Introduction
The current Partnership Act 1932 (‘the Act’ hereinafter) came into existence to oversee the main functionaries regarding partnership in trade, commerce, and business. ‘Partnership’ is defined as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The challenge here is to determine the test by which courts can determine the existence of a partnership between the parties against mere co-ownership or some other relation between them. In this regard sections 5 and 6 of the Act must be taken into the relation to define some natures of partnership which include modes and a contractual element within them. Also, sections 7 and 8 oversee the timeframe of parties staying within the partnership. These elements actually point towards one certain direction which poses the ‘real intention of the parties’ to actually become partners and work together to share a profit, especially the part where this relation needs to be based on ‘free consent’ just like a contract. This article looks into the origin of a partnership and the test of intention which brings into existence the idea that the formed partnership.
Intention in contract
In the onset the principles of the Contract Act 1872 can be used to supplement the Partnership Act. In the case of Carlill v Carbolic Smoke Ball Company, the Court applied the “objective test” and asked whether the reasonable bystander, after taking into account all the circumstances of the case, thinks that the parties intended to be bound in a contract.1 And reversely when there was no intention to be legally bound there can’t be a valid contract, especially in familial instances and social promises like in the case of Balfour v Balfour.2 So these cases prove that ‘intention’ plays a vital role to determine if there was actually a ‘valid contract’ within the parties that is enforceable in the court of law, same things can be juxtaposed against parties trying to establish or deny a partnership through the harmonious interpretation of this Act by the virtue of section 2(e), and the principle that no provision of valid laws are in isolation with each other.
Role of Real Intention in Partnership and its formation
In the case of Hiralal Gendalal v Bharirath Bamchandra3 It was held that ‘although the right to participate in the profits of a business is a strong test of a partnership, yet whether that relationship does or does not exist must depend on the Real Intention4 and the contract of the parties.’ According to the explanation of section 6 of the partnership act, sharing of profit is a key mode of determining the existence of partnership. A case further propounds that to an ‘agreement’ to contribute money towards an undertaking and to share profits and losses therefrom is a partnership.5 Agreement is an essential element in a contract, and a contract between parties in instances where they intend to share the profit indicates a partnership between them.6 Section 5 of the Act explicitly says a relation of partnership arises from contract and not from status, this principle was reaffirmed in the case of Noor Hossain v Commissioner of income tax.7 It can be seen where the agreement of partnership was made not for the purpose of creating a real partnership but for an ulterior motive to avoid taxation, it wasn’t considered a partnership.8 A partnership depends upon mutual confidence and utmost good faith. So, sharing of profit is not a conclusive test of an existing partnership as a man who received profits is not necessarily a partner.9 There are other factors where partners intend to carry out a business through the mutual agency of one another and from that real relationship of partnership comes into fruition. So, the presumption of partnership lies in fact and circumstances not in law. The fact of participation in profits must be considered in the light of other circumstances,10 making this aspect a cogent aspect of determining partnership while taking into consideration the circumstances including the real intention and contract of the parties.11 And according to the intention a course of business must be started with certain duties and responsibilities where the relationship between the partners becomes a fiduciary one and they conduct their business in a good faith basis. The intention of the partners will have to be decided with reference to the terms of the agreement and all the surrounding circumstances, including evidence as to the interlacing or interlocking of management, finance and, other incidents of the respective business according to the case of Deputy Commissioner of Sales Tax (Law) Board Of Revenue (Taxes) vs. K Kelukutty. 12 So the cardinal principle of partnership seems to lie within the particulars of how it was formed and particularly the state of mind continuing through that formation. This can be inferred from section 30 where it states a minor can’t become a partner, for obviously a minor can’t give consent, also according to section 44(a) an unsound person can’t carry on with a partnership relation as their state of mind becomes deluded.
Conclusion
The common law surrounding the test of partnership takes into consideration of temperament of the subcontinent where the locals didn’t do everything on a formal basis, which is contrary to some civil law legal systems, including the United States’, Uniform Partnership Act, which defines partnership as the association of two or more persons to carry on as co-owners a business for profit, whether or not the persons intend to form a partnership. The Partnership Act of 1932 keeps the scope open for no agreement about the determination of the fixed period of partnership and no clause with respect to the determination of partnership in its section 7. So, when a dispute arises regarding the formation of partnership the subcontinental courts always look into the facts and circumstances which led to the actual formation of the partnership and the conduct surrounding it.
Footnotes
1 Carlill v Carbolic Smoke Ball Company [1892] EWCA Civ 1
2 [1919] 2 KB 571
3 (1946) 33 AIR Bombay 174
4 Alco Hygienic Products Ltd. v Respondent: Islami Bank Bangladesh Ltd. (1995) 47 DLR 264
5 AIR 1919 Upp Bur 33
6 (1911) 163 Pun. L.R. 598 (DB)
7 (1964) PLD Dacca 373
8 (1960) PLD Kar.852
9 Cox v Hickman (1860) 8 HLC 268
10 (1928) AIR Mad. 890 (DB)
11 (1959) AIR Mad.379
12 AIR 1985 (SC) 1143