Question

Anderson, Burton and Cummings are partners in an import partnership, which carries on business by importing manufactured products from various areas of the world, mostly Southeast Asia, and then selling them to numerous retailers in Ontario. They have been in partnership for less than a year. They have a very short written Partnership Agreement, which sets out a few of the terms regarding their relationship—for example, the ratio of profit sharing (each receives one‐third) and the prohibition of personal use by partners of any of the partnership assets. The written agreement also states that a partner may not negotiate a contract on behalf of the partnership in an amount greater than $10 000 without the approval of the two other partners. The three partners develop plans for expanding their business operations and explore ways of obtaining a loan of capital that will permit them to increase imports by a significant amount. Dilbert and Evans advance a loan to the partnership of a significant amount. Under the loan contract, it is agreed that the creditors, Dilbert and Evans are to be paid a share of the profits of the firm based on the proportion of the capital they provide. Also, the loan incorporates the Partnership Agreement by reference and states that Dilbert and Evans must observe that agreement. The lenders have some control on how their loan of capital is to be used in the business. Dilbert and Evans never refer to themselves as partners in the firm. They consider their loan an investment in the business and expect to recover a good return on their investment. Cummings meets Foster, a clothing manufacturer, and enters into a contract to import $50 000 worth of goods. Cummings signs the contract on behalf of the firm, and Foster is unaware of the limitation on Cummings’ authority. The partnership is experiencing serious financial difficulty and defaults in payment to Foster, as well as other creditors. Foster sues everyone on the debt. He commences an action against Anderson, Burton and Cummings (A, B and C) and includes the lenders, Dilbert and Evans (D and E), claiming that they were dormant partners, liable for the firm’s debts.

Analyze the legal implications of this situation and advise the parties involved.   

Answer 1

In the given case, Anderson, Burton and Cummins were the general partners while Dilbert and Evans were the limited partners of the company. Anderson, Burton and Cummins share the profits and liabilities of the company equally while Dilbert and Evans will only be liable for their investment.

Cummins signed an import contract worth $50000 with Foster. Cummins did not have the authority to sign a contract worth $50000, on behalf of the firm, without the approval of the other 2 partners. Anderson and Burton were not informed about the contract and hence the contract was not valid as per the partnership agreement signed between the 3 partners. If Foster sues the company and all partners for the debt of the contract, it will not be valid. This is because the contract was not signed as per the partnership terms of the company and hence only Cummins can be held liable for the debt. The company as well as the remaining partners cannot beheld liable for Foster’s debt.