Partnership Act- True test of Partnership

Intoruction

5 essentials of partnership are 

1. Association of Two are more person
2. Agreement between person
3. Sharing of Profit
4. Carrying on business
5. Mutual Agency

Is it required that all above elements should be present to consider as partnership ? Will only a single element present above confirm the relationship as partnership ?
Which element above would definitely says that partnership exists between parties

Why we need a test anyway!

Why do we need to study these test anyway ? (Apart from exams!)

Take this example. Mr Ramesh and Mr Suresh carries trading business in chocolates with a firm name "Chocalate Wale". They need to expand a business so they took a loan from Mr Mallya. Now "Chocalate Wale" agrees to pay profit to Mr Mallya and also confer power to Mr Mallya to manage business as a trustee. Mr Mallya took a loan then to buy a jet from State Bank of Wasseypur. If Mr Mallya defaults loan, can  State Bank of Wasseypur sue "Chocalate Wale" ?   

To answer these question we need to determine if Partnership relationship existed between Mr Mallya and Ramesh and Suresh.

Section 6 and Sharing of Profit

Whenever there is sharing of profit, it doesn't necessarily mean partnership exists between them. Section 6 provides that in certain cases even though profit is shared with other person, they still are not partners.

Below are the scenario when sharing of profit doesn't constitute a partenership

1. When a profit is shared to lender of money to business or partners. Meaning if Bank has given a loan for business and firm shares a profit with bank, it doesn't make Bank a partner
2. Sharing to servant or agent as remuneration. When profit is shared as incentive to servants or agent they don't become a partner
3. Sharing of profit to widow or sons of deceased partner
4. Profit is shared for using a goodwill. For example famous "Paradise Biryani" of Hyderabd let use it's name to Amit Bhai Pakodewale, provided Amit Bhai shares the profit, in this case "Paradise Biryani" owner will not become a partner

Cox V Hickman

 This example is similar to what given above of Mr Mallya.

Smith and Son were some sort of iron merchant. They took a loan. 5 persons from a company who gave loan started managing their iron business.  Among these 5 were Cox and Wheatcroft.Creditor also used to get profit out of business. Then this Mr Cox took some goods from Mr Hickman, but didn't pay them for goods. Mr Hickman sued Smith and Son stating that Cox, Smith are partners.

What do you think court held ?

What's the real test then ?

Agreement, association, carrying on business all are necessary. Also sharing of profit doesn't give rise to partnership. The real test is done by whether there is the relationship of mutual agencies between partners. Whether act of partner can bind each other.

In Cox V Hickman court ruled the same that Cox and Wheatcroft were agent of Smith, but vice versa relationship didn't existed between them. Mutual agency along with other facts will be used to decide whether relationship of partnership exists between partner!