The High Court recently considered whether the signature of one partner (D) on loan agreements was enough to bind a general partnership, despite the execution blocks providing for the signature of both the partners (D and J).
The argument against
D and J had a property investment business funded by RBS. When one partner, J, moved to Spain, the other partner, D, continued to borrow money from RBS to operate their business. J argued that D did not have authority to bind the partnership to loan agreements entered into as (i) the signature blocks on the loan agreements had a section for the signatures of both partners (and it was not clear the capacity in which they were signing – as individuals or partners) and (ii) the bank mandate (which provided that only the signature of one partner was required to operate the bank account) was limited to everyday operations on account and did not extend to loans, so couldn’t be relied upon as authority for entry into the loan agreements.
Looking at the language
Although it was not clear from the signature blocks in the loan agreements whether the partners signed as individuals or on behalf of the partnership, it was quite plain from the language used in the definition of the “Borrower” that:
- the loan was being made to D and J as partners (not to them as individuals); and
- the purpose of the loans was to operate the partnership’s business.
The High Court considered section 5 of the Partnership Act 1890, which says that the acts of every partner in connection with the kind of business carried on by the partnership, binds the partnership and each partner.
It was held that the loan agreements were validly executed and binding on the partnership and on both partners, despite two execution blocks being set out on the loan agreement – one for each partner. The High Court stated that it could not have been the bank’s intention to deprive itself of the protection afforded to it by section 5 of the Partnership Act.
Although the Partnership Act is clear about one partner’s ability to bind the partnership, it remains best practice and a way to avoid this costly kind of litigation for either all partners to sign or for a lender to request a copy of a resolution signed by all of the partners, which clearly sets out the authority granted to any particular partner(s) when entering into finance documents on behalf of the partnership.
Despite the legislation being 127 years old, it goes to show some things never change!
For more information about dealing with general partnerships, see our Top tips blog from May here.