Court analyses whether venture was a partnership or a series of separate businesses
08 August 2024The Court of Appeal has assessed whether an arrangement under which investments were managed by four separate managers under four separate investor pools was merely a set of parallel, independent businesses or, in fact, an ordinary partnership.
What happened?
Hamilton v Barrow and ors [2024] EWCA Civ 888 concerned a foreign exchange trading business established by three individuals (A, B and C), under which the venture would collect funds from investors to deploy in FX trading.
Over time, the original participants began to pay commission to other people who introduced investors. The introducers included a fourth individual (D).
The venture was split into five “sections”. A and B managed one section. The other sections were “loosely geographically organised” and managed by others. D managed one of those other sections.
In short, an investor in D’s section claimed that he had been misled as to how his invested funds would be applied. He brought claims against A, B and D as partners in a partnership. (C had, by this time, disappeared.)
The key question was whether the venture was an ordinary partnership between the various section managers (including A, B and D) or merely a set of parallel but independent businesses. (See box below “What is an ordinary partnership?”.)
If it was a partnership, then A and B would be equally liable, as partners, for any misrepresentations made in connection with investments into the section managed by D.
What is an ordinary partnership?
Partnerships are one of the oldest forms of business arrangement recognised by the laws of the United Kingdom.
A partnership is an arrangement founded principally on a mixture of concepts of contract law, trust law and agency. It recognises a set of circumstances in which individual persons (whether natural persons or corporate bodies) have come together to pursue a common business.
Two types of partnership exist in the UK: ordinary partnerships (sometimes called “general partnerships”) and limited partnerships.
In most cases, partners in a partnership will have intended to set their arrangement up as a partnership from the outset. However, in some cases, an ordinary partnership can arise as a result of the individual parties’ conduct and behaviour towards each other and third parties. (Limited partnerships are formed by registration at Companies House and cannot arise accidentally.)
In the UK, limited partnerships are predominantly used in investment fund structures. Ordinary partnerships are used principally for professional services businesses, such as consultancies, legal firms and general medical practices.
Ordinary partnerships in the UK are governed by statute, specifically the Partnership Act 1890. Under section 1(1) of that Act, an ordinary partnership exists when two or more persons carry on a business in common with a view of profit. This is generally a question of fact in each case.
In England and Wales, ordinary partnerships do not have separate legal personality. Rather, the partnership is simply a convenient means of referring to all the partners acting collectively as individuals. By contrast, in Scotland, ordinary partnerships are separate persons in law.
The consequences of forming an ordinary partnership are significant and include the following.
- Each partner in an ordinary partnership has the power to bind every other partner to contractual arrangements. This is in contrast to a limited company, where individual members do not have power to bind the company (although the directors do).
- Each partner has also unlimited liability for the debts and obligations of the partnership (although a partnership can, in most cases, limit its liability to third parties by contract). In essence, this means each partner is liable for each other partner’s actions. This is in contrast to most forms of body corporate (including limited companies and limited liability partnerships (LLPs)), where each member’s liability for the corporation’s debts and obligations is limited to a specific amount.
- As a result of this, each partner in an ordinary partnership owes extensive duties to each other partner. These go beyond “regular” fiduciary duties and include a duty of “utmost good faith”. This contrasts with companies, whose members do not owe each other any special duties, and LLPs, whose members do not owe each other fiduciary duties unless they specifically create them (e.g. under the LLP agreement).
For this reason, it is common in joint venture and other contractual arrangements to include provisions stating that the parties do not intend to create a partnership. However, whether they in fact do so will depend on whether the conditions for forming a partnership are satisfied.
What did the court say?
The High Court found that the arrangement was a partnership. A and B appealed. The Court of Appeal upheld the High Court’s decision and confirmed that the arrangement was an ordinary partnership.
In reaching its decision, the Court of Appeal gave the following reasons.
- Unlike in previous cases decided by the court, where individuals had been conducting separate kinds of business activity as a joint venture, here all section leaders were conducting “exactly the same kind of business” and were “not doing so independently”.
- Section leaders met in daily meetings that were closed to regular investors and in near constant contact about running the different sections.
- They took decisions by majority vote, including on the text of emails sent to participants.
- When D’s section was established, participants had been sent emails stating that their accounts would be managed “in the same manner as before”, implying continued involvement by A and B.
- All funds received from investors were channelled through a single account, with A and B taking commission on funds invested in all sections and the same netting and capping arrangements applying across all sections.
- “Near-identical” marketing and communications material was deployed across all sections.
- Section leaders had previously looked into putting the venture on a “different legal footing using some form of fund structure” with a formalised arrangement to share running costs.
- The main driver behind setting up different “sections” of investors was that the venture was getting too large for A and B to handle all investors themselves. They were designed principally to “make the fund more manageable” and “reduce [A’s and B’s] workload”.
- The different section leaders had placed mutual confidence and trust in each other, including (for example) in relation to operating banking arrangements. It was “inconceivable” that any section leader would be able to hand their role over to a third party.
The court also affirmed that, although the existence of an ordinary partnership required A, B, D and the other section leaders to be carrying on a business with a view to a profit, this did not mean that there needed to be formal profit-sharing arrangements in place.
What does this mean for me?
For parties looking to establish a new business venture, the key question is whether an ordinary partnership is an appropriate vehicle.
We see ordinary partnerships less and less frequently in England and Wales, not only due to the fact that partners have unlimited liability for the partnership’s obligations, but also because the lack of personality can make it more administratively cumbersome to contract with third parties and hold property, as well as more difficult to raise finance.
If an ordinary partnership is the right structure, parties should engage early with legal advisors to ensure an appropriate partnership deed is put in place. Although it is possible to form an ordinary partnership without a formal deed, the default statutory provisions for partnerships are inappropriate for most businesses and it is rare to forego a properly-drafted partnership deed.
The partners in the partnership will need to ensure they set out carefully and cleary the extent to and circumstances in which each of them has authority to commit the partnership. The partnership deed should make it clear how the partners make decisions and who can sign on behalf of the firm.
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