In Pakistan, the need for a Partnership Agreement is primarily governed by the Partnership Act, 1932. While the law does not mandate a written partnership agreement for the formation of a partnership, it is highly advisable to have one for several compelling reasons.
Firstly, the absence of a written partnership agreement can lead to ambiguities and disputes among partners. The Partnership Act, 1932 defines a partnership as the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all . Without a written agreement, the mutual rights and duties of partners may only be determined by oral agreements or the conduct of the partners, which can be difficult to prove in case of a disagreement.
Secondly, section 11 of the Act allows the mutual rights and duties of partners to be determined by contract between them. Such contracts can be expressed or implied by a course of dealing and may be varied by mutual consent . A written agreement provides clarity and serves as a reference point for the partners’ roles, responsibilities, and profit-sharing ratios, reducing the likelihood of conflicts.
Moreover, section 69 of the Act states that no suit to enforce a right arising from a contract shall be instituted in any Court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the Register of Firms as a partner in the firm . While this section emphasizes the importance of registration, a written partnership agreement is often a prerequisite for registration, thus enabling partners to enforce their rights through the legal system.
Additionally, the agreement can include provisions that are not covered by the Act, such as dispute resolution mechanisms, confidentiality clauses, and non-compete clauses, which are essential for protecting the business interests of the partners.
In conclusion, while a written partnership agreement is not legally mandatory in Pakistan, it is a prudent and beneficial practice. It provides legal clarity, minimizes disputes, and safeguards the interests of all partners involved. Therefore, it is highly recommended to formalize your partnership through a detailed written agreement.