Month: December 2020

The commercial invoice is one of the most important documents in international trade and ocean freight shipping. It is a legal document issued by the seller (exporter) to the buyer (importer) in an international transaction and serves as a contract and a proof of sale between the buyer and seller.

Unlike the Bill of Lading, the commercial invoice does not indicate the ownership of goods nor does it carry a title to the goods being sold. It is, however, required for customs clearance purposes to calculate and assess the duties and taxes due.

When used in foreign trade, a commercial invoice is a customs document. It is used as a customs declaration provided by the person or corporation that is exporting an item across international borders. Although there is no standard format, the document must include a few specific pieces of information such as the parties involved in the shipping transaction, the goods being transported, the country of manufacture, and the Harmonized System codes for those goods. A commercial invoice must often include a statement certifying that the invoice is true, and a signature.

A commercial invoice is used to calculate tariffs, international commercial terms (like the Cost in a CIF) and is commonly used for customs purposes.

Commercial invoices in European countries are not normally for payment. The definitive invoice for payment usually has only the words “invoice”. This invoice can also be used as a commercial invoice if additional information is disclosed.

The commercial invoice details the price(s), value, and quantity of the goods being sold. It should also include the trade or sale conditions agreed upon by both buyer and seller of the transaction being carried out.

It may also be required for payment purposes (such as in the event of payment via Letter of Credit and may need to be produced by the buyer to its bank to instruct the release of funds to the seller for payment.

The commercial invoice is a legal document between the exporter and the buyer (in this case, the foreign buyer) that clearly states the goods being sold and the amount the customer is to pay. The commercial invoice is one of the main documents used by customs in determining customs duties.  A commercial invoice is a bill for the goods from the seller to the buyer. These documents are often used by governments to determine the true value of goods when assessing customs duties. Governments that use the commercial invoice to control imports will often specify its form, content, number of copies, language to be used and other characteristics.  

Air Waybill  

Air freight shipments require airway bills.  An air way bill accompanies goods shipped by an international air carrier. The document provides detailed information about the shipment and allows it to be tracked.  Air waybills are shipper-specific and are not negotiable documents (as opposed to “order” bills of lading used for vessel shipments).

An air waybill (AWB) or air consignment note is a receipt issued by an international airline for goods and an evidence of the contract of carriage, it is a document of title to the goods. Hence, the air waybill is non-negotiable.

An air waybill (AWB) is a legally binding transport document issued by a carrier or agent that provides details about the goods being shipped. It provides detailed information on the contents of the shipment, the sender and recipient, terms and conditions, and other information. The AWB is a standard form that is distributed by the International Air Transport Association (IATA).

Functions of the AWB

The air waybill serves many functions, including:

• Evidence of receipt of goods by an airline
• Contact information among all parties
• Contract of carriage between shipper and carrier
• Freight bill
• Customs declaration
• Description of the goods
• Guide for handling and delivering goods
• Tracking of shipment

Features and Format of the AWB

An AWB is typically a one-page document that is packed with important information. The bill is designed and distributed by the IATA and is used in domestic and international shipping. The document itself is issued in eight sets of different colors, with the first three copies being the original.

• The first original (green) is the issuing carrier’s copy.
• The second (pink) is the consignee’s copy.
• The third (blue) is the shipper’s copy.

The fourth copy is brown and functions as the receipt and proof of delivery. The other four copies are white.

The air waybill may come with an airline logo at the top right corner or it may be a neutral AWB. The two are essentially identical outside of the airline logo and prepopulated information for the airline.

Each air waybill must include the carrier’s name, office address, logo, and AWB number, which is an 11-digit number that can be used to make bookings and track the status and location of the shipment.

The top-left quadrant of an air waybill document will contain information for the shipper, consignee, agent, airport of departure, and airport of destination.

The top-right quadrant will contain the information for the airline either in the form of printed and prepopulated text and logos or manually-entered information. The top-right section will also contain information about the declared value for carriage and declared value for customs.

The middle of the page will contain information on the contents of the shipment, including the number of pieces, gross weight, chargeable weight, total charge, and the nature and quantity of goods.

The bottom portion of the air waybill will contain additional charges and taxes, an area for the signature of the shipper or agent, and an area to enter the date, time, and place of execution.

Bill of Lading  

A bill of lading is a contract between the owner of the goods and the carrier (as with domestic shipments). For ocean shipments, there are two common types: a straight bill of lading, which is non-negotiable, and a negotiable, or shipper’s order bill of lading. The latter can be used to buy, sell or trade the goods while in transit. The customer usually needs an original bill of lading as proof of ownership to take possession of the goods from the ocean carrier.

A Bill of Lading is a document that confirms the receipt of shipped cargo. Lading is the process of loading cargo or shipment into a vessel. The bill serves to document that a shipment has been loaded and has been received at its predetermined destination. The document also includes information describing the type, quantity, and destination of the cargo.

There are three main types of the Bill of Lading. A straight bill of lading is one where the transporter has received advanced payment. An order bill of lading is used when the shipment of goods happens before the payment for transportation is made. An endorsed order bill of lading will transfer ownership of goods once delivery has been made. It can also be traded as a security or even used as collateral for debt obligations.

A bill of lading is a document issued by a carrier (or their agent) to acknowledge receipt of cargo for shipment. Although the term historically related only to carriage by sea, a bill of lading may today be used for any type of carriage of goods. Bills of lading are one of three crucial documents used in international trade to ensure that exporters receive payment and importers receive the merchandise. The other two documents are a policy of insurance and an invoice. Whereas a bill of lading is negotiable, both a policy and an invoice are assignable. In international trade outside the United States, bills of lading are distinct from waybills in that the latter are not transferable and do not confer title. Nevertheless, the UK Carriage of Goods by Sea Act 1992 grants “all rights of suit under the contract of carriage” to the lawful holder of a bill of lading, or to the consignee under a sea waybill or a ship’s delivery order.

A bill of lading must be transferable, and serves three main functions:

• It is a conclusive receipt, i.e., an acknowledgement that the goods have been loaded
• It contains or evidences the terms of the contract of carriage
• It serves as a document of title to the goods, subject to the nemo dat rule.

An inspection certificate, which is issued by an independent trustable company, verifies whether or not the goods are in conformity with the sales contract in regards to quality, quantity, tariff classification, import eligibility and price of the goods for customs purposes.

Certificate of Inspection is a document certifying that the concerned merchandise (including perishable goods) was in good condition immediately prior to its shipment. The Certificate of Inspection is an inspection report or report of findings and is required by some importers or importing countries.

Inspection certificate, sometimes called as certificate of inspection or pre-shipment inspection certificate, is a trade document used in international trade transactions, issued generally by an independent inspection company after conducting a related inspection, certifying whether or not the goods are in question are in conformity with the specifications stated on the sales contract.

The export or trader uses such a report in the inspection of goods purchased from a manufacturer. The export-manufacturer also uses such a report in the inspection of its own productions. In case a Certificate of Inspection is required, the importer may stipulate in the Letter of Credit (LC) to use a specific independent surveyor.

In the case of a foreign government required pre-shipment inspection, which is stipulated in the LC, the report of findings can be in the form of a security label attached with the invoice. The label bears the number and date of the corresponding report of findings issued by the foreign government engaged surveyor.

Inspection certificates can be classified under two main categories:

• Commercial Inspection Certificates
• Official Inspection Certificates

In some instances buyers could not trust the sellers’ production quality or else conditions may dictate that the quality of the goods must be approved before they will be dispatched from the exporter’s factory.

In such a circumstance, an independent company, which is trustable by both buyer and seller, must be checking the goods and verifies its findings with a certificate specifying whether or not the goods are in conformity with the sales contract.

This example illustrates the function of a commercial inspection and commercial inspection certificate.

In addition to commercial inspection certificates, it is possible to talk about some form of official inspection certificates, which are requested by the custom offices of some importing countries during the import procedures.

For example all goods that will be exported to Iraq should accompany a pre-shipment inspection certificate, which confirms the quality, quantity, tariff classification, import eligibility and price of the goods for customs purposes.

Which countries demand official pre-shipment inspection certificates?

Angola, Bangladesh, Benin, Burkina Faso, Burundi, Cambodia, Cameroon, Central African Republic, Comoros, Republic of Congo (Brazzaville), Democratic Republic of Congo (Kinshasa), Cote d’Ivoire, Ecuador, Ethiopia, Guinea, India, Indonesia, Iran, Kenya, Kuwait, Liberia, Madagascar, Malawi, Mali, Mauritania, Mexico, Mozambique, Niger, Senegal, Sierra Leone, Togo, Uzbekistan.

Who should issue and sign the inspection certificate

Inspection certificate, which is created after the completion of the related inspection, should be issued by the inspector, who works for an independent inspection company.

In most cases inspection certificates are issued just after the completion of the inspection and signed by the inspectors, who conducted the inspection.

Many inspection companies publish full inspection reports online as a result buyer can reach inspection results simultaneously.

As a rule of thumb, inspection certificate should be issued on a formal company letterhead of the inspection company.

Global Inspection Companies: Third party inspections in international trade, either commercial or official, are generally carried out by multinational big independent inspection companies, whose management belongs to western countries such as USA, Germany, Switzerland, Netherlands etc. SGS, Bureau Veritas SA, Intertek, Cotecna, Alfred H Knight International Ltd, Baltic Control Ltd. Aarhus, CIS Commodity Inspection Services, Control Union International, CSA Group, are some of the biggest inspection companies operate in global scale.

Benefits of an inspection certificate for exporters and importers

• Inspection certificate clears doubts about quality of the goods and assists in achieving desired level of quality.
• Inspection certificate evidences the quality of the goods by a 3rd party. In case importer receives poor quality goods despite a positive inspection certificate, it is possible to claim compensation from the inspection company.
• Inspection certificate may function as a documentary evidence under letter of credit transactions.

Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport by which the property is transferred, acquired, or held between the points of origin and the final destination. Cargo insurance is the sub-branch of marine insurance, though Marine insurance also includes Onshore and Offshore exposed property, (container terminals, ports, oil platforms, pipelines), Hull, Marine Casualty, and Marine Liability. When goods are transported by mail or courier, shipping insurance is used instead.

General averages

Average in marine insurance terms is “an equitable apportionment among all the interested parties of such an expense or loss.”

General average stands apart for marine insurance. In order for general average to be properly declared

1) there must be an event which is beyond the shipowner’s control, which imperils the entire adventure

2) there must be a voluntary sacrifice

3) there must be something saved.

The voluntary sacrifice might be the jettison of certain cargo, the use of tugs, or salvors, or damage to the ship, be it, voluntary grounding, knowingly working the engines that will result in damages. General average requires all parties concerned in the maritime venture (hull/cargo/freight/bunkers) to contribute to make good the voluntary sacrifice. They share the expense in proportion to the ‘value at risk” in the adventure. Particular average is the term applied to partial loss be it hull or cargo.

Average: is the situation in which the insured has under-insured, i.e., insured an item for less than it is worth. Average will apply to reduce the claim amount payable. An average adjuster is a marine claims specialist responsible for adjusting and providing the general average statement. An Average Adjuster in North America is a ‘member of the association of Average Adjusters’ To ensure the fairness of the adjustment a General Average adjuster is appointed by the shipowner and paid by the insurer.

Specialist policies

Various specialist policies exist, including:

• Newbuilding risks: This covers the risk of damage to the hull while it is under construction.
• Open Cargo or Shipper’s Interest Insurance: This policy may be purchased by a carrier, freight broker, or shipper, as coverage for the shipper’s goods. In the event of loss or damage, this type of insurance will pay for the true value of the shipment, rather than only the legal amount that the carrier is liable for.
• Yacht Insurance: Insurance of pleasure craft is generally known as “yacht insurance” and includes liability coverage. Smaller vessels such as yachts and fishing vessels are typically underwritten on a “binding authority” or “lineslip” basis.
• War risks: General hull insurance does not cover the risks of a vessel sailing into a war zone. A typical example is the risk to a tanker sailing in the Persian Gulf during the Gulf War. The war risks areas are established by the London-based Joint War Committee, which has recently (when?) moved to include the Malacca Straits as a war risks area due to piracy. If an attack is classified as a “riot” then it would be covered by war-risk insurers.
• Increased Value (IV): Increased Value cover protects the shipowner against any difference between the insured value of the vessel and the market value of the vessel.
• Overdue insurance: This is a form of insurance now largely obsolete due to advances in communications. It was an early form of reinsurance and was bought by an insurer when a ship was late at arriving at her destination port and there was a risk that she might have been lost (but, equally, might simply have been delayed). The overdue insurance of the Titanic was famously underwritten on the doorstep of Lloyd’s.
• Cargo insurance: Cargo insurance is underwritten on the Institute Cargo Clauses, with coverage on an A, B, or C basis, A having the widest cover and C the most restricted. Valuable cargo is known as specie. Institute Clauses also exist for the insurance of specific types of cargo, such as frozen food, frozen meat, and particular commodities such as bulk oil, coal, and jute. Often these insurance conditions are developed for a specific group as is the case with the Institute Federation of Oils, Seeds and Fats Associations (FOFSA) Trades Clauses which have been agreed with the Federation of Oils, Seeds and Fats Associations and Institute Commodity Trades Clauses which are used for the insurance of shipments of cocoa, coffee, cotton, fats and oils, hides and skins, metals, oil seeds, refined sugar, and tea and have been agreed with the Federation of Commodity Associations. There has also been discussion about insurance policies to address plastic pollution as a result of plastic cargo losses at sea. For example, marine insurance policies should factor in liability for marine plastic pollution, marine clean-up and conservation.

Claims basis and deductibles

Marine insurance is always written on an occurrence basis, covering claims that arise out of damage or injury that took place during the policy period, regardless when claims are made. Policy features often include extensions of coverage for items typical to a marine business such as liability for container damage and removal of debris.

A deductible is the first amount of a claim that the policy holders bears themselves. There can occasionally be a zero deductible but in most cases a deductible applies to claims made under a policy of marine insurance.

Marine Insurance Certificate

A marine insurance certificate is a document that an insured gives to the shipper responsible for their cargo or any other shipping-related activity. It certifies that the cargo is insured while in transit and is supported by a copy of an insurance policy. It is also called a special cargo policy or a cargo insurance certificate.

The certificate is for an open policy (or open cover) insurance. The open policy specifies a period of time that the marine business of the insured will be covered by an insurer when they ship their cargo to a specific shipper or carrier. In other words, it notifies the shipper that the shipping activity is insured.

While the certificate is issued by the insured, it is supported by a copy of the insurance policy from the insurer or such a copy will soon be forwarded.

Certificate of Insurance: It is an evidence of insurance but does not set out the terms and conditions of insurance. It is also known as ‘Cover Note’.

Insurance Broker’s Note: It indicates insurance has been made pending issuance of policy or certificate. However, it is not considered to be evidence of contract of insurance.

A packing list is a document used in international trade, that provides the exporter, the international freight forwarder, and the ultimate consignee with information about the shipment. This list also includes details about how the shipment is packed and the marks and numbers that are noted on the outside of the boxes.

An export packing list must always include information about the number of units, boxes, and any other available packaging information.

The information must match the Commercial Invoice and should reflect the same parties to the transaction. It should also clarify if solid wood was used to pack the shipment. Most countries enforce certain Fumigation and Heat Treatment regulations when it comes to transporting wooden materials.

Additionally, the packing list must include a Fumigation or Heat Treatment Certificate and must comply with the Lacey Act.

Packing list important

There are a few reasons why a packing list is so important when exporting goods from a given country. Here are some of the reasons:

• It provides a count for the product that is being released.
• It also serves as proof of the inland bill of lading.
• It indicates the details required for a Certificate of Origin.
• It provides much of the detail needed by the Electronic Export Information section in the Automated Export System.
• It serves as proof of a Material Safety Data Sheet, in the case that goods are deemed hazardous or dangerous.
• It is used to create a booking with the international carrier, as well as the issuance of the international Bill of Lading.
• It helps the partnered customs broker when entering the listed goods in their country’s import database, as it contains important information.
• It serves as a guide for the receiver/buyer when counting the product that they received.
• It serves as a supporting document for reimbursement under a letter of credit.

When creating a packing list, make sure to include as much detail as possible about the shipment. Some important details to include are:

• Date
• Shipper and exporter contact information
• Consignee contact information
• The origin address of cargo
• The destination address of cargo
• Total number of packages within this shipment
• A detailed description of each package
• The volume and weight of each package
• The volume and weight of the entire shipment
• Commercial invoice number for this shipment

Authority

Authority is the right to give orders and power to command subordinates. It is the power to take decisions and guide the actions of others to attain organizational goals. It is a commanding force that compels the subor­dinates to do the right thing to attain organizational goals. It consists of the right to command and to utilize organizational resources. Authority is the core of the structure of an organization. The strength of an officer is known by the authority he enjoys.

Authority is nothing but the rights or the powers with the executives which the organization provides them with the aim of accomplishment of certain common organizational goals.

Hence, it includes the powers to assign duties to the subordinates and make them accept and follow it.

Without authority, a manager ceases to be a manager because he will be able to make his juniors or subordinates work towards the accomplishment of the goals.

According to George R. Terry “Authority is official and legal right to command action by others and to enforce compliance. In this way authority is exercised”:

(i) by making decision

(ii) by seeing that they are carried out through

(a) persuasion

(b) sanctions

(c) requests

(d) even coercion, constraint or force.

The following characteristics of authority deserve special attention:

1. Right to command: Authority is the legitimate right to command, direct, guides, and control the activities of the subordinates to attain organizational goals.
2. Right of decision-making: Authority includes the right to take decisions and get them executed by the subordinates. Generally, decisions are taken on problems related to assigned activities.
3. Positional in nature: Authority is always positional in nature. It refers to the relationship between superior and subordinate. Once the superior vacates his position, he ceases to have authority.
4. Limited scope: The extent of authority is determined by the rules and norms of the organization. The limit of authority enjoyed by a position is limited.
5. Delegated downwards: Authority is always delegated downwards. The superior can delegate part of his authority to his subordinate in discharging his assigned duty.
6. Longer stability: Authority has a longer stability. The authority, once granted, remains in force unless it is withdrawn prematurely.
7. Possibility of withdrawal: Authority granted to a position can be withdrawn at any time if the situation so warrants. Generally, authority is withdrawn with a view to reduce the damage for better results.
8. Downward flow: Authority always flows downward in an organizational structure. The superior grants authority to his subordinates to get the work done.
9. Legal right: Authority implies a legal right (within the organization itself) available to superiors. It is granted as per the statute (i.e., rules and regulations) of the organization to achieve the pre-decided organizational goals.
10. Influencing behaviour of subordinates: Authority influences the behaviour of subordinates in terms of doing the right things at the right time. It is a commanding force that compels the subordinates to do the right thing to attain organizational goals.

Responsibility

“Responsibility is an obligation of an individual to perform assigned duties to the best of his ability under the direction of his leader.” In the words of Theo Haimann, “Responsibility is the obligation of a subordinate to perform the duty as required by his superior”.

As per McFarland, responsibility means, “the duties and activities assigned to a position or an executive”.

Characteristics

• Its importance lies in the creation of the obligation to perform the work.
• It arises from the superior-subordinate relationship.
• Unlike Authority, it flows from bottom to top.
• It is always in the form of a continuing obligation.
• No one can delegate responsibility.

Forms of Responsibility:

(i) Operating Responsibility and

(ii) Ultimate Responsibility.

(i) Operating Responsibility: It is the obligation of an employee to carry out the assigned tasks.

(ii) Ultimate Responsibility: It is the final obligation of the manager who ensures that the task is done efficiently by the employees.

Accountability

It means to be responsible for explanation to any superior. When a sub­ordinate works under a boss and he is assigned some duties to be performed, he will be accountable for doing or not doing that work. Thus, accountability is a derivative of responsibility. So, accountability is the personal answerability for results.

Features:

1. It is in fact the legal responsibility.
2. It can neither be shared nor delegated.
3. It always to be assigned duties only.
4. It always from downward to upward.
5. It is different from responsibility.
6. It is unitary in nature i.e., a sub-ordinate under the principle of unity of command is accountable only to one officer who has delegated authority to him. It avoids confusion and conflicts.

Planning and control are the two sides of the same coin. They are in fact parts of one integral function and it can be quite difficult to separate the two. This means that we cannot tell when the planning function ends and the control functions begin. Planning sets the philosophy and the guidelines on which the company operates. And controlling ensures that the activities of the firm conform to these plans, goals, objectives etc.

Planning and controlling are inter-related to each other. Planning sets the goals for the organization and controlling ensures their accomplishment. Planning decides the control process and controlling provides sound basis for planning. In reality planning and controlling are both dependent on each other. In the words of M.C. Niles, “Control is an aspect and projection of planning, where as planning sets the course, control observes deviations from the course, and initiates action to return to the chosen course or to an appropriately changed one.”

The relationship between planning and control can be explained as follows:

1. Planning Originates Control:

In planning the objectives or targets are set in order to achieve these targets control process is needed. So, planning precedes control.

2. Controlling Sustains Planning:

Controlling directs the course of planning. Controlling spots, the areas where planning is required.

3. Controlling Provides Information for Planning:

In controlling the actual performance is compared to the standards set and records the deviations, if any. The information collected for exercising control is used for planning also.

4. Planning and Controlling are Interrelated:

Planning is the first function of management. The other functions like organizing, staffing, directing etc. are organized for implementing plans. Control records the actual performance and compares it with standards set. In case the performance is less than that of standards set then deviations are ascertained. Proper corrective measures are taken to improve the performance in future. Planning is the first function and control is the last one. Both are dependent upon each other.

5. Planning and Control are Forward Looking:

Planning and control are concerned with the future activities of the business. Planning is always for future and control is also forward looking. No one can control the past, it is the future which can be controlled. Planning and controlling are concerned with the achievement of business goals. Their combined efforts are to reach maximum output with minimum of cost. Both systematic planning and organized controls are essential to achieve the organizational goals.

Active or managing partner:

A person who takes active interest in the conduct and management of the business of the firm is known as active or managing partner.

He carries on business on behalf of the other partners. If he wants to retire, he has to give a public notice of his retirement; otherwise, he will continue to be liable for the acts of the firm.

Sleeping or dormant partner:

A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the management of the business. Such a partner only contributes to the share capital of the firm, is bound by the activities of other partners, and shares the profits and losses of the business. A sleeping partner, unlike an active partner, is not required to give a public notice of his retirement. As such, he will not be liable to third parties for the acts done after his retirement.

Nominal or ostensible partner:

A nominal partner is one who does not have any real interest in the business but lends his name to the firm, without any capital contributions, and doesn’t share the profits of the business. He also does not usually have a voice in the management of the business of the firm, but he is liable to outsiders as an actual partner.

Sleeping vs. Nominal Partners:

It may be clarified that a nominal partner is not the same as a sleeping partner. A sleeping partner contributes capital shares profits and losses, but is not known to the outsiders.

A nominal partner, on the contrary, is admitted with the purpose of taking advantage of his name or reputation. As such, he is known to the outsiders, although he does not share the profits of the firm nor does he take part in its management. Nonetheless, both are liable to third parties for the acts of the firm.

Partner by estoppel or holding out:

If a person, by his words or conduct, holds out to another that he is a partner, he will be stopped from denying that he is not a partner. The person who thus becomes liable to third parties to pay the debts of the firm is known as a holding out partner.

There are two essential conditions for the principle of holding out : (a) the person to be held out must have made the representation, by words written or spoken or by conduct, that he was a partner ; and (6) the other party must prove that he had knowledge of the representation and acted on it, for instance, gave the credit.

Partner in profits only:

When a partner agrees with the others that he would only share the profits of the firm and would not be liable for its losses, he is in own as partner in profits only.

Minor as a partner:

A partnership is created by an agreement. And if a partner is incapable of entering into a contract, he cannot become a partner. Thus, at the time of creation of a firm a minor (i.e., a person who has not attained the age of 18 years) cannot be one of the parties to the contract. But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the benefits of partnership’, with the consent of all partners. A minor partner is entitled to his share of profits and to have access to the accounts of the firm for purposes of inspection and copy.

He, however, cannot file a suit against the partners of the firm for his share of profit and property as long as he remains with the firm. His liability in the firm will be limited to the extent of his share in the firm, and his private property cannot be attached by creditors.

On his attaining majority, he has to decide within six months whether he will become regular partner of withdraw from partnership. The choice in either case is to be intimated through a public notice, failing which he will be treated to have decided to continue as partner, and he becomes personally liable like other partners for all the debts and obligations of the firm from the date of his admission to its benefits (and not from the date of his attaining the age of majority). He also becomes entitled to file a suit against other partners for his share of profit and property.

Other partners:

In partnership firms, several other types of partners are also found, namely, secret partner who does not want to disclose his relationship with the firm to the general public. Outgoing partner, who retires voluntarily without causing dissolution of the firm, limited partner who is liable only up to the value of his capital contributions in the firm, and the like.

However, the moment public comes to know of it he becomes liable to them for meeting debts of the firm. Usually, an outgoing partner is liable for all debts and obligations as are incurred before his retirement. A limited partner is found in limited partnership only and not in general partnership.

Partnership Deed

Partnership Agreements are be used by Partners wishing to form a partnership for doing business together. It is strongly recommended or encouraged for partnerships to have some kind of agreement among themselves, in case future disputes prove difficult to arbitrate. It is meant to promote mutual understanding and avoid mistrust. It indicates the terms on which the business corporation is founded.

A partnership is a unique form of business in which partners work together to achieve common goals. Due to this feature of partnerships, partners are allowed to decide the terms of their relationship with each other. The documents which they do so are called partnership deeds.

Partnership Deed

As explained above, partners are free to define the terms of their relationships, even if they go contrary to the Act in certain cases. They can either decide on such terms with an oral agreement or a written one.

Partnership deeds, in very simple words, are an agreement between partners of a firm. This agreement defines details like the nature of the firm, duties, and rights of partners, their liabilities and the ratio in which they will divide profits or losses of the firm.

Although the drafting of partnership deeds is not compulsory, it is always advised to do so. This helps in ensuring that all terms agreed by partners exist in written form on paper. Doing so can reduce disputes between partners and govern their functioning better.

Unlike similar documents like articles of association of companies, partnership deeds need not be registered mandatorily. However, registration can ensure the prevention of legal challenges to its validity when disputes arise. An ideal partnership deed is comprehensive and clear about all details pertaining to the functioning of a firm. It should not contain any ambiguities.

Absence of a Partnership Deed

In case partners do not adopt a partnership deed, the following rules will apply:

• The partners will share profits and losses equally.
• Partners will not get a salary.
• Interest on capital will not be payable.
• Drawings will not be chargeable with interest.
• Partners will get 6% p.a. interest on loans to the firm if they mutually agree.

Contents of Partnership Deeds

Although there is no specific format prescribed for drafting a partnership deed, a typical deed contains the below mentioned clauses.

• The name of the firm
• Name and details of all partners
• Date of commencement of business
• Duration of the firm’s existence
• Capital contributed by each partner
• Profit/loss sharing ratio
• Interest on capital payable to partners
• The extent of borrowings each partner can draw
• Salary payable to partners, if any
• The procedure of admission or retirement of a partner
• The method used for calculating goodwill
• Preparation of accounts of the firm
• Mode of settlement of dues with a deceased partner’s executors
• The procedure followed in case disputes arise between partners