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ART. III.A bill to authorise Limited Partnerships: reported to the House of Representatives of Pennsylvania, by Mr. J. B. SMITH: December 5th, 1835.
A bill has been introduced into the Legislature of Pennsylvania to sanction the formation of "Limited Partnerships." In the present era of reform (so called) nothing can be regarded as entirely safe from the pruning knife wielded by innovating hands and the law, therefore, venerable and cultivated as it is, must share the fate that falls even upon the Constitution. The present is the age of experiment; and men will scarcely be found, at any period, willing to admit the existence of aught in morals, government, or law, which they cannot make a little better. There are, however, over the civilised world, periodical returns of sedateness, when, tired with the turmoil of constant change,--the "rattle" affording no further pleasure, and the "straw" tickling but to tease,--people are disposed to recline upon the wisdom of their ancestors, and to receive, as possessing the tone of command, the whisper of sic antiquitus usitatum. Such a time, no doubt, will come in America; and happy will the generation be that beholds it, if no violent convulsion of the social fabric bear the experience along with it.
Let us not be misunderstood. We are far from being the opponents of reformation in general: reformation cautiously considered, and cautiously applied. But we are opposed to mere change, and the love of it as such; where the exigencies of society do not imperiously call for it. And we are further of the opinion, that if any people ever existed that less required change in any particular, it is the American people, whether in their general or state governments, or laws. Not that every thing in either is, in our judgment, perfect; but that all things are so perfect, that any alteration should be viewed with a jealous eye, and only admitted after a careful scrutiny.
One further general remark before discussing the particular subject before us.
We do not pretend to assimilate a mere change in the law to the adoption of revolutionary measures; or to rank the introduction of a novel principle in the legal system of partnership among the worst features of these changing times. We, however, look upon it as an index of the spirit that is abroad, and as such lay our hands upon it. Again; there is nothing more pernicious in its results than the tampering with settled principles of law by those who are unskilled in the mysteries of the science, and who attempt to mend what is really not out of order; and the subsequent disorder of which may be fairly attributed to the unskilful tinkering of a soi-disant reformer. The ultimate results of an alteration in a legal principle which,
has been established for centuries, and whose ramifications are beyond the ken even of the professors of the science, cannot be anticipated by any; and cautious jurists, therefore, remove with hesitation, approaching almost to dread, a single brick of the old edifice, lest a foundation stone being moved, the whole pile be shaken.
To understand clearly the new provisions which it is in contemplation to introduce into this branch of our jurisprudence,, we shall present a general outline of the existing law of partnership, so far as respects the rights and liabilities of the members of the firm. This we undertake for those of our readers who are not lawyers; for the latter the abstract will not be necessary.
The essence of a partnership is a community of profit and loss in the business for which the association is formed. Whenever two or more persons carry on any particular trade, or unite for the prosecution of any one object of trade, if the profit and loss of the particular adventure or the general business, (as the case may be,) are to be divided between those engaged in it, (whether equally or not is unimportant,) a partnership in the eye of the law is formed between such persons, whether this be stipulated by the parties themselves or not. Thus it will be seen, that these contracts may be created, either expressly by the parties, or for them by the law. In the latter case, however, it is only so far as respects third persons that people are constituted partners against their consent. The reason of this rule of law (seemingly harsh) is well founded. A community of profit and loss interests one in the whole and every part of an adventure. Until the accounts of the transaction are closed, it cannot be ascertained whether profit or loss has resulted; but when this is done, if the experiment have proved unfortunate, it is but fair that he who was to share in the expected profit, should be liable, with the rest, to the burden; and if the reverse have occurred and the fates have been propitious, the whole expenses are, of course, first deducted, and the surplus merely distributed: thereby identifying the interests of each one with his associates and with the entire result of the operation. Whatever, therefore, may be the private arrangement between them as to a division of the gain, or a partition of the responsibilities, the world can and should only regard them as equally liable for all claims against the association, because all are, as we have seen, interested alike in the winding up of the business. To lay down any adverse rule, or to assume any middle ground, based upon the voluntary arrangements of the parties to the contract, over which the world has no control, and of which it is, in most cases, ignorant, would be at once to subject the rights of creditors to the VOL. XVIII.-No. 37.
caprices, nay the selfish or fraudulent combinations of others. The good old common law of England adopted principles a little more in unison with the interests of commerce and the dictates of common sense.
As a result then from this community of profit and loss, the responsibilities and liabilities of partners necessarily flow. The debts of the partnership are equally binding upon all the members of the firm; all are parties to the contracts from which they arise, and all have an equal chance of benefit from them. By taking a portion of the profits, any one of the association subtracts from that fund which ought to be applied in the first place to the debts of the company.
This rule of law is not, then, a mere positive institution, unsupported by reason or founded on local or partial views, but recommended by the highest dictates of general policy, and framed with a direct reference to the best interests of com
It is a mere corollary therefore from this, or rather a stating of the proposition in other words, to say that the whole firm is bound by the acts of any one partner in and about the business of the partnership. Each one is possessed (as the lawyers term it, in barbarous law French) per my et per tout, that is, each one is interested in and has a title to the whole and every part of the partnership effects; and may dispose of them in the usual course of business, in the name of the firm, for partnership purposes. This also is perfectly essential to the life of trade. The partners have associated, under a common and assumed name, in the pursuits of trade. By that appellation and not by their individual names are they known to the community. The name of the firm is that which gives validity to transactions in which it is concerned. It is the seal to its instruments of writing. Of this name, then, as of the rest of the partnership effects, each partner has the control. If the actual presence of each member of the firm were required when the name of the association was used, a stop would shortly be put to all mercantile transactions, for all their activity would be paralysed. As it would be impossible for third persons to know of the presence or absence of all the members when the name of their firm is employed, and of course, constant uncertainty would hang over commercial instruments, the law presumes, from the use of the name by one, the presence of the others, or in other words, authorises such use. There is and there can be no middle ground in this.
Dormant partners are persons equally interested with the active partners in the profits and loss of the business, but who are not known to the world to be so. Their names do not appear in the transactions of the firm, and they take no active
part in its negotiations. These partners, when discovered, are equally liable with the active partners to the debts of the concern, for the reason we have before discussed, viz: principles of public policy; inasmuch as, sharing in the profits, they detract from the partnership property the primary fund for the discharge of its liabilities. Dormant partners are not responsible on the ground of their names forming any part of the consideration for entering into the contract, as they are, by the supposition, unknown at the time of its being formed; but solely for the reason we have mentioned.
A partnership is, therefore, an association to prosecute some lawful trade or business, with the advantages of combined capital and combined effort; and the consequent and fair responsibility of each member of the association for the debts of the firm. They are, in some measure, quasi corporations, having a particular name and distinct property, though endowed with none of the prerogatives which exempt the members of corporations and their separate estates from liability. To prohibit them would be permanently injurious to commerce; but to endow them with special immunities would, we think, produce the same result. What the new provisions are, which it is intended to engraft upon the law of partnership in Pennsylvania, we shall presently see. In the meantime, we will take a hasty glance at the law upon this subject elsewhere.
The law of England-the princess of commercial countries -has always rejected the innovation of a restricted responsibility in partnerships. No one, we presume, will deny the supremacy of her trade-the perfection of her mercantile law -the active circulation of her wealth--the eminent station of her bankers and merchants. We should suppose there was, in that country, but little complaint in regard to dormant or idle capital; and that there no anxious crowd of profitless subjects with full coffers stood, eager, but afraid, to enter the arena of business unless invited by the inducement of special immunities. There may be a few, desirous of buying a ticket in a great commercial lottery, where the prospect of a rich prize in the shape of high profits may tempt them to embark in a speculation where the only risk is the price of the ticket; viz. the capital they contribute. But to such the law of England wishes to tender no encouragement. Neither would we.
The introduction of these limited partnerships into England, under the style of "Joint Stock Companies" has been more than once attempted, but, in their full extent, as we have said, uniformly and successfully resisted. Until the 6th year of the late king, the power of licensing these associations was vested in parliament alone; which confined itself to the granting of regular acts of incorporation; an authority, (except in special
cases, and then under the provisions of acts of assembly.) exercised in these states by the legislature. In the 6th year of the reign of George IV. (1825) the crown was empowered to grant charters of incorporation, by which the members of the corporate bodies may be made individually liable to such extent, and subject to such regulations and restrictions, as the king may deem expedient. It will be seen, therefore, that instead of opening the door still wider to associations of individuals with restricted liability, the legislature of that great commercial country has thought it expedient to confine the creation and privileges of these societies within narrower limits.
We will now turn, for a few moments, to the law of the continent of Europe.
In many parts of Europe, it is true that these limited partrships are admitted. It is a provision, in all those countries, of this species of contract, that the names of the parties and the character of the business should be entered on a registry. Whether or not the regulations of those states contain the clauses which we shall presently notice in the law of France, we are unable to state, nor is it very important.
In France, the law of partnership forms an important chapter in her commercial code. It is known, that the great mind of her late imperial ruler was earnestly directed to the revision and codification of her system of laws. If ever any country, from the diversity of local customs and provincial laws, required such a measure, it was France; and the work was performed in a mode that has entwined around the brows of Napoleon one of his greenest laurels. The subject of partnership, so far as it commands our attention at present, is thus regulated by the Code de Commerce and the Code Civil:
By the civil code, (Tit. 9, ch. 1, No. 1832,) partnership is defined to be a contract by which two or more persons agree to put any thing (whether money, goods, or labour) into a common stock, with a view of dividing the benefits which may result from it. The broad division of the contract is into universal and particular partnerships. The former are again subdivided into partnerships of present goods and future acquisitions, and of future profits alone. These terms explain themselves; the word "goods," embracing what we call real as well as personal estate. The particular limitations and qualifications of these contracts, it is aside our purpose to consider.
Particular partnerships have reference to certain determinate objects, and to the advantages to result from them; and agree in this respect with those in use in England and America. There is in the law of France an important distinction between partnerships for strictly commercial purposes, and others,