Partnership Law (Western Australia)

PARTNERSHIP LAW

Definition

Partnership Act 1895

Section 7(1)  -relation between persons carrying on a business in common with a view to profit

Elements that needs to be proven:

(a)    Carrying on business

-          Carrying on implies that a repetition of acts

-          Series of acts which constitutes a business

-          Case: Canny Gabriel Castle Advertising Pty Ltd & Anor v Volume Sales (Finance) Pty Ltd

o   A co named Fourth Media Management Pty Ltd (FM) entered into contracts with singers Elton John and Cilla Black for performances in Australia. Volume Sales (VS) agreed to finance the contracts.

o   Agreement between FM & VS:

§  FM assign half interest to VS on singers contracts;

§  Arrangement considered as joint venture

§  VS finance through loan – described as loan to JV which was payable before distribution of profits

§  Profits shared equally

§  Policy matters agreed by both parties

§  Bank account of VS opened and operated as VS deems fit

§  Loan repaid if contract with singers fails

o   After agreement entered, FM granted charge over interest in box office proceeds of contract to Canny Gabriel.

o   Question: Will VS’s interest prevail over the later created charge?

o   If arrangement was partnership, then VS interest would prevail over charge.

o   Held: THERE WAS PARTNERSHIP

o   Why: Agreement exhibited all the indications of a partnership but did not describe the parties as partners and did not expressly provide for the sharing of losses.

o   Reason for the decision:

§  Parties became joint venturers in a commercial enterprise with a view to profit;

§  Profits were shared;

§  Policies were to be jointly decided

§  Parties concerned with the financial stability of one another

(b)   In common

-          It is not a requirement for all the partners to be actively involved in the running of the business

-          But must be clear those who are running the business are doing so for all partners and not for themselves

-          Mutuality of rights and obligations must exist

(c)    View to profit

-          Parties must intend that the business will be profitable

-          Refers to pecuniary gains

CREATION OF PARTNERSHIP

May be created by :

1.       Written agreement

2.       Oral agreement; or

3.       Implied by conduct

Written Agreement

-          Not compulsory but recommended

-          Where agreement exist court will endeavour to give meaning to the intent of the agreement even if against the Act

-          Where agreement is silent, Act will be used to fill the gaps

Oral Agreement

-          May be formed verbally

-          Disputes would be difficult to resolve

Implied by Conduct

-          Words or conduct lead others to believe that a partnership exists, then they will be stopped from denying the existence of the partnership

Determination on the existence of a partnership

Common law and Act have rules to assist court to determine whether a partnership exists.

Common Law Rules

·         Intention

o   Intention of parties manifest in words and actions

o   Written agreement may be able to assist in objective decision making

o   Court will look objectively at the action of partners to determine whether they intended to be partners

o   Law can decide partnership exists, even if the parties themselves do not agree – Canny Gabriel

·         Agency;

o   Proof of parties acting as an agent for the other in the business relationship

 And

·         Sharing of profits and losses

o   Evidence of sharing of profits and losses

o   Case: Cox v Hickman

§  B &J Smith traded in partnership under the name of ‘Stanton Iron Co’ and was in financial difficulties

§  Deed of arrangement with creditors were entered – assigning the business and partnership pty to trustee

§  Trustee given power to carry on the business under new name

§  Future income to be divided rateably between all the creditors

§  If the creditors paid off the business was to be returned to the Smiths

§  Cox and Wheatcroft were the creditors appointed as trustees

§  Cox never acted as trustee and Wheatcroft did it for a short time

§  Once W stopped to act remaining trustees incurred debt with Hickman

§  Hickman wanted C & W to be liable for the debt

§  Held: no holding out that C & W were partners and H had no knowledge of them or of the deed of arrangement – they could deny liability although as creditors they were to share the profits rateably as it was insufficient to make them partners

Statutory Rules

3 statutory rules:  Section 8(1A)

a.       Rule 1: Co-ownership

b.      Rule 2: sharing of gross returns; and

c.       Rule 3: sharing of profits and losses

Rule 1: Co-ownership

·         Co-ownership of property does not amount to partnership – regardless sharing profit or not – Section 8(1A)(1)

Rule 2: Sharing of Gross Returns

·         Sharing of gross returns does not create a partnership – Section 8(1A) (2)

·         No statutory definition of ‘return’ but at common law it is taken to mean profit

Rule 3: Sharing of Profits and Losses

·         Receipt of share of profits of a business is prima facie evidence that the person is a partner but not conclusive – Section 8 (1A) (3)

·         No statutory definition of profit

Relationship of Partners with outsiders

The relationship can be dealt as follows:

·         Law of agency;

·         Power of partner to bind;

·         Liability of partners to persons outside the firm

·         Extent of liability to persons outside the firm

·         Holding out: liability by estoppels of apparent partners of a firm

·         Liabilities of incoming and outgoing partners

Law of Agency

Ø  Principal authorizes the agent to act on P’s behalf to place P in a contractual relationship with a third party – agency

Ø  P gives agent actual authority to act

Ø  In the eyes of the third party – agent has apparent authority to act on P’s behalf – third party is here known as outsider and is not expected to know the actual authority that has been given to the Agent

Power of Partner to Bind

Ø  Each partner is both an agent and principal to every other partner in the firm

Ø  Scope of agency is for the purpose of the business of the partnership

Ø  Actual authority may be express e.g. contained in an agreement or implied from partners course of conduct

Ø  Actions of partners who do anything for carrying on in the usual way, business of the kind conducted by the firm will bind the firm and other partners.

Ø  S26 PA 1896 – acts of every partner – doing an act necessary or usually done in carrying on business of the kind carried on by firm… bind partners as if he were their agent appointed for that purpose. UNLESS partner has no authority and person he is dealing with (a) knows the lack of authority or (b) has no belief he is a partner

Ø  Case: Baird’s Case – fiduciary relationship

Liability of Partners to persons outside the firm

Ø  Liability means : debt, obligation or liability of any kind

Ø  Whether it is incurred within the scope of the partnership business and is effected in the usual way?

Ø  If yes: partners are bound – S26

Ø  Case: Mercantile Credit Co Ltd v Garrod

o   2 partners in a garage business fell into dispute when one partner sold a car to a 3^rd party

o   The partner sold without authority and sale was in breach of partnership deed

o   Partner sold a car which did not belong to the partnership

o   3^rd party tried to get purchase price back from innocent partner

o   Question: Was the act of selling the car in the course of carrying on business in the usual way? If yes, innocent party liable.

o   Held: Selling cars was in the ordinary business of the garage and innocent party liable

Ø  Exception is only when the partner does not have authority to act for the firm in the matter concerned and third party did not believe him to be a partner.

Ø  Acting without express authorization  but by being partner confers authority to bind partnership if the following is satisfied:

o   Transaction was entered into by a partner;

o   Transaction was within the scope of the kind of business carried on by the firm;

o   Transaction effected in the usual way; and

o   Outsider knows or believes the person acting is a partner or must not know the lack of authority to act.

Ø  Transaction entered into by a partner

o   Partners will be bound to a transaction made with an outsider when transaction made by one or more partners

o   If not made with partner cannot be liable

Ø  Transaction within the scope of the kind of business carried on by the firm

o   whether transaction is within the scope of business carried on by the firm is a question of fact

o   Case: Polkinghorne v Holland

Ø  Mrs. P was a client of a firm of solicitors

Ø  Received advice from one of the partners about an investment in which the partner was financially interested

Ø  Investment was a failure

Ø  Mrs. P incurred heavy losses

Ø  Brought an action claiming damages

Ø  Question: Whether the remaining innocent partners were liable for her loss?

Ø  Held: They were liable

Ø  Why? Court acknowledged it was difficult to determine what was within the course of a solicitor’s business.  The giving of financial or investment advice was within the usual course of business of that firm of solicitors. When enquired about investment. Should furnish information and assistance or point out what inquiries may be made and if required undertake them or seek for assistance of those who will give such advice.

Ø  Transaction must be effected in the usual way

o   Transaction will not be binding if it was carried out in an unusual way

o   For the act to be usual in the business of the firm, it must be reasonably necessary and not merely convenient for carrying out of that type of business

o   Case: Union Bank of Australia v Fisher

Ø  Held: Handing over of original documents to a solicitor although convenient was not a usual practice.

o   Even if action by partner is within scope of business but carried on in an unusual manner the other partners may not be bound

o   Case: Goldberg v Jenkins

Ø  A partner borrowed money on behalf of the firm at over 60% interest when the comparable rates were 6% - 10%

Ø  Held: such borrowing was ‘beyond the usual’ way of the firm and thus firm not bound

Ø  Reason: the partner would have been able to obtain loans within rates of 6% -10% and looking at 60% - the person lending money on those terms knows that the person borrowing is not conducting an ordinary business transaction.

Ø  Outsider knows or believes the person acting is a partner or must not know the lack of authority to act

o   Even if all the previous criteria is satisfied but the outsider knows of the lack of authority – it will not bind the other partners

o   Case: Construction Engineering (Aust) Pty Ltd v Hexyl Pty Ltd

o   A company called Tamble entered into partnership agreement with Hexyl for the construction and operation of home units on land owned by Tamble

o   Effect of partnership agreement is that Tamble will enter into the contract for the construction of this building in its own name as principal

o   Tambel entered into a building  agreement with Construction Engineering

o   At the time of agreement Construction Engineering did not know of the existence of the partnership nor believe Tambel to be a partner

o   Dispute on entitlement of payment arose

o   Construction Engineering claimed that contract was made on behalf of partnership

o   Held:  Hexyl was not a party to the building contract

o   Reason: Construction Engineering did not know or believe Tambel to be a partner

The extent of the partners’ liability to persons outside the firm

Ø  Extent of liability in contract and tort varies

Ø  Liability in Contract

o   Every partner in a firm is liable jointly with other partners for all debts and obligations of the firm incurred while the partner is a partner – Section 16

o   Joint liability – partners must be sued jointly and not individually

o   If all are not sued, partner who is sued can bring the other partners as co-defendants

o   Case: Polkinghorne v Holland

Ø  Liability in tort and crime

o   If partner commits a tort while acting on behalf of the firm in the ordinary course of its business with third parties, liability will be joint and several – Section 19

o   E.g. negligent advice given to outsider

o   Several liability means that each partner remains individually liable as partner of the firm e.g. misapplication of money or property received or in the custody of the firm –Section 18

o   Case: Mann v Hulme

§  M & R were solicitors in a partnership

§  Mr and Mrs H clients of the firm

§  Dealt with R who prepared their wills and discussed on making investments on their behalf

§  Invested their money on second mortgage and assured that the investment will be safe

§  Mr & Mrs H sued in that the money received by R was misapplied

§  Question: Was innocent partner liable? Yes – relates to cases whereby money or property received by the firm in the course of business which has been misapplied

Holding out: the liability by estoppels of apparent partners of a firm

Ø  any person held out as a partner may be liable – Section 21

Liabilities of Incoming and outgoing partners

Ø  only liable for partnership liabilities incurred while a member of the partnership

Ø  not liable for anything before joining partnership or after ceasing to be a partner – Section 24

RELATIONSHIP BETWEEN PARTNERS

Internal relations between partners examined as follows:

·         fiduciary duty of utmost faith

·         model set out rules

·         variation of partnership’s rules by consent

·         partnership property

·         accounts

·         accountability for secret profits

·         not to compete with the firm

Fiduciary Duty of Utmost Faith

§  relationship of trust

§  act in good faith and honesty

§  avoid conflict of interests

§  to act in best interest of the other partners

§  not make personal profits or take advantage of the relationship

§  fiduciary duty

§  Case: Birtchnell v Equity Trustees

o   Relation is based on some degree of mutual confidence that acts will be for joint advantage

§  Chan v Zacharia

Model set of rules governing the relationship between partner

§  Although written agreement can provide for the working of the partnership the Act gives a model

§  These will apply where the partners do not have a written partnership agreement – Section 34

§  1A) The interests of partners in the partnership property, and their rights and duties in relation to the partnership, shall be determined, subject to any agreement, express or implied, between the partners, by the rules set out in subsections (1) to (9).

 (1) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm.

(2)         The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him — 

 (a)         in the ordinary and proper conduct of the business of the firm; or

(b)         in or about anything necessarily done for the preservation of the business or property of the firm.

(3)         A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which he has agreed to subscribe, is entitled to interest at the rate of 6% per annum from the date of the payment or advance.

(4)         A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him.

(5)         Every partner may take part in the management of the partnership business, and shall attend diligently to the partnership business, and shall not be entitled to any remuneration for acting in the partnership business.

(6)         No person may be introduced as a partner, without the consent of all existing partners.

(7)         Any difference arising as to matters connected with the ordinary course of the partnership business may be decided by a majority of the partners.

(7A)         A decision for the purposes of subsection (7) must be arrived at in good faith for the interest of the firm as a whole, and every partner must have an opportunity of being heard in the matter.

(7B)         Subsection (7A) extends to powers conferred by a majority of the partners by express agreement.

(8)         The partnership books are to be kept at the place of business of the partnership (or the principal place, if there is more than one), and every partner may, when he thinks fit, have access to inspect and copy any of them.

(9)         No change may be made in the conduct or regulation of the partnership affairs without the consent or authority of a majority of the partners, and no change may be made in the nature of the partnership business, or the place where it is carried on, without the consent of all existing partners.

Variation of the rules by consent of the parties

§  Rights may be varied with the consent of all the partners

Partnership Property

§  Comprises of all property and rights and interest in property brought into the partnership

§  Such property must be applied by the partners exclusively for the purposes of the partnership

Render Accounts

§  Render true accounts and full disclosure

Private Profits (Secret Profits)

§  Must account for all secret profits

Duty not to compete

§  Carries on any business of the same nature that competes with the firm, partner must account for and pay over to the firm all profits made.

DISSOLUTION

Can be ended as follows:

§  Expiration of fixed term

§  Partner giving notice

§  Death / insolvency

§  Bankruptcy

§  Illegality

§  Order of court

Section 35 - Expulsion of partner

        (1)  No majority of the partners can expel any partner unless a power to do so has been conferred by written agreement between the partners.

        (2)  Where such power is conferred, it may be exercised only in good faith with a view to the benefit of the firm, and the partner whom it is sought to expel must have an opportunity of being heard.