Under section 1(1) Partnership Act 1890: ‘Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.’ There are various categories of partners including equity partners, who share in the profits and losses of the business, and salaried partners, who are self employed or perhaps employees but are ‘held out’ as partners.
One consequence of a partnership is that generally a partner’s actions bind the whole partnership. The partners are personally jointly and severally liable to an unlimited extent. The authorised actions of one partner can lead to the liability of the other partners. Even where actions are outside of a partner’s authority all the partners can be liable if the wrongdoer was ‘held out’ as a partner.
In Nationwide Anglia Building Society v Lewis  2 WLR 915, it was said that a salaried partner could be held liable as a partner of the firm if the claimant relied on that employee being a partner. In Wendover Developments Ltd v Fish (1999– unreported) this position was followed and a structural engineer, whose name appeared on the firm’s notepaper but who was not actually a partner, was liable as a partner.
As in Nationwide and Wendover, which both involved professional negligence, this liability issue includes actions by a partner that are tortious. Under section 10 Partnership Act 1890 wrongful acts or omissions by a partner in the ordinary course of business of the firm can result in liability for the other partners. However these ‘wrongful acts’ are not confined to common law torts such as negligence, as discussed by Lord Nicholls in Dubai Aluminium Co Ltd v Salaam  UKHL 48. In this case the partner of a law firm dishonestly participated in a breach of trust in relation to bogus consultancy agreements by drafting the agreements for Mr Salaam and giving direct advice to other wrongdoers who were not clients of the firm.
This was seen by the court as falling within section 10. As such, despite the court acknowledging that the other partners were totally innocent in this matter, the entire partnership was held liable under section 10.
Lord Nicholls also discussed the meaning of ‘in the ordinary course of business’ in section 10, saying it has a more extended scope than just what the partners have agreed with one another to do; it includes things that are closely connected to authorised actions. As such this section is very broad and creates several threats for partners.
Another consequence of partnership to note follows from section 11 Partnership Act 1890. This provides that the firm (in effect all the partners) can be liable to make up for a loss resulting from the misapplication of money or property transferred from a third person and received either by a partner with appropriate authority or the firm in the course of its business.
By way of example, in Bass Brewers Ltd v Appleby  2 B.C.L.C. 700 an accountant received the proceeds of sale of a mortgaged property, in his capacity as a receiver, but failed to account for the money before he went bankrupt. The accountant was held out as a partner in a firm and the money had gone to that firm’s account. As such all the partners were liable under section 11.
An important way for partners to protect themselves in respect of liabilities for acts or omissions in work for clients and third parties is, of course, professional indemnity insurance. Definitions of insured in professional indemnity policies do vary and it is sensible for partners and their brokers to check the relevant policy to establish who is insured under the policy.
Furthermore, partners and their brokers should check the scope of the insuring clause(s) and the exclusions from cover so as to be aware of the cover provided for claims arising from professional work (where for example there will almost certainly be exclusions of cover for partners who commit or condone dishonest or fraudulent acts or omissions).
Another way for partners to reduce their exposure is for the partnership to agree with its client to limit the partnership’s liability to that client. However, where a professional is permitted to use such clauses their efficacy will still be subject to certain legal principles, such as those set down in the Unfair Contract Terms Act 1977 and relevant regulations (which in some cases apply a test of reasonableness) and, in the case of auditors’ Liability Limitation Agreements, the Companies Act 2006. Where appropriate, in order to further manage risks, partners should also consider disclaiming any liability to third parties.
As a result of the unlimited personal liability of a partner for the acts or omissions of his or her other partners, the structure of partnerships is increasingly being abandoned in favour of LLPs or limited companies. With LLPs the rules governing the law of partnerships do not apply (section 1(5) Limited Liability Partnerships Act 2000) and individual members are not liable for another member’s acts. Although the actions of a member can make the LLP itself liable (section 6(4) Limited Liability Partnerships Act 2000) this will only be to the extent of the LLP’s assets; without more the other individual members are not personally liable. Again, professional indemnity insurance that covers the actual LLP as well as individual members is important. With limited companies clients and third parties can generally only claim against the company and, depending on the circumstances, the particular professional (including a director or employee) who provided or omitted to provide the relevant advice if he or she is deemed to have owed a personal duty; generally other directors or shareholders will not be personally liable.
Professionals conducting their business as a partnership need to be alive to various issues, including those briefly referred to above, and to ways to try to protect themselves.
Simon Mason – partner, Fishburns LLP for Lockton Companies LLP