Test for Determining the Existence of Partnership

Law of partnership an extension of law of agency:
As mentioned above there are four essential characteristics of partnership. An association of two or more persons entering into an agreement to share profits may not necessarily determine partnership because such an agreement may not be able to carry on business and may be formed for charitable or social objects. Similarly mere sharing of profits may exist between the joint owners of the property and therefore this may also not determine the existence of partnership. Even a mere statement that the parties are to be partners will not necessarily constitute them as partners in law. So also a person who holds out himself to be a partner is not a partner in law though he may be liable to third parties.

Section 6 of the Act lays down in determining whether a group of persons are a firm or not and whether a person is or is not a partner in a firm, regard shall be given to the relation between the parties as shown by all the relevant facts taken together.
The intentions of the partners will have to be decided with reference to the terms of the agreement and all the surrounding circumstances including evidence as to the interfacing or interlocking of management finance and other incidents of the respective businesses.
The members of a Hindu Undivided family carrying on family business are not partners, because a male child of a Hindu acquires an interest in such business by birth apart from any agreement to that fact. He is not a partner but a joint owner. Joint ownership is a family quasi-partnership created by the operation of law and is not a partnership arising out of a contract. Similarly, a Burmese Buddhist husband and wife carrying on business are not partners.
The true test for determining the existence of partnership is Agency and Authority. In determining the existence of partnership it is essential to trace the real intention of the parties to the agreement and circumstances of the case, whether the relation of principal and agent exists between the parties? It is the reaction of agency which distinguishes a partnership from co-ownerships. It was held that in cases where losses as well as profits are shared, the presumption about the existence of partnership still becomes stronger, though not conclusive. Agency is an essential element of partnership just sharing of profits and contribution to losses is not sufficient. It was held that the receipt by a person of a share in the profits of a businesses is prima facie evidence that he is a partner, but this is not a conclusive test. The question whether a person is a partner or not therefore depends in nearly all cases upon whether or not he has the authority to act for other partners and whether or not other partners have the authority to act for him. Intention of parties to be gathered from the language used in the deed read as a whole and having regard to the ordinary sensible meaning.
It is only where there is a difference of opinion between the partners that the matter is connected with the business has to be decided by a majority of partners. Hence control and management can be exercised by a single partner and need not be by the majority.
Where a contract was entered into by one of the partners of a firm with the Finance Corporation for supply of dal, the contract will be binding on the other partners of the firm when validity of the contract or authority of the partner to enter into the contract is not denied by other partners
Source: Business Law