“A rose by any other name” - contracting out of the legal relationship of partnership

The judgment of Municipal Employees’ Pension Fund and Others v Chrisal Investments (Pty) Ltd and Others (792/19) [2020] ZASCA 116 (1 October 2020) (Chrisal Investments Judgment) offered noteworthy insight regarding whether parties can lawfully agree that their legal relationship does not qualify as a partnership, notwithstanding the fact that their relationship exhibits all the essential characteristics of such. In the Chrisal Investments judgment, the Supreme Court of Appeal (SCA) questioned whether the standard boiler plate clause (commonly worded along the lines of “nothing herein contained shall be construed as creating a partnership between the parties”) would suffice to override their factual relationship.

17 Feb 2021 3 min read Corporate & Commercial Alert Article

At a glance

  • The Chrisal Investments Judgment explored whether parties can legally agree that their relationship is not a partnership, even if it exhibits all the essential characteristics of one.
  • The Supreme Court of Appeal questioned the effectiveness of boilerplate clauses stating that the relationship is not a partnership and emphasized that such clauses may not override the factual nature of the relationship.
  • The judgment highlighted the importance of carefully considering the terms of agreements that resemble partnerships, such as joint venture or consortium agreements, and including more substantial provisions to avoid the legal consequences of a partnership.

By way of background, the Chrisal Investments Judgment involved the Municipal Employees’ Pension Fund (MEPF) who purchased a 55% interest in a letting enterprise comprising the ownership of certain properties upon which three shopping centres were operated, and the lease agreements in respect of the tenants of such shopping centres, which enterprise (the Business) was conducted by three subsidiaries of a holding company, Adamax Property Projects Menlyn Proprietary Limited (Adamax). Simultaneously with the conclusion of the sale, MEPF concluded a detailed co-ownership agreement with Adamax which delineated how the Business would be jointly conducted, including (amongst other things) the distribution of income, apportionment of costs and general management of the business.

Soon after the conclusion of the sale and co-ownership agreement, the relationship between the parties became acrimonious and the parties decided to end their affiliation with each other. This resulted in a dispute as to how the assets of the business would be divided upon termination. Ultimately the SCA based its decision on the two types of co-ownership that exist in law, being free co-ownership and bound co-ownership.

In discussing this distinction and the legal effects thereof, the SCA entered into a noteworthy discussion regarding the legal relationship of partnerships, as an example of bound co-ownership. In doing so, the SCA considered the nature of the co-ownership agreement and questioned whether it would qualify as a partnership. The SCA discussed the requirements of a partnership, being:

  1. that each party bring something into the business, be it assets, finance, skill or labour;
  2. that the business is carried on for the joint benefit of the partners; and
  3. that the business is conducted for the purpose of making a profit, and concluded that the legal relationship between the parties would have qualified as such.

However, the parties did not argue this point before the SCA, which the SCA suspected was due to the fact that clause 7 of the co-ownership agreement stated:

‘Nothing in the agreement shall be deemed to constitute a partnership or a joint venture of whatsoever nature and / or description and none of the Parties shall be entitled to bind the other in any manner.’

On this score, the SCA argued that this clause could not detract from the other provisions of the agreement or alter the proper characterisation of the legal relationship between the parties. It further expressed its reservations regarding whether the mere fact that the parties agree that their relationship is not a partnership can impact the legal position where the relationship has all the characteristics of a partnership. The SCA quoted Rhodesia Railways and Others v Commissioner of Taxes 1925 AD 438 at 465, which stated:

“Where all these essentials are present, in the absence of something showing that the contract between the parties is not an agreement of partnership, the Court must come to the conclusion that it is a partnership. It makes no difference what the parties have chosen to call it; whether they call it a joint venture, or letting and hiring. The Court has to decide what is the real agreement between them.”

Overall, the SCA expressed doubt that a boilerplate clause in an agreement, despite expressly stating that the relationship between the parties will not constitute a partnership, will suffice to avoid the relationship being characterised as a partnership where all the characteristics of a partnership are otherwise present. Interestingly, and perhaps unfortunately, the SCA provided no substantive guidance or elaboration as to what kind of clause parties should include in their agreements in order to avoid the legal characterisation of their relationship as a partnership.

Accordingly, parties must be mindful that in the event that agreements exhibit characteristics of a partnership there is now established precedent from the SCA that the relationship will not be exempt from being categorised as such. This is of particular importance in agreements such as joint venture agreements and consortium agreements where, “No Partnership” boilerplate clauses are frequent, and parties should consider including more substantial provisions in order to circumvent the presumption of a partnership contract and the legal consequences thereof.

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