Sally and Tom decide to go into business, selling discounted merchandise through

Question

Sally and Tom decide to go into business, selling discounted merchandise through their Web site "e-buy." They sign a partnership agreement that requires Sally to contribute $12,000 and Tom to contribute $8,000 in capital to start the firm. The agreement also states that only Sally will have the authority to bind the partnership in deals with third parties, but the agreement says nothing about the management of the firm or a division of profits. Without Sally's knowledge, Tom tells United Computer Products, Inc., that he represents the firm and signs a contract with United to buy hard drives for resale on e-Buy. In the first year, e-Buy makes a profit of $50,000. What are the partners' rights with respect to the management of the firm? Is the partnership bound to the contract with United? Do the partners split the first year's profits? If so, how much is each entitled to?

Explanation / Answer

The partners’ rights with respect to the management of the partnership business and the revenues of the firm is a divided of each equally. The partnership is assured to the contract with United. Because the agreement is silent on the subject of the firm’s management, each partner has an equal right to manage the business. For the same reason, each partner has a right to an equal share of the profits, even though their capital contributions were not equal. The apparent authority of a partner to bind a partnership in dealing with third parties cannot be limited by an agreement between the partners of which third parties are unaware. Every partner is an agent of the partnership and may bind the firm to contracts with third parties. Only if the third party is aware that a partner’s authority is limited will the liability of the firm also be limited to the same extent.

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