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With any business venture, one of the key aspects to think about is how liability will work. In other words, if the business finds itself in debt, who will be responsible for repaying that money?
One popular concept that arises here is joint and several liability, which is common in partnerships.
What Is A Partnership?
A partnership is a type of business structure. To have a partnership, there must be two or more people who have come together to form a business.
A partnership is different to a sole trader or a company. A sole trader is an individual who runs their business themselves and has personal liability, whereas a company is a much more complex structure, sitting as a legal entity on its own with limited liability.
Unlike a sole trader, in a partnership you work with other people and unlike a company, you can be held liable for any debts your business incurs. This, however, depends on the kind of liability you have agreed to as a partner.
What Is Liability In Business?
Liability refers to the extent you are legally responsible for something. For example, if you’re a school teacher, then you are legally responsible for the safety of the children under your care during school hours. If a child is hurt at school, then you would be liable.
In business, your liability refers to your responsibility for your businesses financial dealings, regulations and obligations.
Limited Vs Unlimited Liability
Business partnerships can be either limited liability partnerships or unlimited liability partnerships.
In a limited liability partnership, each partner is responsible for themselves. If you’re in a limited liability partnership then you cannot be responsible for any negligence or poor decision making made by one of your partners.
A limited liability partnership on the other land, means you completely share any potential repercussions caused by another partner.
Difference Between Joint And Several Liability In A Partnership
Joint and several liability in a partnership refers to the amount of responsibility each party has undertaken, particularly in case of a conflict. In a joint liability partnership, both partners are fully liable. A several liability partnership, however, limits the amount of liability one partner has for the other’s actions.
For example, Dawn and Summer agree to build a house for Annie.
If Dawn and Summer are in a joint liability partnership, then both are responsible for all aspects of their contract to Annie to be fulfilled. In a joint liability partnership, the partners are both equally liable whether or not they contributed equally to the negligence. If Dawn does not fulfill her duties, Annie can sue both. If Summer then repays the full amount owed to Annie for the house, then both Summer and Dawn are off the hook.
With the same scenario in mind, if Dawn and Summer had a several liability partnership, things would have gone differently. In a several liability partnership, each partner is responsible for their own actions.
For example, Dawn and Summer agree to build a house for Annie. Dawn agrees to do the exterior work such as roofing and landscaping, whereas Summer promises to take on all the indoor responsibilities such as plumbing and electricity. In a several liability partnership, each partner is responsible for their own part. Therefore, if Dawn completes her end of the contract to Annie but Summer doesn’t, Annie can only hold Summer liable.
Additionally, there is also a joint and several liability partnerships where each party is responsible for their own actions but they can all be held liable if one person doesn’t perform their duty. As such, they can be sued together or separately.
Partnership Agreement
A Partnership Agreement will contain the regulations, obligations and expectations of each partner. This agreement is legally binding.
Having a partnership agreement when entering into business with other people is vital. Not only will it contain your individual duties towards the business, but it will also detail the liability of each partner and a procedure in case of conflict.
If you want to terminate your arrangement, the rules around this should also be set out in this agreement.
Presumption Of Joint Liability
If liability is not clearly stated, then partners may be subjected to a presumption of joint liability. This can happen when both partners have agreed to undertake a task together. If you do not have the intention to be held liable jointly, this needs to be expressed in your agreement.
It’s crucial that the intention of liability of all partners is unequivocally stated in the partnership agreement. If liability is not made clear in your contract, then you are likely opening yourself up to unnecessary litigation and potentially being held liable for a partner’s negligence.
What Does Case Law Say About This?
Wang v Rong [2015] is a prime example of why partnership agreements prepared by a legal expert are crucial.
The three partners, Wang, Rong and Zhang, had purchased a franchise cafe together with the intention of being business partners. Their partnership agreement was not drafted by a legal professional, but rather, an accountant who did not cater it to their expectations.
The conflict was largely about payment. The partners seemed to disagree on the issue of salary based on compensation however, as their agreement did not reflect this, the court decided to divide the money as a distribution of profits. This is a common practice among partners unless explicitly stated otherwise.
Needless to say, if the three partners had invested in a proper partnership agreement, they could have avoided their day at court altogether.
Partnership Act
Each state has their own partnership act. In NSW, the Partnership Act 1892 regulates business partnerships. The act defines partnerships, outlines the limitations and liabilities, discusses finances as well as other important aspects of a partnership.
It’s an important document for any business owner, however, it is rather dense. If you are confused about anything, always seek legal help to help you clarify things.
Need Help?
If you are considering entering into a partnership or already are in one and want to get your documents sorted, then speaking to a legal professional is the best way to ensure your documents are sorted. Our lawyers have aided numerous business owners and can help you too!
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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