of individuality and independence since partners tend to act in unison most of the times and in the interest of the partnership as a whole. There is little room for one of the partners in a partnership to go on a frolic of his own.

·           In JOAs the partners are not carrying out business with the common view to one profit. They are each carrying on several businesses with a view to very separate profits.

·           Partnerships are not formed by disparate groups of people but Persons just do not walk off the streets and the following working day they find themselves bosom buddies in business. With JOAs oftentimes by those who bear some familiarity with each other and who may have had either some familial or friendship history, the formation can be between and among groups who have never seen or heard of each other before and who may not have  paid a cursory glance to each other prior to the current agreement. JOAs bind disparate groups.

Nutshell

The first instalment in the series is appropriately named: Marriage of Convenience or just a seat at the table . In this instalment, according to Gizel, no one doubts that at the end of the day profit maximisation is at the core of the arrangement, however one must not labour under the guise that the Joint Operating Agreements are themselves partnerships as per the 1890 Partnership Act. The purpose of this 3-part series is to investigate the veracity of the claims that JOAs are true partnerships.  Kindly read that to update yourself. Look out for the final instalment. To view Gizel's professional profile and for more information on this article please click here: -->