Ordinary Partnerships

by Şeyma İnal and Zeynep Özgültekin

Introduction

Ordinary partnerships are gaining popularity in Turkey over the past decade; especially due to the rapid increase in necessity of joint ventures being the best course of action for companies intending to cooperate for tenders in various sectors such as infrastructure, transportation, energy, and defence. Ordinary partnerships constitute one of the most preferred common legal structures for such contractual joint ventures; that being said, confusion regarding their distinctive nature causes specific clarifications to be made in due course.

Under Turkish law, commercial companies (such as limited liability companies, joint-stock companies, etc.) are regulated under the Turkish Commercial Code No. 6102 (“TCC”), whereas ordinary partnerships are regulated under Articles 620-645 of the Turkish Code of Obligations No. 6098 (“TCO”). In Article 620 of the TCO, an ordinary partnership is defined as “an agreement in which two or more persons undertake to join efforts and/or goods to reach a common goal”. Unlike the companies regulated under the TCC, an ordinary partnership does not have an independent legal entity, and the partnership is not separated from its partners in its relations with third parties. Since the ordinary partnership itself cannot undertake obligations on its own behalf, the partners of an ordinary partnership are jointly and severally liable from the debts arising from the partnership’s transactions.[1]

The joint and several liability of the partners and the general principle of an ordinary partnership, its non-mandatory nature and key takeaways will be outlined below in detail.

General Principle and the Nature of Ordinary Partnerships

As a general principle, in ordinary partnerships, the partners bear several, joint and primary liability which is not limited with the capital allocated for the ordinary partnership itself (as opposed to commercial companies regulated under the TCC), as set forth under Article 638/III of the TCO; “the partners shall be jointly and severally liable for the obligations undertaken jointly or through representatives against a third person unless otherwise agreed”. Indeed, since the partnership is not separated from its partners in relations with third parties, the partners are directly liable for the debts arising from the partnership’s transactions with all their assets without any limitation.[2]

Internal Liability of Ordinary Partnerships’ Partners

The partners of an ordinary partnership may lift the several liability amongst themselves, as Article 638/III of the TCO gives them the freedom to agree otherwise. In fact, Article 638/III of the TCO exactly uses the expression “unless otherwise agreed” meaning that several liability is not absolute. In the doctrine, it is stated that if it is agreed between the parties to the contract before or -at the latest- at the time of the conclusion of the contract giving rise to the debt that partners will not be severally liable but be liable pro rata to their share contribution in proportion to certain shares, then several liability will be no more valid and applicable. [3] An internal agreement entered between the partners to eliminate several liability is not sufficient alone to eliminate the liability towards third persons acting in bona fide. On the other hand, if such third-person party to the relevant transaction knows that the principle of several liability has been eliminated, then the partners will be relieved of such liability.

External Liability of Ordinary Partnerships’ Partners

Although the partners may lift several liability in their internal relations, ultimately their joint and several liability towards third persons does not change and the right to recourse may be exercised between the partners. In its recent decisions, the Court of Appeals[4] ruled that even if it is agreed between the partners within their internal relationship that several liability will not be valid, and such provision is incorporated into the partnership agreement, this arrangement will not be binding upon third persons. In 2018, the Court of Appeals rendered in its judgment that[5] the internal agreement between the debtors will be binding in their internal relationship by virtue of the principle of freedom of contract. Accordingly, the joint and several debtor who has paid the debt is entitled to claim such amount from the debtor who is ultimately liable for the amount paid, by exercising his/her right to recourse, as per the joint and several liability arising from the law. Similarly, in another judgement[6], the Court of Appeals has established that a rule lifting several liability by stipulating under the deed of partnership that one of the partners will hold the representation power and bear the debts of the partnership is valid only within the internal relationship and is not binding upon third persons. In short, since an ordinary partnership does not have legal personality, and thus no capacity to have rights and no capacity to act, it cannot separate itself from its partners in its relations with third parties, which means that an ordinary partnership has no capacity either to sue or to be sued. Therefore, the lawsuits, bailiff’s office procedures, or arbitration procedures must be initiated by all partners of the ordinary partnership. Similarly, the lawsuits, bailiff’s office procedures, or arbitration procedures to be initiated against the ordinary partnership should be addressed to all partners of the ordinary partnership. This principle is largely accepted by the Court of Appeals[7].

It is important to note that the protection of the transaction security in the market and the third persons acting in good faith are the causes justifying the presence of the joint and several liability. Otherwise, the consequences of an internal transaction that lifts the several liability between the partners would be unfair to a third party, who has conducted a transaction assuming that it could claim its receivables from either of the partners but ends up being only able to recourse to each partner with limitation to their shares.

Conclusion

In summary, ordinary partnerships are the most common forms of joint ventures that have been increasingly preferred in tenders for undertaking various projects. However, considering that this type of partnerships lacks a legal entity, it is very crucial to carefully evaluate the liability structure of an ordinary partnership as well as the liability of partners towards third parties. If a debt will not be jointly and severally borne by the partners as per the general principle, then, disclosing such internal agreement to third parties at the time of the conclusion of the contract at the latest is strongly recommended.

[1] The definition given in the TCO is criticized by the academicians, who argue that it should be expressly indicated in the ordinary partnerships do not constitute a legal entity. For more details, see Ahmet AYAR, Adi Ortaklık Sözleşmesinde İç ve Dış İlişkiler (Internal and External Relations in Ordinary Partnership Agreements), Doctoral Thesis, Yeditep University, 2015, p. 10.

[2] The Assembly of Civil Chambers of the Court of Appeals’ decision dated 8.10.2003 with file no. 2003/12-574 and decision no. 2003/564.

[3] Prof. Dr. Nami Barlas, Contractual Relations Based on Ordinary Partnership (“Adi Ortaklık Temeline Dayalı Sözleşme İlişkileri”), p. 111

[4] The 13th Civil Chamber of the Court of Appeals, in its decisions dated 29.01.2019 and numbered 2018/3340 E. 2019/738 K.; 10.05.2018 and numbered 2016/22662 E. 2018/5682 K., reversed the judgements of the first instance courts by stating that Provisions concerning collective ownership apply to ordinary partnerships, and partners are jointly and severally liable towards others as well. The court’s disregarding this fact and passing a written judgment on the basis of the proportions which constitute an arrangement related with the internal relationships is contrary to the procedure and the law and is a cause for reversal.”

[5] The 13th Civil Chamber of the Court of Appeals, in its decision dated 22.1.2018 and numbered 2015/34882 E. 2018/340 K., have ruled that “…if an agreement has been made in the internal relationship of the debtors -who are severally liable- stipulating that the liability in this respect would be borne by one of them, then it should be accepted that, since the provisions of an agreement entered into by the parties with their free will are binding upon themselves, the joint and several debtor who has paid the debt is entitled to claim -by way of recourse- the collection of the debt from the debtor who is ultimately liable for the amount paid by the former in the internal relationship as per the joint and several liability arising from the law.”

[6] Commercial Chamber of the Court of Appeal’s decision dated 13.6.1966, numbered 5060/2959; similarly, please also see the decision of the 9th Civil Chamber of the Appeal Court’s decision dated 8.4.1980 and numbered 3649/3335.

[7] For instance, see the decision of the Supreme Court of Appeal 12th Civil Chamber dated 10.03.2016 and with no. E. 2015/30038 K. 2016/7147, the decision of the Supreme Court of Appeal 9th Civil Chamber dated 26.11.2019 and with no. E. 2017/13691, K. 2013/31612.

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2022-04-27T14:34:12+03:00