The Partnership Agreement, an Instrument for Business Development and for Improving Profitability
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Strada Munţii Tatra, Nr. 4-10
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011022 Bucureşti, Sector 1
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+40-21-312.10.08
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+40-21-312.10.09
Website
www.pachiu.com
ANA-MARIA GOGA
Partener
SOCIETATEA CIVILA DE AVOCATI "PACHIU SI ASOCIATII"
General overview on the partnership agreement
Although business development based on partnership agreements, particularly with the local public authorities, is more and more frequent in praxis, the partnership agreement does not stand for a specific type of agreement, explicitly regulated by recent pieces of legislation, being merely expressly specified as such in Articles 251-256 of the Romanian Commercial Code from 1887, as subsequently amended and supplemented.
According to the provisions of the Romanian Commercial Code, the partnership agreement represents a specific type of company, established for the development of commercial operations, whereby a party to the partnership participates in the other party's business for the purpose of improving its profitability and sharing with such party the profit and loss thereof.
The parties to the partnership agreement
The parties to a partnership agreement are the following:
i) The administrator associate (the "Administrator"), which is the active participant that directly performs business operations and deals with third parties on its own behalf and on behalf of the other participants to the partnership, fulfilling all necessary activities for the purpose of achieving the scope of the partnership and being usually a trader or a commercial company; and
ii) The participant associate (the "Associate"), which is the passive associate that makes a contribution to the partnership, consisting in assets or money. The Associate may be any natural or legal, public or private individual or entity, including financial institutions and public authorities.
The number of parties participating in a partnership is not restricted, the essential element of the partnership being represented by the parties' agreement to contribute for the purpose of developing a business activity, whereby each party shares the profit and loss of such business.
Parties’ share to the profit and loss
Therefore the share of each party to the profit and loss of the partnership represents the basis of the partnership agreement. Furthermore, the exclusion of one party's share to the profit or loss, or the restricted share to the loss, implies the nullity of the partnership agreement, the leonine clause being forbidden within a partnership agreement.
The requirement regarding the share to the profit and loss by each party of the partnership agreement raises in practice several issues, as, depending on the specific partnership, both the Administrator and the Associate might be interested in excluding the Associate's share to the profit and loss of the business, conducted by the Administrator. In this regard, it is to consider the situation in which the Associate contributes with a property to the partnership, on which the Administrator develops a real estate project, case in which especially the Administrator would be interested to pay to the Associate a fix indemnity in exchange of the use of such real estate.
Although the exclusion of one party's share to the profit and loss leads, as a principle, to the nullity of the partnership agreement, specific variations of the aforementioned requirement are accepted in the Romanian case law.
Consequently, the provision according to which the participants shall not share the loss, caused by one party's proved fault is obviously admitted. Furthermore, the clause based on which a party shall bear the loss of specific business operations and is excluded to share the loss of other specific operations, is also admitted, under the condition that the loss are not certain only in connection to the operations, whose loss are being borne by only one party.
Moreover, a partnership agreement in which a party did not share the profit and loss, but instead such party was entitled to receive from the other party a certain yearly indemnity, or a guaranteed minimum profit, was admitted by the Romanian courts of law, although such clause is at the edge of the leonine clause, being considered that each party has its own interest within the partnership, respectively the Administrator to use the assets contributed by the Associate, and the Associate to receive the yearly indemnity.
However, partnership agreements based on which the Associate would bear 30% of the profit of the business conducted within the premises, with which the Associate contributed, were declared null and void as a partnership agreement, since the participation of the Associate to the loss was not established.
The parties’ contributions to the partnership
Unlike the case of a commercial company established based on Romanian Company Law no. 31/1990, as subsequently amended and supplemented (the "Company Law"), which has its own patrimony, distinctively from that of such company's associates, the partnership does not have own patrimony, and as a consequence thereof, the partnership has no legal personality.
Moreover, in the case of a partnership agreement, the Associate remains owner of the assets contributed to the partnership, whereby the Administrator merely obtains a right of use with regard to such assets. In case that the relevant asset was destroyed or the Associate loses the property right over such asset during the partnership, due to the Administrator's fault, the Associate shall be entitled to receive compensation for such loss.
The contribution of the Associate may consist in assets, an amount of money, an universality of assets or specific undertakings if, for instance, the Associate undertakes not to perform certain activities, performance of which would lead to the inefficiency of the activity conducted by the Administrator).
