Relations of Partners Inter Se

Partners must act in the utmost good faith (S.9), render true accounts, and account for personal profits and competing business (S.16); their mutual rights are governed by the deed, and in its absence by the default rules in S.12 and S.13.

The internal relations of partners rest on a single foundation: utmost good faith. Partnership is a fiduciary relationship in which each partner controls assets and incurs liabilities on behalf of the others. Sections 9 to 17 impose the duties that follow from that trust and supply default rules where the deed is silent.

Legal Framework

Provision	Subject	Key Rule
S.9	General duties	Partners are bound to carry on the business to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information
S.10	Duty to indemnify for fraud	Every partner must indemnify the firm for loss caused to it by his fraud in the conduct of the business
S.11	Determination of relations by contract	Mutual rights and duties may be determined by contract, express or implied by a course of dealing
S.12	Conduct of the business	Every partner has a right to take part in the conduct of the business; differences on ordinary matters are decided by a majority, but no change in the nature of the business without the consent of all
S.13	Mutual rights and liabilities	Default rules on remuneration, profit sharing, interest on capital and advances, and indemnity
S.14	Property of the firm	Property brought into the common stock, acquired for the firm, or acquired with firm money, is property of the firm
S.15	Application of firm property	Firm property must be held and used exclusively for the purposes of the business
S.16(a)	Personal profits earned by partners	A partner who derives profit from any transaction of the firm, or from the use of the firm's property, name or business connection, must account for it
S.16(b)	Competing business	A partner who carries on a competing business must account for and pay over the profits made in it
S.17	Rights and duties after a change	The default position on a change in the firm, expiry of the term, or additional undertakings

The Duty of Good Faith (S.9)

Partners are bound to:

Duty	Content
Carry on the business to the greatest common advantage	Act in the interests of the firm rather than for personal benefit
Be just and faithful to each other	Deal honestly and openly in all firm matters
Render true accounts	Maintain and disclose accurate accounts
Give full information of all things affecting the firm	Volunteer material information; a partner must not withhold it until asked

Why the duty is expressed as "utmost" good faith: Each partner can bind the others without consultation and has access to the firm's assets and information. There is no realistic way for partners to police one another transaction by transaction. The law compensates for that vulnerability by imposing a positive duty of candour, so that the obligation is not merely to avoid dishonesty but to disclose.

Default Rules on Mutual Rights (S.12, S.13)

These apply only in the absence of contrary agreement, which is why a well drafted deed is important.

Matter	Default rule	Provision
Participation in the business	Every partner has a right to take part	S.12(a)
Access to books	Every partner may have access to, inspect and copy the books	S.12(d)
Ordinary differences	Decided by a majority, after every partner has been allowed to express his views	S.12(c)
Change in the nature of the business	Requires the consent of all partners	S.12(c)
Remuneration	No partner is entitled to remuneration for taking part in the business	S.13(a)
Profits and losses	Shared equally, irrespective of capital contributed	S.13(b)
Interest on capital	Not payable, except out of profits where the deed so provides	S.13(c)
Interest on advances	Payable at six percent per annum on a loan made by a partner beyond his capital	S.13(d)
Indemnity for the firm's acts	The firm must indemnify a partner for payments made and liabilities incurred in the ordinary and proper conduct of the business	S.13(e)
Indemnity to the firm	A partner must indemnify the firm for loss caused by his wilful neglect	S.13(f)

Why profits are shared equally by default regardless of capital: S.13(b) reflects the character of partnership as a relation of persons rather than of capital. Partners contribute skill, effort, reputation and connections as well as money, and the law does not attempt to value these. Equality is the simplest rule where the parties have not agreed otherwise, and it puts the onus on partners who want a different split to say so in the deed.

Why interest on advances is payable but interest on capital is not: Capital is the partner's stake in the venture and is remunerated by his share of the profits. An advance beyond capital is a loan to the firm, functionally the same as borrowing from an outsider, so it carries interest at the statutory rate of six percent.

Property of the Firm (S.14, S.15)

Property of the firm includes:

Category	Explanation
Property brought into the stock of the firm	Assets contributed by partners at formation or later
Property acquired for the firm	Purchased in the course of and for the purposes of the business
Property acquired with money belonging to the firm	Traceable acquisitions
Goodwill of the business	Expressly included by S.14

Under S.15, firm property must be held and used exclusively for the purposes of the business.

Goodwill: Being firm property, goodwill may be sold on dissolution under S.55, and a partner who takes it must be accounted for its value.

Duty to Account for Personal Profits (S.16)

Profits from Firm Transactions and Firm Assets (S.16(a))

If a partner derives any profit for himself from any transaction of the firm, or from the use of the property, business connection or name of the firm, he must account for that profit and pay it to the firm.

**Bentley v Craven (1853)** Court of Chancery

Facts: A partner in a sugar refinery was the firm's buyer. He had sugar of his own which he sold to the firm at the prevailing market price, without disclosing that he was the seller. The price was fair.

Issue: Must a partner account for profit made on a sale to his own firm where the price was fair and no loss was caused?

Held: Yes. He must account for the profit. As the firm's buyer he was bound to buy on the best terms for the firm, and he could not occupy the inconsistent position of seller without disclosure and consent. Fairness of price is no defence.

Relevance: The classic authority on S.16(a). Establishes that the duty is to disclose and obtain consent, and that absence of loss to the firm is irrelevant.

Competing Business (S.16(b))

If a partner carries on any business of the same nature as and competing with that of the firm, he must account for and pay to the firm all profits made by him in that business.

**Aas v Benham (1891)** Court of Appeal

Facts: A partner in a firm of shipbrokers used information obtained through the firm's business to advise a shipbuilding company, from which he received remuneration. Shipbuilding was not the firm's business.

Issue: Must a partner account for profits made in a business which is not of the same nature as the firm's, even though he used knowledge gained through the firm?

Held: No. The duty to account extends to profits made within the scope of the partnership business or from the use of partnership property. Since shipbuilding was outside the firm's business and no partnership property was used, he was entitled to retain the remuneration.

Relevance: Defines the outer limit of S.16(b). The competing business must be of the same nature as the firm's. Contrast with Bentley v Craven.

Illustrations

Duty to disclose material information: A partner learns that a major customer is about to become insolvent and says nothing while the firm continues to supply on credit. He breaches the S.9 duty to give full information of all things affecting the firm.
Equal sharing despite unequal capital: A contributes Rs. 20 lakhs and B Rs. 5 lakhs, with no agreement on profit shares. Under S.13(b) profits are shared equally. A cannot claim a larger share by reference to his capital.
Interest on an advance: A partner lends the firm Rs. 10 lakhs beyond his agreed capital. Under S.13(d) he is entitled to interest at six percent per annum on that advance, although under S.13(c) he gets no interest on his capital.
No remuneration by default: One partner works full time in the business while the others are passive. Under S.13(a) he is not entitled to remuneration in the absence of agreement, which is why a working partner's salary should always be provided for in the deed.
Change in the nature of business: Two of three partners in a textile trading firm wish to move into real estate development. Under S.12(c) this is a change in the nature of the business and requires the consent of all, so the dissenting partner can block it. A majority could not.
Secret profit on a sale to the firm: A partner responsible for procurement sells his own stock to the firm at market price without disclosing his interest. Applying Bentley v Craven (1853), he must account for the profit even though the price was fair.
Competing business: A partner in a firm dealing in pharmaceuticals sets up his own pharmaceutical distribution business. Under S.16(b) he must account for and pay over the profits of that business to the firm.
Non-competing outside activity: A partner in a firm of shipbrokers earns fees advising a shipbuilder, a business the firm does not carry on, without using firm property. Applying Aas v Benham (1891), he may retain those fees.
Use of the firm's name: A partner obtains a personal commission from a supplier by leveraging the firm's purchasing relationship. Under S.16(a) he must account for it, this being profit derived from the business connection of the firm.

Recall Check

Why does S.9 require partners to volunteer information rather than merely answer questions honestly?
Why is interest payable on a partner's advance but not on his capital?
What is the limit on the duty to account for profits of an outside business?

Key Cases

Bentley v Craven (1853) Bentley v Craven 1853
Issue: Whether a partner who sold his own goods to the firm at a fair price must account for the profit.
Rule: A partner must not occupy a position inconsistent with his duty to the firm without disclosure and consent; fairness of price is no defence.
Held: He was liable to account for the profit made.

Aas v Benham (1891) Aas v Benham 1891
Issue: Whether a partner must account for profits from a business outside the scope of the firm's business.
Rule: The duty to account is confined to profits within the scope of the partnership business or derived from partnership property.
Held: The partner could retain remuneration earned in a business the firm did not carry on.

Distinctions

Basis	S.16(a) Personal Profits	S.16(b) Competing Business
Trigger	Profit from a firm transaction, or use of firm property, name or connection	Carrying on a business of the same nature, competing with the firm
Requirement of competition	Not required	Essential
Defence of fair dealing	None; disclosure and consent are required	None once competition is shown
Limit	Must be connected with the firm's transactions or assets	Business must be of the same nature (Aas v Benham)

Basis	Ordinary Differences (S.12(c))	Change in the Nature of Business (S.12(c))
Decision required	Majority, after all views are heard	Consent of all partners
Examples	Choice of supplier, pricing, hiring staff	Entering a wholly new line of business
Effect of dissent	Dissenting partner is bound	Dissenting partner can block the change

Basis	Interest on Capital (S.13(c))	Interest on Advances (S.13(d))
Payable by default	No	Yes
Rate	As agreed, out of profits only	Six percent per annum
Character of the contribution	The partner's stake in the venture	A loan to the firm

Flashcards

State the three general duties in S.9.

To carry on the business to 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 firm.

How are profits shared in the absence of agreement?

Equally, under S.13(b), irrespective of the capital contributed.

Is a partner entitled to remuneration for working in the business?

Not by default. S.13(a) provides that no partner is entitled to remuneration for taking part in the conduct of the business.

What interest is payable on a partner's advance beyond his capital?

Six percent per annum under S.13(d).

Can a majority of partners change the nature of the firm's business?

No. Under S.12(c) a change in the nature of the business requires the consent of all partners.

Must a partner account for profit on a sale of his own goods to the firm at a fair price?

Yes. Bentley v Craven (1853) held that fairness of price is no defence where the interest was undisclosed.

When may a partner retain profits from an outside business?

Where the business is not of the same nature as the firm's and no partnership property or connection was used (Aas v Benham, 1891).

What constitutes property of the firm?

Under S.14, property brought into the stock of the firm, acquired for the firm or with firm money, including the goodwill of the business.

Exam Scenario

Problem: Three partners run a firm dealing in industrial chemicals, with no written deed. Kiran contributed Rs. 30 lakhs, Lalit Rs. 10 lakhs and Manju nothing but works in the business full time. Kiran also lent the firm a further Rs. 15 lakhs when it needed working capital. During the year Manju, who handles procurement, supplied the firm with solvents from her own separate stock at prevailing market rates without telling the others. Lalit set up a small business distributing the same class of industrial chemicals in a neighbouring district. Kiran and Lalit now wish to move the firm into pharmaceutical manufacture; Manju objects. At year end Kiran claims a larger profit share for her capital, Manju claims a salary, and both dispute the others' conduct. Advise.

Step 1: Dispose of the money claims from the default rules

There is no deed, so S.12 and S.13 govern everything.

Claim	Default rule	Outcome
Kiran's larger share for Rs. 30 lakh capital	S.13(b), profits shared equally irrespective of capital	Fails
Manju's salary for full time work	S.13(a), no partner entitled to remuneration	Fails
Interest on Kiran's Rs. 30 lakh capital	S.13(c), not payable	Fails
Interest on Kiran's Rs. 15 lakh advance	S.13(d), six percent per annum	Succeeds

Step 2: Separate Kiran's capital from her advance

Apply S.13(c) and S.13(d) together. Kiran gets no interest on her Rs. 30 lakh capital, which is her stake in the venture and is remunerated by her profit share.

She is entitled to interest at six percent per annum on the Rs. 15 lakh advance, which is in substance a loan to the firm rather than a stake in it.

Step 3: Manju's undisclosed supply of solvents

Apply S.16(a) and Bentley v Craven (1853). As the partner responsible for procurement Manju was bound to buy on the best terms for the firm, and could not occupy the inconsistent position of seller without disclosure and consent.

She must account to the firm for the profit she made.

Step 4: Lalit's competing business

Apply S.16(b). Distributing the same class of industrial chemicals in a neighbouring district is a business of the same nature as the firm's and competing with it. He must account for and pay over the profits.

Aas v Benham (1891) does not help him. There the outside activity was in a different business and no firm property was used, so Lalit cannot bring himself within that principle.

Step 5: The move into pharmaceutical manufacture

Apply S.12(c). This is a change in the nature of the business, which requires the consent of all partners.

Manju's objection is therefore decisive, and Kiran and Lalit cannot proceed as a majority.

Three traps in this problem

Capital does not buy a bigger share. Under S.13(b) profits are shared equally whatever the contribution, and under S.13(c) capital earns no interest either. Kiran's Rs. 30 lakhs gets her nothing extra.

Fairness of price is no defence. Manju sold at prevailing market rates and caused the firm no loss, but Bentley v Craven (1853) makes the duty one of disclosure and consent, so she must still account.

A majority cannot change the nature of the business. S.12(c) decides ordinary differences by majority but requires unanimity for a change in the nature of the business, so a single dissenting partner blocks it.

Conclusion. Kiran recovers only six percent on her advance, Manju gets no salary and must account for her solvent profits, Lalit must account for his competing business, and the move into pharmaceuticals is blocked. Every dispute arises from the absence of a deed dealing with profit shares, a working partner's salary, interest on capital and permitted outside activities.