Partnership agreement

Partnership agreement

The partnership agreement is regulated by Article 637 of the Civil Obligations Act (Official Gazette “Narodne novine” nos. 35/05, 41/08, 78/15, 29/18), which reads: In a partnership agreement, two or more persons mutually commit themselves to invest their work and/or assets in order to achieve a common goal. This goal must be permitted, not contrary to the Constitution of the Republic of Croatia, compulsory regulations and the morals of society.

As a partnership is an association of persons and assets without legal personality, this article should explain how a partnership agreement is concluded and how it is terminated, what constitutes partnership assets, management and representation, and the relations of partnership members with third parties.

The form of concluding a partnership agreement

As it follows from the legal definition, concluding a partnership agreement does not create a legal entity because the partnership does not have legal personality. This means that it differs from an association of several persons who are establishing a company, for example a joint-stock company or a limited liability company.  

The partnership agreement is not a formal contract and can be concluded either orally or in writing. However, it is advisable to conclude the partnership agreement in writing for several reasons. First of all, it is important for legal security to record such an agreement in the land register, otherwise it will not be visible that some real estate has been entered into the partnership, which is very important because the registered owner is no longer the actual owner of the subject real estate, but one of the joint owners. Furthermore, as the partnership agreement is most often concluded for construction projects where one party invests the right of ownership of the land, and the other party invests knowledge, machines, equipment, money, and labour in order to achieve a common goal, the need to conclude such an agreement in writing arises because after the completion of construction, the partnership property is divided and the obligation to pay real estate sales tax and value added tax also arises.

Partnership agreement - What constitutes partnership assets?

Pursuant to Article 638 of the Civil Obligations Act, the assets of a partnership consist of the contributions of partners (principal) and assets acquired through the partnership's operations. Partnership assets also include compensation for destroyed, damaged or confiscated things that belong to partnership assets.

Given that property consists of partners' contributions in things, rights, money, work and other goods in equal parts, unless otherwise specified, it is a matter of joint property, which is fundamentally different from co-ownership. In co-ownership, the shares are determined, and in partnerships they are only determinable, therefore the partner cannot dispose of their share and individual things and rights from the joint property.

The partnership agreement is regulated by Article 637 of the Civil Obligations Act (Official Gazette “Narodne novine” nos. 35/05, 41/08, 78/15, 29/18), which reads: In a partnership agreement, two or more persons mutually commit themselves to invest their work and/or assets in order to achieve a common goal. This goal must be permitted, not contrary to the Constitution of the Republic of Croatia, compulsory regulations and the morals of society.

As a partnership is an association of persons and assets without legal personality, this article should explain how a partnership agreement is concluded and how it is terminated, what constitutes partnership assets, management and representation, and the relations of partnership members with third parties.

Management and representation of partnerships

According to the Act, the business operations of the partnership shall be managed by all the partners together, but they can authorize one or more of them to manage the operations through the partnership agreement, so the authorized partners will be considered the proxies of the others. The right to manage operations can be revoked by unanimous decision of all other partners due to gross breach of duty, inability to manage business operations or other important reasons
Partners cannot entrust the management of the partnership's operations to third parties, nor admit anyone to the partnership, nor undertake legal transaction that would jeopardize the common goals of the partnership.

Relationship of partnership members towards third parties

A partner cannot validly bind the partnership through a legal transaction with a third party without the express or implicit consent of the other partners or their proxies.
Likewise, the claims of the partnership belong to all partners together, unless otherwise stipulated in the partnership agreement, and all partners are jointly and severally liable for the obligations, unless otherwise agreed with the creditor.

Partnership agreement - Termination of the partnership agreement

Pursuant to Article 652 of the Act, a partnership agreement concluded for an indefinite period can be terminated by a partner at any time, except at inopportune time or to the detriment of the other partners.

On the other hand, a partnership agreement concluded for a certain period of time can be cancelled before the expiration of that time only for important reasons, and in particular due to the violation of an essential obligation from the partnership agreement committed by the other partner, either due to impossibility of fulfilling such an obligation or death, that is, resignation of a partner on whom the performance of the partnership's business mainly depended.

In addition, a partner can be excluded from the partnership if there are important reasons for this, especially due to the violation of an essential obligation from the partnership agreement, bankruptcy, complete or partial loss of business capacity or loss of trust due to committed criminal offence.