9 Clare, Dan and Eve formed a partnership 10 years ago, although Clare was a sleeping partner and never had anything
to do with running the business. Last year Dan retired from the partnership. Eve has subsequently entered into two
large contracts. The first one was with a longstanding customer Greg, who had dealt with the partnership for some
five years. The second contract was with a new customer Hugh. Both believed that Dan was still a partner in the
business. Both contracts have gone badly wrong leaving the partnership owing £50,000 to both Greg and Hugh.
Unfortunately the business assets will only cover the first £50,000 of the debt.
Required:
Explain the potential liabilities of Clare, Dan, and Eve for the partnership debts.
(10 marks)

9 This question requires candidates to consider the inter-related rules governing partnership and agency law.
Clare
The first thing to establish is the status of Clare. Although the question states that she is a sleeping partner, it has to be stated that
the law does not recognise any such category. A dormant or sleeping partner is a person who merely invests money in a partnership
enterprise but, apart from receiving a return on capital invested, takes no active part in the day-to-day running of the business.

Although a limited partner in a limited partnership formed under the Limited Partnerships Act 1907 may be seen as a dormant
partner, the term is used more generally to refer to people who simply put money into partnership enterprises without taking an
active part in the business and yet do not comply with the formalities required for establishing a limited partnership (as this
partnership was formed 10 years ago the requirements, and benefits of the Limited Liability Partnerships Act 2000 do not apply
to it). The essential point that has to be emphasised with regard to Clare is that she has placed herself at great risk. The law
considers her in the same way as it does a general partner in the enterprise and consequently she will be held personally and fully
liable for the debts of the partnership to the extent of her ability to pay. By remaining outside the day-to-day operation of the
business, Clare has merely surrendered her personal unlimited liability into the control of the active parties in the partnership.
Dan
The rules relating to the residual responsibility of retired partners for partnership debts depend on when the debts were contracted
and the action taken by the former partner to announce their retirement from the business.
A retired partner remains liable for any debts or obligations incurred by the partnership prior to retirement. Thus the date of any
contract determines responsibility: if the person was a partner when the contract was entered into, then they are responsible, even
if the contract is completed after their retirement. It is possible for the retiring partner to be discharged from existing liability as a
consequence of a contract of novation. Novation is essentially a tripartite contract involving the retiring partner, the remaining
members of the continuing partnership and the existing creditors. Under such an agreement any liability of the retiring partner is
passed to the remaining partners. As creditors effectively give up rights against the retiring partner, their approval is required. Such
approval may be express, or it may be implied from the course of dealing between the creditor and the firm.
Where someone deals with a partnership after a change in membership, they are entitled to treat all the apparent members of the
old firm as still being members until they receive notice of any change in the membership. In order to avoid liability for future
contracts, a retiring partner must ensure that individual notice is given to existing customers of the partnership; and advertise the
retirement in the London Gazette. This serves as general notice to people who were not customers of the firm prior to the partner’s
retirement, but knew that that person had been a partner in the business. Such an advert is effective whether or not it comes to
the attention of third parties.
As regards new customers a retired partner owes no responsibility to someone who had no previous dealings with the partnership
nor previous knowledge of their membership (Tower Cabinet Co Ltd v Ingram (1949)).
It follows from this that Dan could be liable for any debts towards the longstanding customer Greg, unless he has taken steps to
notify Greg of his retirement from the partnership, which does appear likely. However, Dan’s liability as regards any partnership
debts to Hugh who had never dealt with the partnership when Dan was a member depends on whether the appropriate notice
was issued in the London Gazette. If it was, then Dan is not liable to Hugh. If it was not, he will be liable.
Eve
She is the last remaining active partner in the business and has full responsibility for any partnerships debts.
Under s.9 of the Partnership Act 1890 (PA), the liability of partners as regards debts or contracts is joint. The effect of joint liability
used to be that, although the partners were collectively responsible, a person who took action against one of the partners could
take no further action against the other partners, even if they had not recovered all that was owing to them. That situation was
remedied by the Civil Liability (Contributions) Act 1978, which effectively provided that a judgment against one partner does not
bar a subsequent action against the other partners. This means that as regards Greg’s debt, Clare, Dan, and Eve are all personally
responsible for any shortfall and he may take action against any one of them. The one against whom the action is taken will be
able to claim a proportionate indemnity from the others. In the case of Hugh’s debt if the appropriate notice had been issued in
the London Gazette Dan would not be liable and hence the loss would be borne by Clare and Eve proportionally.