Partnership and Agency clauses (or "No Agency Clauses") in contract law deny the existence of a partnership or agency between the contracting parties, rather than admit them.
Background to Partnerships
Commonly, businesses refer to “partnering up” with other businesses to indicate cooperation of some form.
That not the kind of partnership we’re talking about.
The type we're talking about has pretty serious consequences. If you're not aware of what can happen, it can come as a big surprise.
In the vast majority cases, different businesses will want to avoid being partners within the legal meaning of the word. At all costs.
Partnerships in Law: Meaning
Partnership law and the law of agency imports a whole lot of legal luggage to business relationships. It’s the sort of luggage you don’t want to carry, if you don’t mean or intend to.
At law, partnerships are formed automatically when the requirements of the Partnership Act are satisfied. If parties behave in a way which establishes a partnership, then all of the consequences of being a partnership flow from that.
Here’s some of the consequences of partnership law:
- Partners have legal authority to bind other partners in the partnership.
- Every partner in a firm is liable jointly with the other partners for the debts and legal obligations of the partnership.
So, when one partner enters a contract on behalf of the partnership, all partners in the partnership are liable on the contract.
- All members of a partnership are jointly and severally liable for the debts of the partnership.
- All of the assets of each partner are available to judgment creditors to enforce a judgment.
- Partnerships in the business context defeat the purpose of using separate legal entities to manage the liability of the company.
The same law governs all partnerships in law. Two or more companies can mistakenly form partnerships as easily as individuals might.
Agency Law: Meaning
An agency relationship includes one whereby one person (an agent) is authorised to act on behalf of another (the principal).
The agent is authorised to create legally binding relationships between the principal and third parties, for acts within the scope of authority of the agent.
Therefore, the principal ends up being is primarily liable for the contracts entered into on its behalf by the agent.
If an agency is intended, it make sense to define the scope – and limits - of authority of the agent.
What are Partnership and Agency Clauses used for?
Most businesses do not want to have partnerships or agency arrangements.
Although there are other reasons, that reason alone two or more companies operating in a joint venture not intending to be a partnership, can take positive steps to avoid being categorised a partnership at law.
A partnership or agency clause records that intention in the contract: what the parties intend.
That's not to say that just because you have a partnership clause in a contract, a court can't decide that a partnership has been formed by the parties' conduct.
After signing the contract, if the parties go on and behave themselves like they are in a partnership and satisfy the requirements of the Partnership Act, contract law won't avoid that conclusion.
What the partnership or agency clause will probably do is apply to save the situation where there is some ambiguity whether partnership relationship exists, and is not conclusive.
Example: No Partnership or Agency Clause
When businesses want to make it clear in joint ventures and business “partnership” agreements that they do not wish to form a legal partnership or agency, you’ll see contract terms such as this:
This agreement shall not constitute or imply any partnership, joint venture, agency, fiduciary relationship or other relationship between the parties, other than the rights and obligations expressly set out in this agreement.
Neither party shall make or hold itself out as having authority to make any commitments on behalf of the other party.
Example: Agency Clause
The Agent has authority to enter into contracts with companies in [sector] for the [sale/licensing] of [widgets] up to a value of £[amount], with a monthly maximum of £[amount], and not further or otherwise.
The Agent will inform the Principal in writing of all such contracts and prospective contracts in writing within 14 days of the end of each calendar month.
- Common Contract Clauses: Boilerplate Provisions
- Liability for Groups: Joint and Several Liability and Contract Clauses
- Subcontracting Out Performance: Delegation in Contract law
- Pre contracts and Preliminary Contracts: The Role of Heads of Terms
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