THE IMPORTANCE OF HAVING A VALID PARTNERSHIP AGREEMENT

Written by Marco Basson

13 of June 2023

A partnership agreement is a legally binding contract that protects the interests of all partners involved. It sets out the legal framework for the partnership and the rights and obligations of each partner. In the event of a dispute or disagreement, a partnership agreement serves as a reference point for resolving conflicts and protecting the rights of the partners. It also clarifies what is expected from each partner, which prevents misunderstandings and conflicts among partners.

This article explores the importance of a partnership agreement, the essential aspects of a partnership agreement, and the important terms that need to be addressed to help prevent conflicts.

WHAT ARE THE KEY ELEMENTS OF A PARTNERSHIP AGREEMENT?

There are four key elements of a partnership agreement:

  1. Every partner must contribute to the partnership. The contribution may take various forms: capital, property, services, knowledge, or skill. There is no restriction on the type of contribution; the only requirement is that it must have economic or commercial value.
  2. The objective must be to make a profit that will be divided among the partners. This is the essential objective of a partnership; if the partners are not concerned with making a profit and do not see it as their main objective, there will be no partnership. The aforementioned is not subject to an actual profit being made, as long as making a profit is the main goal.
  3. The partnership business will be carried out for the joint benefit of the partners. A partnership is formed for the common interest of every partner, and usually, the intention is that each party derives an income from the partnership. Usually, a partnership is formed for the continuous running of a business, but it may also be formed to accomplish a specific project. For example, five friends form a partnership for a specific property development.
  4. The contract between the parties should be a valid, lawful agreement. This agreement should embody the essentials of a partnership and must be entered into with the clear intention of creating a partnership.

Without the above key elements and the intention to establish a partnership, a partnership will not be able to exist.

WHAT PROVISIONS MUST BE CONTAINED IN YOUR PARTNERSHIP AGREEMENT?

Certain important provisions will provide a harmonious environment and the necessary clarity for a partnership to function properly. These provisions are as follows:

  • Mutual mandate;
  • The obligation to share in the net profit;
  • The proportion in which the net profit is shared;
  • The obligation to share in the net loss;
  • The proportion in which the net loss is shared;
  • The proportion in which the assets are divided upon the dissolution of the partnership;
  • The proportion in which the partners are co-owners of the assets of the partnership; and
  • Dissolution of the partnership.

DOES A PARTNERSHIP EXIST WITHOUT A WRITTEN AGREEMENT?

In the absence of a valid partnership agreement, the past conduct and intention of the parties can provide insight as to whether they intended to form a partnership.

It is important to note that the person alleging the existence of a partnership agreement will carry the burden of proof. This means that they need to provide the court with relevant evidence that can be applied to legal principles.

HOW DOES THE COURT DETERMINE WHETHER A VALID PARTNERSHIP HAS FORMED WHEN THERE IS NO WRITTEN AGREEMENT IN PLACE?

The following cases discuss the existence of a partnership without a valid agreement:

  • Harrington v. Fester 1980 (4) SA 424 (C)

The applicant claimed the existence of a partnership; however, there was no written agreement. The court found that, at best, the correspondence between the parties revealed no more than a possible intention to enter into a partnership. Certain other correspondence indicated that the applicant had treated the respondent as an employee, which would be inconsistent with the existence of a partnership. There was also no partnership bank account. If the parties’ intention is not to establish a partnership, no partnership will come into existence.

  • In Pezzutto v. Dreyer 1992 (3) SA 379

The appellant had alleged that a ‘handshake agreement’ of a partnership between himself and three others had come into existence. The court stated that for a partnership to come about, there must be an agreement to that effect between the contracting parties. On his evidence, which the court found to have been uncontradicted, unchallenged, and plausible, the appellant was held to have proved the essentialia necessary for the creation of a partnership agreement.

The court found that there had been clarity among the parties regarding the nature of each party’s contribution, and the fact that the exact extent of such contribution and the precise role of each party had not been spelled out had not made the agreement void for vagueness.

In the absence of even one of the essential elements of a partnership agreement, no partnership would come into existence.

HOW CAN THE PARTNERSHIP BE TERMINATED OR DISSOLVED?

There are different ways to dissolve or terminate a partnership, the most important of which are the following:

  • A mutual agreement between the partners.
  • Time-lapse: It has been agreed that the partnership will only exist for a certain period of time.
  • The completion of a task: If a partnership was formed to carry out a particular task or business, the partnership would dissolve when the task or business was done.
  • A change in partnership regarding members: the retirement or death of a partner or the admission of a new partner results in the termination of the existing partnership and the creation of a new partnership. If a partner retires or dies, the other partners may agree to continue the partnership’s activities, resulting in the formation of a new partnership.
  • Insolvency of the partnership or any of its members.
  • Notice of Dissolution: This can be given by one of the members, but it must be done in good faith, in a reasonable time, and it must benefit the partnership.
  • By order of the court.

Before entering into a partnership, it is essential to understand the document and all its essential provisions. If a verbal partnership agreement is formed, the onus will be on the party alleging the partnership to prove to the court that a partnership was indeed formed.

It is, therefore, of vital importance to obtain legal assistance when entering into a partnership. Contact one of our commercial law attorneys today to assist you in drafting your partnership agreement.

DISCLAIMER: Information provided in this article does not, and is not intended to constitute legal advice. READ MORE