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The General Partnership in Estonia

With the enactment of the Commercial Code, a system of new types of traders was established in which the general partnership plays a significant role. As it is not possible to consider all issues pertaining to general partnerships in the framework of this article, it has been endeavoured to be selective and to consider only those issues which seem most significant from the point of view of the general partnership concept. Therefore, this article considers the nature of the general partnership which is bound on one side by the fact that it is a legal person, and on the other side by the fact that it is also a contract.

Estonian law in principle differentiates two types of traders. First, a trader is a natural person who provides goods or services for payment in his or her own name, if the sale of goods or services is his or her permanent activity. Second, a trader is a commercial undertaking provided by law (§ 1 of the Commercial Code, hereinafter CC). In addition to other commercial undertakings, the law prescribes for a general partnership (subsection 2 (1) of the CC). Commercial undertakings, including general partnerships, are entered in the commercial register by a mandatory procedure, and the creation and termination of their passive legal capacity is dependent upon the making of corresponding entries in the register. Consequently, a general partnership is a legal person similar to a public limited company or a private limited company. This principle is provided directly by subsection 6 (1) of the General Principles of the Civil Code Act.

Considering the general partnership in a comparative law context based on the concept of a trader presented above, what a general partnership really engages in is not important in Estonia. There is no requirement enacted by law that a general partnership must provide goods or services for payment in its own name. Therefore, a general partnership may also operate in an area which has nothing in common with business or commerce in the broadest meaning of the words (for example, a non-profit legal person may be established as a general partnership). Thus, the Estonian concept of a general partnership differs from the Anglo-American concept, because in the latter it is required that a general partnership operate in a certain field, analogous to a sole proprietor in Estonia. In this manner, the business nature of a general partnership is emphasised. As G. Morse notes, “the occupation of a landowner can not form the basis for partnership whereas that of a market gardener clearly can”. *1

The above discussion arises from the fact that in Estonia a general partnership is a legal person as are other commercial undertakings. The Partnership Act of Great Britain defines a general partnership as a relationship which exists among persons operating a joint profit-oriented business. *2 Thus, a general partnership is only a relationship, without independent organisation and without the status of a legal person. The nature of a general partnership is analogously defined in German law, where a general partnership is commercial only if its object is the exploitation of a commercial enterprise by an independent merchant, meaning that the given business demands a commercial organisation due to its nature or extent. *3 According to the CC however, a general partnership is a commercial undertaking in which two or more partners operate under a common business name and are solidarily liable for the obligations of the undertaking with all of their assets. A similar principle is also valid in France, where a general partnership is a commercial undertaking by virtue of its form, independent of the object of its activity.

Returning to the general partnership as a legal person, in a majority of countries a general partnership is nevertheless not a legal person. But a general partnership is a legal person in France for example, and in this regard the general partnership concept in Estonia is most similar with French law. *4 According to the interpretation of a legal person as a concept, it may be argued that there are no great differences in the essential aspect of a general partnership, which would arise from the fact that a corresponding entity is, or conversely is not, declared a legal person. It is precisely the form of undertaking to which the differences are bound, or in other words, to its entry or non-entry in the corresponding register.

Since a general partnership is a legal person, by law the undertaking is deemed to be created by the making of a corresponding entry in the commercial register. Whether a general partnership already factually exists from entry into a partnership agreement is a problematic issue in Estonian law. In certain cases, the law indeed indirectly acknowledges that a commercial undertaking being founded is a legal subject. Thus, in the case of a private limited company or a public limited company for example, a bank account may be opened for the payment of contributions of the commercial undertaking being founded. Transactions may also be concluded on behalf of the commercial undertaking while it is being founded. Corresponding provisions do not exist for general partnerships, but on the basis of legal analogy, it may be claimed that although a general partnership acquires the rights of a legal person only after entry in the register, it already factually exists as a partnership after entry into a partnership agreement. Before entry in the register, a general partnership exists as a factual relationship, the basis of which is the partnership agreement entered into between the partners. Thus, it already exists in relations between general partners before entry in the commercial register. This means that the partners are obligated to adhere to the terms of the partnership agreement and if any of the partners violate the terms of the agreement, the others have the right to demand termination of the violation and performance of contractual obligations, including by way of a court.

An Estonian general partnership is very similar to the civil law partnership and the only difference in principle from which all remaining differences between these two institutions also arise, is the fact that the general partnership is a legal person and is therefore regulated by rules pertaining to legal persons and commercial undertakings.

In order to understand the nature of a general partnership in Estonia, it is important to also consider the principle of freedom of contract in a partnership agreement in the context of relations between partners. Generally, the partners of a general partnership are given great freedom to specify the structure of the partnership and the relations among themselves by way of the partnership agreement. In Germany for example, the principle is valid that partners may agree otherwise than as prescribed by law on nearly everything (German Commercial Code § 109). The only issue is that the system put in place by law is valid with respect to third persons. It must be kept in mind, of course, that derogation from the general principles of civil law is not permitted.

Chapter 13 of the CC provides for the relations between partners of a general partnership. Therefore, absolute freedom of contract in the specification of relations between partners is not valid in partnership agreements of general partnerships as the law has provided definite limits. In this respect, the majority of rules are permissive, and therefore partners have the option to employ a procedure different from that provided by law in the partnership agreement. For example, the contributions of partners are equal as a rule, but the partnership agreement may prescribe otherwise (subsection 86(2) of the CC). According to subsection 88 (1) of the CC, each partner has the right and the obligation to manage the general partnership. But subsection (2) of the same section prescribes the possibility of granting management of the partnership to one or several partners precluding the management right of a partner. Also permissive are the rules which regulate reimbursement of expenses and compensation for damage to partners, the number of votes of partners and majority requirements to adopt a resolution of the partners, and the distribution of profit and coverage of loss. But in the specified chapter there are also numerous imperative rules in which the partners have no possibility to enter into a different type of agreement. For example, all partners must make contributions. Also imperatively specified is the extent of competence of the partners with the management right in the management of the general partnership, and the procedure for deprivation of the management right and renunciation of it. The right of a partner to receive information concerning the activity of the general partnership and the obligation of the partner to keep a business secret is absolute. Therefore, the partners cannot arrange for the preclusion of a partner’s right to information, or agree that partners may release information about the activity of the partnership independent of a corresponding decision of the partners. The provision regulating the prohibition on competition is also of an imperative nature. The precondition for the permissibility to operate in a competing area is not the inclusion of a corresponding provision in the partnership agreement but the consent of the other partners. This may be expressed tacitly because according to the CC, the fact that the other partners are aware of the operation of a partner in the same area of activity as a partner in another general partnership, a general partner in a limited partnership or as a sole proprietor is sufficient. The rule regulating claims associated with a violation of the prohibition on competition is also imperative (§ 96 of the CC).

Since pursuant to subsection 82 (2) of the CC, partners may agree on any other terms which are not contrary to law, the general principle of freedom of contract is valid with respect to the remaining issues which are not determined by the CC. This principle is above all, however, limited by the general principle of civil law according to which a transaction contrary to law is void except if the law is not significantly violated (General Principles of the Civil Code Act § 66 (2)).

In addition to the above examples, the CC also contains such rules where permissiveness is achieved by separate provisions. For example, subsection 101 (2) provides that the partners are solidarily liable for the obligations of the general partnership with all of their assets. Subsection (3) of the same section changes a provision imperative in nature into a permissive one, according to which an agreement contrary to the specified principle is not valid with respect to third persons. The given rule provides the opportunity for entering into a special agreement between partners. For example, it is possible to place the entire liability on only one partner and preclude the obligation of the other partners or restrict it to a certain extent, but such an agreement is not valid with respect to third persons. Thus, the CC strictly separates the relations between partners and the relations of the general partnership, and thereby the partners with third persons.

Connected with relations between partners is the issue of the right of a partner to information or the right to audit. Pursuant to subsection 94 (1), a partner has the right to obtain information concerning the activities of the general partnership and to examine all documents, and to demand a copy of the annual report. The issue of whether a partner has the right to also authorise a third person to examine the documents or if only the partners have this right is not directly resolved by law. However, it is possible to indirectly deduce the limitations on transfer of this right from the provisions of subsection 94 (2) because the partner must preserve the secrecy of information received. However, it is not possible according to Estonian law to force a third person to preserve a business secret but there are two exceptions. Namely, lawyers and auditors are required by law to preserve the secrecy of information received by them in connection with their professional functions, except if a corresponding person (in this case a partner) permits disclosure. Such permission however, cannot be granted by a partner based on the provision discussed above. Thus, partners of a general partnership have the right to specify only a lawyer or an auditor as a representative in exercising the right to audit.

From the above, it appears that the concept of a general partnership established by the Estonian CC lies somewhere between German and French law, and although the Estonian general partnership is a formal unit similar to a private limited company or a public limited company, the relations between partners are to a very large degree determined by the partners themselves. The fact that a general partnership is a legal person does not decrease the importance of the personal aspect or change the nature of the corresponding commercial undertaking.