Topic 3 - Partnership

8/10/2019 Topic 3 - Partnership

http://slidepdf.com/reader/full/topic-3-partnership 1/40

LAW OF ASSOCIATIONS

TOPIC 3

PARTNERSHIP

Definition

A partnership is the relationship which exists between persons carrying on abusiness in common with a view to profit. It involves an agreement between two or more parties to enter into a legally binding relationship and is essentially contractualin nature. According to Tindal CJ in Green v Beesley (1!"# $ %ing & C 1' at 11$)I have always understood the definition of partnership to be a mutual

participation ...* yet the participants do not create a legal entity when they create apartnership. James +J in Smith v Anderson (1'# 1" Ch , $- at $! saw theconcept in the following way/

An ordinary partnership is a partnership composed of definite individualsbound together by contract between themselves to continue combined for some 0oint ob0ect either during pleasure or during a limited time and isessentially composed of the persons originally entering into the contract withone another.

,espite these definitions there are limitations on the number of persons that can

form a single partnership. ee Corporations Act A partnership will have a name(called a firm name# and this is registered under one of the state %usiness &ames Acts.

2artnership law derives both from case law and from statute law. The relevantlegislation is to be found in the 2artnership Acts 13$ (&4#. This area of the lawhas been described as a special type of agency. The main reason for this is thatpartners when acting in the course of the partnership business are acting asagents for one another/ see Lang v James Morrison & Co Ltd (1311# 1! C+5 1 at 11.

Determining when a partnership eists

Ne!essar" e#ements

ection 1 of the 2artnership Act provides that three elements must be satisfied inorder to establish the existence of a partnership. These elements are/

the carrying on of a business6 in common6 with a view to profit.

© 26 May 2011 Page 1



If one of these elements is missing the relationship is not one of partnership.

Carrying on of a business

The tas7 of determining what is meant by the phrase )carrying on business* has

raised the issue of whether there is a need to establish some repetitiveness of action as opposed to isolated action ta7en by parties. A number of early decisionsemphasised the need for continuity or repetition. In Smith v Anderson (1'# 1" Ch, $- a group of investors subscribed for the purchase of shares through a trust invarious submarine cable companies. The shares were sold to these investors bythe trustees of the trust who then issued certificates to the subscribers. A 81''certificate was issued for each 83' certificate that was subscribed. mith alongwith more than $' other people received a certificate. +ater mith applied to windup the trust on the basis that it was an illegal association under s - of the 9nglishCompanies Act 1:$. ection - of this Act provided so far as was relevant/

&o company association or partnership consisting of more than twentypersons shall be formed after the commencement of this Act for the purposeof carrying on any other business that has for its ob0ect the ac;uisition of gainby the company association or partnership or by the individual membersthereof unless it is registered.

The ;uestion was whether the trust was a partnership. The court loo7ed at thenature of the trust and of the relationship of those involved in it. Although eachholder of a certificate could elect trustees of the trust and received a trust reportand the elected trustees had certain management powers including the power tosell the shares and to reinvest or distribute the proceeds it was noted that the

trustees had no power to speculate and that there were no mutual rights andobligations amongst those involved. In these circumstances the court held that thetrust was not a partnership as there was no association for the purpose of )carryingon a business*.

According to %rett +J at $</

The expression )carrying on= implies a repetition of acts and excludes thecase of an association formed for doing one particular act which is never tobe repeated. That series of acts is to be a series of acts which constitute abusiness ...The association then must be formed in order to carry on a

series of acts having the ac;uisition of gain for their ob0ect.

The same 0udge then +ord 9sher >5 stated in Re Griffin !" parte Board of #rade(13'# :' +J?% $!" at $!/

If an isolated transaction which if repeated would be a transaction in abusiness is proved to have been underta7en with the intention that it shouldbe the first of several transactions that is with the intent of carrying on abusiness then it is a first transaction in an existing business.

In Re Griffin @riffin bought a piece of land with the intention of building cottages on

© 26 May 2011 Page $



it and then selling them. owever at the time of entering into this buildingspeculation he had no money. e had also underta7en certain contracts for ma7ingroads which he could not carry on without borrowing money to pay for the labour and materials.

Bne of the ;uestions facing the court was whether @riffin had entered into businessas a builder. The court concluded that there was no evidence that this was the firstof an intended series of transactions.

imilarly in Ballantyne v Raphael (13# 1" +5 "! a syndicate of more than $'persons had been formed to ac;uire a large bloc7 of land. The intention was tosubdivide the land and sell individual allotments at a profit. The court whichapproved of Smith v Anderson held that this was not a company association or partnership carrying on business for gain. It was an isolated act not repetitive.

owever the necessity of establishing an intention to continue in business has been

overloo7ed in some cases. In $ord v Comber (13'# 1: +5 "-1 olroyd Jadmitted of the possibility that an agreement to share the costs of ac;uiring a singlebloc7 of land and the profit on resale could constitute a partnership between theparties. imilarly the decisions in #rimble v Goldberg D13':E AC -3- !l%in & Co ty Ltd v Specialised #elevision 'nstallations ty Ltd D13:1E 5 (&4# 1:" and layfair (evelopment Corporation ty Ltd v Ryan (13:3# 3' 4& (&4# "'- impliedlyac7nowledged the validity of a partnership in a single venture.

In layfair (evelopment Corporation a deed entitled )Covenants of 2artnership* wasentered into between the following parties/

the plaintiff company described as )the manager*6

a trustee company6 and two directors of the plaintiff company and the plaintiff company called )the

partners*.

This deed provided for/

the purchase by the partners of a parcel of land on which were constructednine flats6

the subse;uent rental of the flats6 the transfer of the land and flats to a trustee.

The deed also/

restricted the partners applying for a separate certificate of title to theproperty6

expressed that the manager was not to be a partner of the partnership after itsold the land to the trustee. After the sale it was to be regarded as anindependent contractor6

gave the partners power to remove the manager.

The plaintiff company purchased the land which it transferred to the trustee. The

© 26 May 2011 Page !



plaintiff company then carried on the business of renting the flats to tenants as wellas managing the buildings. It was the intention of the partners to offer partnershipunits to members of the public for purchase. Advertisements were inserted innewspapers to achieve this. 9ach of the units was )one twentieth of the capital of the partnership* and the units were to be transferable without bringing about

dissolution of the partnership. The advertisements attracted the attention of the5egister of Companies who argued among other things that a )prescribed interest*defined in the Companies Act 13:1 was being offered to the public. In such casesthe 5egistrar argued a registered prospectus was needed. The plaintiff argued thatthey were exempted from having to satisfy the prospectus re;uirements because theCompanies Act specifically excluded )any interest in a partnership agreement ...*from the definition of an )interest*.

The Court held that there was a partnership notwithstanding that the partnershipunits were transferable. According to treet CJ who distinguished the case fromSmith v Anderson (1'# 1" Ch , $- stated at :::< that/

The )partners= whether they be the original three or whether they be $'members of the public who respond to the plaintiff=s invitation are boundtogether by the covenants. The ob0ect of that combination is the earning of profits from the letting of units in the bloc7 of flats held by the trustee onbehalf of the partners. The manager albeit an independent contractor is inevery sense the manager of the business. The business is that of thepartners...The partners do not have independent interests in the partnershipproperty or in the partnership business. They may well be physically remotefrom each other. %ut it seems to me inescapable that they submit themselvesto mutual obligations by the terms of the deed of covenant...

The igh Court was faced with a similar issue in Canny Gabriel Castle Advertising ty Ltd & Anor v )olume Sales *$inance+ ty Ltd (13-# 1!1 C+5 !$1. In this casea company named Fourth >edia >anagement 2ty +td (GF>H# entered into contractswith singers 9lton John and Cilla %lac7 for performances in Australia. olume ales(Finance# (GH# agreed to finance the contracts.

+ater an agreement was made between F> and whereby it was agreed/

that F> assign to a one half interest in the contracts with the singers6 that the arrangement between F> and was to performed as a )0oint

venture*6 that was to finance the contracts by way of a loan and that this loan was

described as a )loan to the 0oint venture* which was repayable prior to thedistribution of profits6

that the accounts show that the money advanced was a loan6 that all profits were to be shared e;ually between the parties6 that all policy matters were )to be agreed upon by the parties hereto*6 that a ban7 account of be opened and be operated )in such manner as

sees fit*6 that the money loaned would be repaid if the contracts with the singers failed.

© 26 May 2011 Page -



Bne day after this agreement was made F> granted an e;uitable charge over itsunderta7ing and property including its interest in the box office proceeds of thecontracts to Canny @abriel Castle Jac7son Advertising 2ty +td the appellant. The;uestion was whether * interest would prevail over the later e;uitable charge. If the arrangement between F> and was a partnership then would have a

beneficial interest which would prevail over the charge. The igh Court held thatthere was a partnership.

Their onours noted at !$/

In short it seems to us that the contract exhibited all the indicia of apartnership except that it did not describe the parties as partners and did notprovide expressly for the sharing of losses although we venture to thin7 thatit did so impliedly.

Factors which led the court to the conclusion that a partnership existed were stated

by >cTiernan >enies and >ason JJ at !$: as follows/

(1# the parties became 0oint venturers in a commercial enterprise with aview to profit6

($# profits were to be shared6(!# the policy of the 0oint venture was a matter for 0oint agreement and it

was provided that differences relating to the affairs of the 0oint ventureshould be settled by arbitration6

(-# an assignment of a half interest in the contracts for the appearances of Cilla %lac7 and 9lton John was attempted although we would havethought unsuccessfully6

("# the parties were concerned with the financial stability of one another ina way which is common with partners.

The finding by the igh Court that the arrangement between the parties was apartnership implicitly ac7nowledged that a single commercial venture could be a)business* in order to satisfy the re;uirements set out in the 2artnership Act.

The decision in Canny Gabriel Castle Jac%son Advertising ty Ltd was applied in#elevision Broadcasters Ltd v Ashton,s -ominees ty Ltd (133# $$ A5 ""$.owever in that case it was held that a 0oint venture for the promotion of a circustour did not ma7e the participants partners. The court noted that although the

parties became 0oint venturers with a view to profit and provided for the sharing of these profits there was no agreement for the sharing of losses and importantly therespective obligations contained in the parties* agreement were regarded asseparate obligations. Further evidence for the lac7 of a partnership was found in thefact that employees were regarded as employees of the defendant and not asemployees of the parties 0ointly. ee also !"parte Coral 'nvestments ty Ltd D133E?d 5 $3$.

Another example of where a single activity to be carried out by parties was held tobe a partnership is .nited (ominions Corporation Ltd v Brian ty Ltd and others(13"# 1" C+5 1. In that case the second respondent ecurity 2ro0ects +td

© 26 May 2011 Page "



()2+*# was engaged in promoting two distinct but related )0oint ventures* involvingthe development of land which it was buying in %risbane. Bne proposed 0ointventure involved the development of part of the land as a hotel. The other involvedthe development of the residue of the land as a shopping centre. %y eptember 13! the participants in each proposed venture had been settled. %rian 2ty +td

was to have a $' share in the hotel venture and a " share in the shoppingcentre venture. Knited ,ominions Corporation +td ()K,C*# was also to be aparticipant in both ventures however 2+ was to be the main participant in eachproposed venture.

,raft 0oint venture agreements had been circulated among the proposedparticipants but not finalised. It was not until $! July 13- that a formal agreementin respect of the shopping centre venture was executed. Approximately 3' per centof the capital for each pro0ect was to be provided by borrowings from K,C with theremainder being contributed by each of the proposed participants according to their respective shares. The prospective parties to the hotel venture including %rian 2ty

+td had by eptember 13! all made payments to 2+ as pro0ect manager. Theprospective participants in the shopping centre pro0ect had also made financialcontributions except for %rian 2ty +td which made a contribution in &ovember 13!.

In Bctober 13! 2+ mortgaged the land to K,C as security for borrowings for thetwo ventures. +ater two further mortgages were also executed by 2+ in K,C=sfavour.

In August 13- the hotel pro0ect was abandoned and thereafter the whole of theland was devoted to the shopping centre pro0ect. The shares of the various parties

were rationalised. 9ventually the shopping centre was built and sold at a largeprofit. owever %rian 2ty +td received neither repayment of the money itcontributed nor payment of a share of the profit. K,C claimed to be entitled toretain all profits because of a )collateralisation clause* in a mortgage given to it by2+ before the 0oint venture agreement was formalised. The effect of this clausewas to charge the land with all indebtedness incurred by 2+ in the venture.

4hen 2+ went into li;uidation the ;uestion was whether K,C stood in a fiduciaryrelationship to %rian 2ty +td on the date on which 2+ gave to K,C the mortgagecontaining the collateralisation clause.

The igh Court held that K,C stood in a fiduciary relationship to %rian 2ty +td andhad breached this duty. Importantly their onours stated that fiduciary obligationswere not confined to persons who actually are partners )but extend to personsnegotiating for a partnership but between whom no partnership as yet exists*. Thismeant that K,C could not rely on the collateralisation clause. According to >ason%rennan and ,eane JJ at $/

the three mortgages upon which K,C see7s to rely were to the extent thatthey would authorise K,C to retain %rian=s share of the surplus of the L0ointventure= given by 2+ and accepted by K,C in breach of the fiduciary dutywhich each owed to %rian.

© 26 May 2011 Page :



The agreement of the $! July 13- although describing the parties as engaging ina )0oint venture* was in essence a partnership agreement dealing with a )partnershipfor one transaction*. Bn this point ,awson J noted at 1"/

The re;uirement that a business should be carried on provides no clear means of distinguishing a 0oint venture from a partnership. There may be apartnership for a single adventure or underta7ing for the Acts provide thatsub0ect to any agreement between the partners a partnership if entered intofor a single adventure or underta7ing is dissolved by the termination of thatadventure or underta7ing. ee for example artnership Act 13$ (&4#s!$(b#.

A single adventure under our law may or may not depending upon its scopeamount to the carrying on of a business/ Smith v Anderson (1'# 1" Ch ,$- at $<$6 Re Griffin !" parte Board of #rade (13'# :' +J?% $!" at

$!6 Ballantyne v Raphael (13# 1" +5 "!. 4hilst the phrase )carryingon a business* contains an element of continuity or repetition in contrast withan isolated transaction which is not to be repeated the decision of this courtin Canny Gabriel Castle Jac%son Advertising ty Ltd v )olume Sales*$inance+ ty Ltd (13-# 1!1 C+5 !$1 suggests that the emphasis which willbe placed upon continuity may not be heavy.

This finding supporting the existence of single venture partnerships can causesome confusion in regards to non<partnership 0oint ventures and syndicates. omereference to this dilemma was made in .nited (ominions Corporation Ltd v Brianty Ltd/ Bn this point the igh Court stated at 1'/

The term )0oint venture* is not a technical one with a settled common lawmeaning. As a matter of ordinary language it connotes an association of persons for the purposes of a particular trading commercial mining or other financial underta7ing or endeavour with a view to mutual profit with eachparticipant usually (but not necessarily# contributing money property or s7ill.uch a 0oint venture ... will often be a partnership. The term is howeverapposite to refer to a 0oint underta7ing or activity carried out through amedium other than a partnership such as a company a trust an agency or 0oint ownership. The borderline between what can properly be described as a)0oint venture* and what should more properly be seen as no more than a

simple contractual relationship may on occasions be blurred. Thus whereone party contributes only money or other property it may sometimes bedifficult to determine whether a partnership is a 0oint venture in which bothparties are entitled to a share of profits or a simple contract of loan or leaseunder which the interest or rent payable to the party providing the money or property is determined by reference to the profits made by the other.

Carrying on of a business in common

To constitute a partnership the business must be carried by or on behalf of all the

© 26 May 2011 Page



partners (Re Ruddoc% (13# " +5 (I2 M ># "1#6 however all the partners need notta7e an active role. In Lang v James Morrison & Co Ltd (131$# 1! C+5 1 an actionwas brought by an 9nglish company James >orrison M Co +td against threedefendants J >cFarland T +ang and 4 Neates. The plaintiffs carried on thebusiness of receiving and disposing of froen meat from abroad. They alleged that

the three defendants carried on business in >elbourne as partners under the names)T >cFarland M Co* and on occasions )>cFarland +ang and Neates*. %efore theaction commenced J >cFarland and 4 Neates became insolvent and the actionproceeded against their assignees and +ang. At the trial 0udgment was given for the plaintiff and +ang appealed to the igh Court.

The igh Court held that there was no partnership. According to @riffith CJ at :/

... the real substance of the transaction was that the plaintiffs and Thomas>cFarland agreed to enter into a 0oint venture. They were not partners asagainst third parties but each party had certain rights against each other.

9vidence for this finding was found in the fact that separate ban7 accounts were7ept as it was apparent that neither +ang nor Neates operated on the account of T>cFarland M Co. Further +ang and Neates too7 no part in the business of the newfirm other than to sign two letters. @riffith CJ saw this as decisive. According to hisonour/

&ow in order to establish that there was a partnership it is necessary to provethat J4 >cFarland carried on the business of Thomas >cFarland M Co onbehalf of himself +ang and Neates in this sense that he was their agent inwhat he did under the contract with the plaintiffs.

In the circumstances the court found that there was no such agency.

This position can be compared with Re Ruddoc% (13# " +5 (I2 M ># "1.5uddoc7 who carried on business as a sole trader became indebted to >rs %earthe grandmother of one of his employees. The employee was 13 years old.5uddoc7 entered into an agreement under seal with >rs %ear whereby she was topurchase a one ;uarter share of the business < the ultimate benefit would go to thegrandson.

Knder the agreement/

>rs %ear had full control over the share including the power of disposition(until the grandson attained $1 years died before attaining such an age or if he displeased her in any way#.

The purchase price of the share was to be treated as having been paid by thedischarge of the debt owing to >rs %ear.

>rs %ear would receive a one ;uarter share of the net profits. owever itwas expressly agreed that she should not be liable as a partner for anylosses and that 5uddoc7 would indemnify her.

>rs %ear=s name was not to be used and she was not to be held out as apartner.

© 26 May 2011 Page



>rs %ear had access to the boo7s and 5uddoc7 was to behave and managethe business )as one partner should do to another*.

At a subse;uent date 5uddoc7 consulted with >rs %ear as to the disposal of another ;uarter< share in the business and at all times during the negotiations for

the sale of this share acted on the basis that her consent was essential. >rs %ear replied that she had no ob0ection to the sale. +ater 5uddoc7 became ban7rupt and>rs %ear put in proofs of debts for money paid to 5uddoc7. The other creditorssought to have these proofs expunged.

The court agreed with the other creditors. Although >rs %ear too7 no part in theday<to<day management of the business she was a partner and could not proveagainst the estate of the insolvent debtor in competition with his other creditors.

According to >olesworth J at "/

The general principle of the authorities is that a right to participate in profitsconstitutes a partner/ and that notwithstanding stipulation of being dormantor not liable to losses. %ut there are cases in which it has been held that therelative rights and liabilities of the persons dealing so far varied from thoseusual between partners that the general rule should not apply. >any of those cases regard loans which continue to be such. This matter had nothingli7e a loan6 it was a purchase for a price never to be repaid. As to what wassaid of the grandson though it may have been the motive for the dealing norights to him formed part of the contract. e got nothing which was notsub0ect to >rs %earOs discretion. he retained all the rights of a dormantpartner.

...The cases show that the relation of partners is the result of their respectivesubstantial rights not of the words employed and that the result of thepartnership liability from participation of profits cannot be evaded by the formof conveyance. In subse;uent matters >rs %ear and >r 5uddoc7 treatedeach other as partners as to his contemplating to sell another fourth and addanother partner which she was willing to do but in which they correspondedon the mutual understanding that her consent was necessary...

In 0eith Spicer Ltd v Mansell D13'E 1 All 95 -:$ two individuals P and Q hoped toestablish a restaurant. They intended to form a company for this purpose. 2rior to

the company=s formation and while they were loo7ing for suitable premises Ppurchased furniture from a third party and had them delivered to Q*s premises. Thefurniture was not paid for and the third party thereupon sued Q on the basis that hewas in partnership with P. The court said there was no partnership as P and Q werenot carrying on business in common but were preparing to do so as a company. Actscarried out in contemplation of a business being underta7en in the future did notpoint to a partnership. Further the holding of property 0ointly did not change things.

1ith a vie2 to profit

© 26 May 2011 Page 3



The third limb of the definition confines partnerships to associations formed for ma7ing profit. This can be contrasted with clubs and societies formed for thepromotion of religious social educational and recreational activities and which arenot run in order to create profits for the individual members. +ord +inley in 1ise v erpetual #rustee Co Ltd D13'!E AC 1!3 stated at that/

Clubs are associations of a peculiar nature. They are not partnerships6 theyare not associations for gain6 and the feature which distinguishes them fromother societies is that no member as such becomes liable to pay to the fundsof the society or to anyone else any money beyond the subscription re;uiredby the rules of the club to be paid so long as he remains a member. It is uponthis fundamental condition not usually expressed but understood byeveryone that clubs are formed6 and this distinguishing feature has beenoften 0udicially recognised.

The )gain* mentioned above is pecuniary gain and refers to the gain made between

accounting periods. Association members unli7e partners do not expect to gainmonetarily by their membership. They may however gain in other ways by for example an improvement in their 7nowledge or s7ills enhanced social status or personal satisfaction from participation in the associations*s activities. Associationmembers cannot obtain a distribution of pecuniary gains or profits made by theassociation although associations can ma7e profits in the furtherance of their ob0ects.

)2rofits= are not defined in the 2artnership Act. owever courts have come up withdefinitions/ see Fletcher >oulton +J in Re Spanish rospecting Co Ltd D1311E 1 Ch3$ at 3<33 ;uoted at D1.1E6 also see Bond Corporation 3oldings Ltd & Anor v

Grace Bros 3oldings Ltd & 4rs (13!# 1 AC+C 1''3. Ksually courts adopt a simplebalance sheet approach in relation to ascertaining whether there is a partnership)profit*. This test involves comparing any change in value of the assets of thecompany at two different points in time. Any gain in value will generally be regardedas a profit.

Stat$tor" R$#es

ection 1 of the 2artnership Act focuses upon features of the relationship betweenthe parties in order to ascertain whether there is a partnership. If these features

indicate that parties are carrying on business in common with a view to profit then apartnership relationship will be found to exist. owever these features may notalways be easy to identify given what the parties have agreed among themselves. As a partnership relationship is a contractual one the actual agreement between theparties must be examined in order to infer whether a partnership relationship hasbeen created. The parties may for example have made express provision to shareprofits but not losses6 they may have specifically stated that their relationship is notbe a partnership relationship6 one of the parties may be an )employee* who is paid ashare of the profits6 or one of the parties may be a finance provider who is beingrepaid out of the profits of the business. In these and in all cases it will be a;uestion of construction whether the parties intended to create a partnership

© 26 May 2011 Page 1'



relationship. The 2artnership Act is of further assistance in this construction.

ection $ of the 2artnership Act sets out some rules which are useful indicators indetermining whether a particular relationship is a partnership relationship. owever it should be noted that these rules are not solely determinative of the issue. A court

will have regard to all the circumstances in order to arrive at the true substance of the agreement between the parties. 5ecourse will be had to both express andimplied intention of the parties in order to determine whether a partnershiprelationship exists. According to 5oper J in 1iltshire v 0uen5li (13-"# :! 4& -/

...it having been ascertained that the parties intended to do all the thingswhich would constitute them partners in law no effect can be given to their declared intention not to become partners. Bf course if the facts aree;uivocal the expressed intention not to become partners is of the utmostimportance as showing the proper inference to be drawn from the facts but if the facts are une;uivocal the same expressed intention is meaningless and

useless.

This intention will be of paramount significance notwithstanding the parties* stateddescription of their relationship. In Ste%el v !llice D13!E 1 4+5 131 the defendantemployed the plaintiff in his accounting firm in 13:. In Bctober 13: an agreementwas entered into between the two men with the plaintiff becoming a )salaried partner*earning a salary. The period of employment was to expire in April 13:3. The capitalof the partnership was expressed in the agreement as belonging to the defendantand the defendant would bear all the losses except that the plaintiff would beentitled to his own furniture and to clients introduced by him. Further theagreement/

provided for the 7eeping of boo7s of account6 called for full<time service6 restrained either )partner* from being engaged in other business6 dealt with the giving of securities on account of the firm6 provided for notice of dissolution for breach6 gave the defendant rights to the profit apart from the plaintiff*s salary and

rights to the capital6 provided that in the event of the defendant*s death the practice was to

belong to the plaintiff together with (the defendant*s estate being paid# thecapital and sums for profits and wor7 in progress6 and

contained a provision for resolution of disputes by an independent expert.

Importantly the agreement also contemplated that a further agreement would beentered into before April 13:3 under which the plaintiff would become a full partner.owever that later agreement was never entered into and the parties continuedafter that date as before until August 13' when relations bro7e down resulting inthe plaintiff leaving the business and ta7ing his clients with him. The plaintiff thenclaimed a declaration that the )partnership* was dissolved and an order that it bewound up.

The ;uestion was whether the arrangement between the parties constituted an

© 26 May 2011 Page 11



agreement for employment or an agreement for partnership. The court found thatthere was a partnership for a fixed term and that this continued without any expressnew agreement.

According to >egarry J at 13<3/

The term )salaried partner= is...to some extent...a contradiction in terms.owever it is a convenient expression which is widely used to denote aperson who is held out to the world as being a partner with his nameappearing as partner on the notepaper of the firm and so on. At the sametime he receives a salary as remuneration rather than a share of the profitsthough he may in addition to his salary receive some bonus or other sum of money dependent upon the profits. 6uoad the outside world it often willmatter little whether a man is a full partner or a salaried partner6 for a salariedpartner is held out as being a partner and the partners will be liable for hisacts accordingly. %ut within the partnership it may be important to 7now

whether a salaried partner is truly to be classified as a mere employee or asa partner.

...4hat must be done...is to loo7 at the substance of the relationship betweenthe parties.

In his onour=s opinion the relationship between the parties satisfied the definitionof a partnership contained in the 2artnership Act. The fact that there was no sharingof profits did not mean that this negatived other evidence of a partnership. Furtherthe conduct of the parties indicated a partnership which was determined in August13'.

As mentioned above the 2artnership Act gives some assistance in determiningwhether a partnership exists. This assistance is contained in the following rules of construction which are set out in section $ of the legislation.

Rule 78 co9o2nership

ection $(1# of the 2artnership Act provides as follows/

Joint tenancy tenancy in common 0oint property or part ownership does not

of itself create a partnership as to anything so held or owned whether thetenants or owners do or do not share any profits made by the use thereof.

This subsection ma7es it clear that holding property 0ointly as co<owners will not of itself create a partnership. In (avis v (avis D13-E 1 Ch !3! the court inferred apartnership relationship in circumstances where two brothers held real estate astenants in common. In that case the brothers* father had left his business and threehouses to his sons as 0oint owners. Bne of the houses had been let to tenants andthe other two houses were used in the business which was carried on by the twobrothers. The brothers borrowed money on the security of the houses and drewidentical wee7ly expenses as from the business. In finding that the brothers were in

© 26 May 2011 Page 1$



partnership in relation to the carrying on of the business the court held that thehouses were partnership property.

Rule :8 Sharing of gross returns

ection $($# of the 2artnership Act provides/

The sharing of gross returns does not of itself create a partnership whether the persons sharing such returns have or have not a 0oint or common right or interest in any property from which or from the use of which the returns arederived.

Therefore by itself the sharing of gross profit will not be enough to create apartnership. In Cribb v 0orn (1311# 1$ C+5 $'" Norn was employed as a ruralwor7er by a landowner. The landowner entered into an agreement with Cribb under

which the landowner had the exclusive use and occupation of a certain area of Cribb=s land. As part of the agreement Cribb would provide machinery and stoc7and the landowner would pay Cribb half of the proceeds of sale of the produce of the land and stoc7 whenever this occurred.

Norn was in0ured while wor7ing and claimed wor7er=s compensation from Cribb onthe basis that Cribb and the landowner were partners.

The igh Court held that there was no partnership6 it was a mere tenancy. As thelandowner had exclusive right to occupy the land and Cribb had no right to direct or control the landowner*s wor7ing of the land there could be no partnership but

merely a tenancy. Further the sharing of gross returns was not enough to establisha partnership but merely constituted rent.

According to %arton J at $1:/

To be partners they must be shown to have agreed to carry on somebusiness < in this case the business of farming < in common with a view of ma7ing profits and afterwards of dividing or of applying them to some agreedob0ect. There is nothing to show that the appellant intended to engage infarming at all or to be concerned in the transaction beyond his right tocompensation.

Rule ;8 rofit and loss sharing

ection $(!# of the 2artnership Act provides/

The receipt by a person of a share of the profits of a business is prima facieevidence that he is a partner in the business but the receipt of such a shareor of a payment contingent on or varying with the profits of a business doesnot of itself ma7e him a partner in the business...6

© 26 May 2011 Page 1!





It is said that a person who shares in net profits is a partner6 that may be soin some cases but not in all6 and it may be material to consider in what sensethe words )sharing in the profits* are used. In the present case I greatlydoubt whether the creditor who merely obtains payment of a debt incurred inthe business by being paid the exact amount of his debt and no more out of

the profits of the business can be said to share the profits. If in the presentcase the property of the miths had been assigned to the trustees to carryon the business and divide the net profits not amongst those creditors whosigned the deed but amongst all the creditors until their debts were paidwould a creditor by receiving from time to time a rateable proportion out of the net profits become a partnerR I should thin7 not.

This then is the general rule. ection $(!#(a# S (e# of the 2artnership Act alsoprovides five cases where this presumption does not arise/<

1. 5eceipt by a person of a debt or other li;uidated demand by instalments or

otherwise out of the accruing profits of a business does not of itself ma7e hima partner in the business or liable as such.

This rule embodies the decision in Co" v 3ic%man D1:'E + Cas $:6 1195 -!1. owever if there are circumstances showing that the relationship isin fact a partnership the lender may be regarded as a partner regardless of the stated intentions of the parties/ see Re Ruddoc% (13# " +5 "1 (I2 M># "1 at D!."E/ compare also Moore v Slater (1:!# $ 4 M 4 (+# 1:1 a caseconcerning an absolute assignment of a debtor=s business coupled with theability of the assignee to dispose of the business for their own benefit.

$. A contract for the remuneration of a servant or agent of a person engaged ina business by a share of the profits of the business does not of itself ma7ethe servant or agent a partner in the business or liable as such.

In 1al%er v 3irsch (1-# $ Ch , -:' 4al7er had been a cler7 to thedefendant*s firm when he and the firm*s proprietors entered into anagreement for 4al7er to be paid a fixed salary in addition to the right toparticipate in one eighth of profits and losses. 4al7er further agreed todeposit 81"'' in the business while the agreement continued receiving "per annum interest. The firm*s name was not altered nor was 4al7er mentioned in firm circulars or bills. Furthermore 4al7er was not introduced

to customers as a partner did not sign bills of exchange and signed lettersand receipts )4al7er for Dthe firmE*.

In 1- the defendant gave him notice and excluded him from the office.4al7er sought to wind up the business sought an in0unction restrainingdealings with the businesses assets and sought the appointment of areceiver and manager. The trial 0udge refused the in0unction and appointmentof a receiver and ordered the defendant to pay the 81"'' into court.

The trial 0udge +indley +J focussed upon 4al7er*s lac7 of ability to controlthe defendant in the management of the business. 4al7er was regarded as a

© 26 May 2011 Page 1"



servant )not in the position of a partner having an e;ual voice or control in themanagement of the concern*. Therefore the in0unction was refused.

imilarly in Bec%ingham and others v ort Jac%son and Manly SteamshipCompany and Another (13"# " 5 (&4# -'! a syndicate of nine persons

had been formed to purchase and renovate a submarine and then to exhibitthe submarine to members of the public for a fee. In order to achieve thisob0ective the syndicate members entered into an arrangement in 13-: withthe 2ort Jac7son and >anly teamship Company (Gthe steamship companyH#whereby the submarine could be moored at a wharf.

The syndicate members purchased the submarine and it was mooredad0acent to the steamship company* wharf at >anly Cove. 4hile thesubmarine was being moored a storm bro7e out and the submarine thesteamship company argued became a danger to the wharf and was indanger of being stranded. The steamship company thereupon engaged the

4aratah Tug and alvage Co 2ty +td (Gthe tug companyH# to ta7e thesubmarine into more open waters < to protect it and the wharf. 4hile it wasbeing towed it was wrec7ed.

%ec7ingham and the other plaintiffs were the surviving members andpersonal representatives of the nine syndicate members. They brought legalproceedings to recover damages for losses on the basis of trespass andnegligence in connection with the mooring and towing of the submarine.

An issue which had to be determined was who was to be responsible for theloss sustained as a result of the destruction of the submarineR If the

members of the syndicate and the steamship company were partners thenthe steamship company would not be liable for the loss. The members of thesyndicate argued that the arrangement entered into was one of lessee andlessor < whereby the syndicate leased the wharf from the steamshipcompany6 alternatively the arrangement was one of principal and agent withthe steamship company being appointed as agent of the syndicate for thepurpose of managing the submarine. In contrast to these two arguments thesteamship company argued that the relationship was a partnership.

In determining this issue the court examined the agreement between theparties. It was noted by the court that the agreement provided/

that the submarine was to be 7ept near the steamship company*s wharf in >anly Cove for a fee of 8-'' per annum6

for the appointment of the steamship Company as managers to thesubmarine exhibit for three to five years on a commission of -' of the admission fees less some costs6

for profit to be shared on a :'<-' basis in favour of the syndicate6 that wor7 to be done on the submarine was to be arranged by the

steamship company but paid for by the syndicate6 that )ownership and possession* of the submarine was to remain with

the syndicate6

© 26 May 2011 Page 1:



that the steamship company was to underta7e general managementand be the sole 0udge of who is to be allowed access to the submarine6

that the steamship company was acting )as agent for the syndicate*6 for the steamship company to be exempted from liability to third

parties6

for either party to terminate by notice after three years < in such casesthe cost of removal of the submarine was to be borne by the syndicate6

the steamship company was to be the sole 0udge of who is to beallowed access to the submarine6

In these circumstances the upreme Court of &ew outh 4ales held thatthere was no partnership between the steamship company and the syndicate.The steamship company was an independent contractor and thereforepotentially liable for negligence. The court referred to +ord alsbury*sremar7s in Adam v -e2bigging (1# 1! App Cas !' where his +ordshipstated/

If a partnership in fact exists a community of interest in the adventurebeing carried on in fact no concealment of name no verbal e;uivalentfor the ordinary phrases of profit and loss no indirect expedient for enforcing control over the adventure will prevent the substance andreality of the transaction being ad0udged a partnership ... and no)phrasing of it* by dexterious draftsmen ... will avert the legalconse;uences of the contract.

!. A person being the widow or child of a deceased partner and receiving byway of annuity a portion of the profits made in the business in which the

deceased person was a partner is not by reason only of such receipt apartner in the business or liable as such.

In Commissioners of 'nland Revenue v Lebus D13-:E 1 All 95 -: theCommissioners attempted to recover income tax on the amounts which weredue under a will to a widow of a partner. The court found that a beneficiaryunder a will would only have to pay tax on the amounts which were paid toher during the years of assessment. The widow did not have to pay tax on ashare of the profits earned by the business. This decision can be comparedwith $ederal Commissioner of #a"ation v 1hiting (13-!# : C+5 133 where itwas held that a beneficiary of a deceased partner*s estate is not taxable on

income earned from the partnership unless the beneficiary has a presentright to have the income paid to him by the trustees.

-. The advance of money by way of loan to a person engaged in or about toengage in any business or a contract with that person that the lender shallreceive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the business does not of itself ma7e thelender a partner with the person or persons carrying on the business or liableas such/ 2rovided that the contract is in writing and signed by or on behalf of all the parties thereto.

© 26 May 2011 Page 1



This provision protects a creditor who has advanced money in return for ashare of the profits. The creditor if the section is satisfied will not beregarded as a partner. In Re Megevand !" parte (elhasse (1# Ch ,"11 ,elhasse agreed to advance money to two others. Conditions of theadvance referred to the e;uivalent of this subsection of the 2artnership Act

and stressed that the advance was a loan only and did not ma7e the lender apartner. owever provision was made for ,elhasse to share in the profitshave a right to inspect the accounts the option of dissolving the partnershipin specified circumstances. Further the advance was not to be repayableuntil after dissolution and it represented all the business capital.

The Court of Appeal held that this arrangement constituted a partnership. According to James +J at "$:/

If ever there was a case of partnership this is it. There is everyelement of partnership in it. There is the right to control the property

the right to receive profits and the liability to share in losses.

%ut it is said that there are other provisions in the contract whichprevent its having this operation and which show clearly that theparties meant the relation of lender and borrower and not the relationof partners to subsist between them. And for this purpose reliance isplaced on the recital of...the agreement for a loan...and thedeclaration...that the )advance does not and shall not be considered torender ,elhasse a partner in the business*. Can those words reallycontrol the rest of the agreementR ,o they really show that theintention was not in truth that which it appears to be by all the other

stipulationsR To my mind it is clear that they do not. 4hen you cometo loo7 at all the other stipulations they are utterly inconsistent withthe notion of a loan by the one to the two so as to ma7e the twopersonally liable in respect of it in any event or under anycircumstances whatever. The loan is said to be made to the two butwhen you read the whole of the agreement together it is impossiblenot to see that it was not a loan to the two upon their personalresponsibility by the person who is said to be the lender but that it wasa loan to the business which was carried on by the two for the benefitof themselves and him and was to be repaid out of the business andout of the business only except in the case of loss when the loss

would have to be borne by the three in the proportions mentioned inthe agreement. The use of the word )lend* and the reference to the Act are in my opinion mere sham < a mere contrivance to evade thelaw of partnership.

In Badeley v Consolidated Ban% (1# ! Ch , $! where a lender (plaintiff# advanced money to a borrower and too7 security over certain plantowned by the borrower. Further the lender was to receive interest and ashare of the net profits. The borrower agreed to apply the loan moneys to thecarrying out of wor7 associated with his business and the lender had a rightto enter the property if the borrower became ban7rupt.

© 26 May 2011 Page 1



The Court of Appeal stressed the need to ascertain the )real agreement*between the parties. haring of profit is not enough the court said to infer apartnership. The formal document signed by the parties expressed the realtruth namely that this was a contract of loan upon security. There was no

participation in loss on the part of the lender. This made it different from(elhasse=s case.

". A person receiving by way of annuity or otherwise a portion of the profits of abusiness in consideration of the sale by him of the goodwill of the business isnot by reason only of such receipt a partner in the business or liable as such.

4here a person sells a business and then continues to receive an annuitybased upon a percentage of the profits he or she will not for that reasonalone be regarded as a partner to the purchaser. The courts will loo7 at theagreement.

In 3a2%sley v 4utram (13$# ! Ch !"3 four people carried on business inpartnership. They entered into an agreement to sell this business toaw7sley. The agreement was signed by one partner on his own behalf andalso as attorney for another and it provided that aw7sley was to underta7eto discharge the existing debts of the business and that if the debts did notexceed a certain amount the vendors were to be entitled to a share of theprofits. The power of attorney under which one partner had signed theagreement on behalf of another did not empower him to enter into apartnership agreement.

aw7sley brought an action for specific performance of the agreement and itwas argued that the arrangements constituted a partnership agreementbetween the four original partners and aw7sley. The court disagreed.

Accordingly to +ord +inley at !1/

It has been contended that this is an agreement for a partnership6 butit is nothing of the sort. It is evidently nothing more or less than anagreement for the sale of the property and the business as a goingconcern for a sum of money a portion of which is undetermined andhas to be ascertained and which portion until paid is to carry a share

of the profits.

Re#ationship of partners to o$tsi%ers

2artnership is a branch of agency law and is characterised by a mutuality of rightsand obligations. 9ach partner is agent and principal of the others and owesfiduciary obligations to the others. 2artners can bind each other and be bound bythe actions of their partners. The ;uestion is when will the acts of a partner bindtheir other partnersR To answer this ;uestion regard must be had to the 2artnership Act and to the general law of agency.

© 26 May 2011 Page 13



The Partnership A!t

ection " of the 2artnership Act states that/

9very partner is an agent of the firm and his other partners for the purpose of the business of the partnership6 and the acts of every partner who does anyact for carrying on in the usual way business of the 7ind carried on by the firmof which he is a member binds the firm and his partners unless the partner so acting has in fact no authority to act for the firm in the particular matterand the person with whom he is dealing either 7nows that he has no authorityor does not 7now or believe him to be a partner.

As mentioned earlier partnership is a branch of agency law. owever onesignificant difference with partnership law is that partners are both principal and

agent and therefore there are two<way fiduciary duties. %ecause partners owe eachother fiduciary duties when one partner acts as the firm*s agent he or she will oweduties to his or her partners and the other partners will owe similar duties bac7 tothat partner/ see hillips93iggins v 3arper D13"-E 1 ?% -11.

The basis of the fiduciary relationship of partners was explained by James +J in Re Agriculturist 'nsurance Co *Baird,s case+ (1'# +5 " Ch App $" at !! in followingway/

Brdinary partnerships are essentially in 7ind and not merely in themagnitude of the partnership or in the number of the partners different from

0oint stoc7 companies. Brdinary partnerships are by the law assumed andpresumed to be based on the mutual trust and confidence of each partner inthe s7ill 7nowledge and integrity of every other partner. As between thepartners and the outside world (whatever may be their private arrangementsbetween themselves# each partner is the unlimited agent of every other inevery matter connected with the partnership business and not being in itsnature beyond the scope of the partnership. A partner who may not have afarthing of capital left may ta7e money or assets of the partnership to thevalue of millions may bind the partnership by contracts of any amount maygive the partnership acceptances for any amount and may even involve hisinnocent partners in unlimited amounts for frauds which he has craftily

concealed from them.

2artners may be bound to a party who is not a partner (an outsider# in the followingsituations/

when the partners have authorised a person whether or not a partner toenter into a transaction on their behalf with the outsider. In such cases thenormal rules of agency apply so that if the agent has acted in entering into atransaction within his or her actual or apparent authority the partners will bebound to the transaction6

© 26 May 2011 Page $'



when the partners have authorised one of their partners to act on behalf of the partnership with an outsider. In these circumstances all the partners willbe bound by the authorised act of their fellow partneragent. It does notmatter whether the transaction was within the scope of the partnershipbusiness or whether the outsider was aware that the agent was a partner in

the business. The 7ey to the partners being bound in this situation is the factthat the transaction was authorised by all the partners6

when one of the partners has acted without express authorisation incircumstances where four re;uirements which are set out in section " of the2artnership Act have been satisfied. In this situation the fact of being apartner confers authority to bind the partnership. This will be so as long asthe following four re;uirements are satisfied/

1 the act or transaction was entered into by a partner6

$ the act or transaction entered into must be within the scope of the 7indof business carried on by the firm6

! the act or transaction must be effected in the usual way6 and

- the other party to the transaction must either 7now or believe that theperson acting is a partner or must not 7now of his or her lac7 of authority to act.

9ach of these re;uirements will now be examined.

#he act or transaction 2as entered into by a partner

Knder section " of the 2artnership Act partners will only be bound to a transactionmade with an outsider when that transaction was made by one or more of their partners. If the transaction was not made by a partner the other partners cannot beliable under this section of the 2artnership Act and the situation would then have tobe analysed in accordance with normal agency rules.

#he act or transaction entered into must be 2ithin the scope of the %ind of business

carried on by the firm

4hether an act or transaction is within the scope of the 7ind of business that iscarried on by the firm is a ;uestion of fact. In this regard it should be rememberedthat businesses may change what they do over time. This is particularly so withrespect to trades and professions.

In ol%inghorne v 3olland (13!-# "1 C+5 1-! >rs 2ol7inghorne was a client of afirm of solicitors comprising three individuals in partnership. he received advicefrom one of these partners (arold olland# about an investment in which thepartner was financially interested. The investment proved to be a failure and >rs

© 26 May 2011 Page $1



2ol7inghorne incurred heavy losses for which she brought an action claimingdamages. The main issue was whether the two innocent partners were liable for her loss.

The igh Court in finding them liable to account to >rs 2ol7inghorne made a

number of important observations. According to 5ich ,ixon 9vatt and >cTiernanJJ at 1":<1"/

The difficulty of the case really lies in determining what is within the course of a solicitor=s business. %y associating themselves in a partnership with aroldolland the respondents made themselves responsible as principals are for an agent for all his acts done in the course of his authority as a partner. Thatauthority was to do on behalf of the firm all things that it is part of thebusiness of a solicitor to do. If in assuming to do what is within the course of that business he is guilty of a wrongful act or default his partners areresponsible notwithstanding that it is done fraudulently and for his own

benefit/ Lloyd v Grace Smith & Co D131$E AC 1:. %ut to ma7e his co<partners answerable it is not enough that a partner utilises informationobtained in the course of his duties or relies upon the personal confidencewon or influence obtained in doing the firm=s business. omething actuallydone in the course of his duties must be the occasion of the wrongful act.

Their onours went on to say (at 1"<3# that the giving of financial or investmentadvice was within the usual course of business of that firm of solicitors.

%ut it is one thing to say that a valuation or expression of his own 0udgmentupon a commercial or financial ;uestion is not within the scope of a solicitor=s

duties and another to say that when he is consulted upon the wisdom of investing in the shares of a company of which his client 7nows nothing it isoutside his province as a solicitor to in;uire into the matter and to furnish hisclient with the information and assistance which the facts upon the register will give to point out what in;uiries may be made and if re;uired tounderta7e them or invo7e the aid of those who will...

It should also be noted that firms may be liable to a transaction entered into by apartner notwithstanding that the firm does not enter into transactions of that type.This will be so where the transaction is of a 7ind that is usually entered by other firms in the same industry. ee Mercantile Credit Co Ltd v Garrod D13:$E ! All 95

11'!.

In respect to trading partnerships courts have been more willing to specify certainacts which are regarded as being within the usual authority of partners. In Ban% of Australasia v Breillat (1-# : >oo 2C 1"$6 1! 95 :-$ the 2rivy Council stated at13!<13-6 :"<:"/

9very partner is in contemplation of law the general and accredited agent of the partnership6 or as it is sometimes expressed each partner is praepositusnegotias societatis6 and conse;uently may bind all the other partners by hisacts in all matters which are within the scope and ob0ects. ence if the

© 26 May 2011 Page $$



partnership is of a general commercial nature he may pledge or sell thepartnership property6 he may buy goods on account of the partnership6 hemay borrow money contract debts and pay debts on account of thepartnership6 he may draw ma7e sign indorse accept transfer negotiateand procure to be discounted promissory notes bills of exchange chec7s

DsicE and other negotiable paper in the name of and on account of thepartnership.

#he act or transaction must be effected in the usual 2ay

&otwithstanding that a partner has entered into a transaction which is within thescope of the 7ind of business carried on by the partnership the transaction will notbe binding if it is carried out in an unusual way. The reasoning for this is that theoutsider is put on notice that the partner with whom they are dealing may lac7 there;uisite authority to bind the other partners. Further for the act to be usual in the

business of the firm it must be reasonably necessary and not merely convenient for the carrying out of that type of business. In .nion Ban% of Australia v $isher (13!#1- +5 (&4# 9; $-1 it was held that the handing over of original documents to asolicitor although convenient was not a usual practice.

In ascertaining whether the partner*s action was )carried out in the usual way= courtswill loo7 at the particular business and at other people=s actions in similar businesses. In Mercantile Credit Co Ltd v Garrod D13:$E ! All 95 11'! two peoplewere in a partnership in a business which leased out garages. In their partnershipagreement both were prohibited from selling motor vehicles. ,espite thisprohibition one partner sold to the plaintiff a motor vehicle which he did not own < in

fact he had sold other vehicles to the plaintiff in the past. The plaintiff sued thepartnership and recovered damages. The court loo7ed at the transaction as it wouldhave appeared to the plaintiff and concluded that from the plaintiff=s point of view thesale was in the usual course of business.

According to >ocatta J at 11':/

...counsel for the plaintiffs says that the ;uestion in this case is whether theact of >r 2ar7in in entering into the sale to the plaintiffs of this >ercedes%en on behalf of the amilton @arages partnership as part and parcel of ahire<purchase transaction was doing an act for carrying on in the usual way

business of a 7ind carried on by the firm of which he was a member. If it wassuch an act counsel for the plaintiffs submits that the section ma7es it clear and enacts that his act binds the firm and his partner to wit the defendant.

is onour went on to say that when 2ar7in entered into the sale of the >ercedes%en to the plaintiff )he was doing an act of a li7e 7ind to the business carried on bypersons trading as a garage*.

is onour further held at 11' that/

whatever express restrictions there might earlier have been on >r 2ar7in=s

© 26 May 2011 Page $!



authority the defendant had 7nown since April 13:' that >r 2ar7in hadbeen selling cars in the firm=s name and that he intended to continue doingso and following Rapp v Latham (113# $ % M Ald 3" that the defendanthaving ta7en no steps to prevent such sales was liable for his partner=sactions. Although it was not strictly necessary to determine what express

restrictions there had originally been as to the sale of cars the evidencestrongly suggested that if the defendant did not actually 7now before April13:' that >r 2ar7in was selling cars in the firm=s name he left the conduct of the business to >r 2ar7in and did not really mind what he did so long as itwas honest.

Thus even if the action by the partner is within the scope of the business carried onby the firm if it is carried on in an unusual manner the other partners may not bebound. Another illustration is Goldberg v Jen%ins (13# 1" +5 !:. In that case apartner purported to borrow money on behalf of the firm at over :' interest whenat the time the comparable rates were between : and 1'. It was held that such

borrowing was beyond )the usual way* of the firm and thus the firm was not bound tothe transaction. According to odges J at !<!3/

A person conducting his transactions in the ordinary way in the year 1would have been able to obtain all the advances which he could reasonablyre;uire at rates varying from : to 1' per cent6 but in this case referring to thelast transaction the interest was something over :' per cent and the personlending money on those terms 7nows that the person borrowing is notconducting an ordinary business transaction and that therefore the partner borrowing would have no power to bind his co<partners.

#he other party to the transaction must either %no2 or believe that the person acting is a partner or must not %no2 of his or her lac% of authority to act

4here a partner enters a transaction with an outsider without the authority of his or her co<partners and that transaction is within the scope of the 7ind of businesscarried on by the firm and it is entered in the usual way it may nevertheless not bebinding on the partners if the outsider 7nows of the lac7 of authority or does not7now or believe that the partner with whom they acted was a partner.

,ifficulties with this rule arise where the outsider is not aware of the partner*s lac7 of

authority. In such cases the 2artnership Act ma7es it clear that in order for liabilityto be avoided by the remaining partners it would need to be shown that the outsider did not 7now or believe at the time of the transaction that the person with whom theydealt was a partner. This position can be contrasted with general agency law.Knder the rules of agency 7nowledge by an outsider that they are dealing with anagent is not relevant in determining the liability of the principal. This was illustratedin 1atteau v $en2ic% D13!E 1 ?% !-:. In that case the defendants owned a hotel/the ictoria otel toc7ton<upon<Tees. This hotel was managed by a person namedumble. umble*s name was over the hotel door and the hotel licence was in hisname. The plaintiffs sold cigars to umble at the hotel despite the fact that thedefendants had forbidden him to buy cigars on credit. The cigars however were

© 26 May 2011 Page $-



such as would be usually supplied and dealt in at such an establishment. Thecigars were not paid for and the plaintiffs sued the defendants for the price of thecigars. It was held that the defendants were liable.

According to 4ills J at !-S3/

once it is established that the defendant was the real principal the ordinarydoctrine as to principal and agent applies U that the principal is liable for allthe acts of the agent which are within the authority usually confided to anagent of that character notwithstanding limitations as between the principaland the agent put upon that authority.

Thus it would appear that despite the fact that the plaintiffs had supplied umble inthe belief that he owned the hotel the defendants were liable.

If however we attach importance to the state of mind of the outsider in relation to the

capacity of the person with whom they dealt that is whether or not the outsider believed or 7new the person was a partner it is ;uite possible that in a partnershipsituation the partners who were not involved in the transaction could escape liabilitysimply by showing that the outsider did not 7now or believe that the person withwhom they dealt was a partner. Applying this situation to the facts of 1atteau v $en2ic% would produce a different result.

The igh Court examined this statutory position in Construction !ngineering *Aust+ty Ltd v 3e"yl ty Ltd (13"# 1"" C+5 "-1. In that case a company called Tambel(Australasia# 2ty +td (GTambelH# entered into a partnership agreement with exyl 2ty+td (GexylH# for the construction and operation of home units on land at 9dgecliff

owned by Tambel. The effect of this partnership agreement was that Tambel wouldenter into a contract for the construction of this building in its own name as principal.ome months later Tambel entered into a building contract with Construction9ngineering 2ty +td (GConstruction 9ngineeringH#. At the time of this agreementConstruction 9ngineering did not 7now of the existence of the partnership nor did itbelieve that Tambel was a partner with exyl. A dispute arose as to Construction9ngineering=s entitlement to payment and it was argued inter alia that the contractmade by Tambel had been made on behalf of a partnership between Tambel andexyl as principals.

The igh Court unanimously held that exyl was not a party to the building contract.

In examining the section in the &ew outh 4ales 2artnership Act their onourssaid (at "-# that the section has two distinct limbs/

The first deals with actual authority. It provides not that every partner isdeemed to be an agent of the firm and his other partners for the purposes of the partnership business but that every partner is an agent of the firm and hisother partners for that purpose. The actual authority to which it refers ishowever but prima facie in that it may be negated or ;ualified by contraryagreement of the partners.

Applying this to the facts the Court found that Construction 9ngineering could not

© 26 May 2011 Page $"



rely upon this limb of the section. Any prima facie authority of Tambel to enter intothe building agreement as agent for exyl as an undisclosed principal or otherwisewas negated by the partnership deed the court held.

According to the Court (at "-#/

the second limb of sec " deals with ostensible authority. 9ven though actualauthority may be lac7ing the act of every partner who does any act for carrying on in the usual way of business of the 7ind carried on by the firm of which he is a member binds the firm and his partners unless the other party)either 7nows that he has no authority or does not 7now or believe him to be apartner=.

As Construction 9ngineering did not 7now or believe Tambel to be a partner thislimb of the section could not assist them. Finally the court noted that irrespective if Tambel had actual or ostensible authority to enter into the building contract on

behalf of exyl as an undisclosed principal the fact remained that it did not contractin that capacity in any case.

Finally it should be noted that the general law agency concept of ratifi!ation isrelevant to consider here. This concept operates where a person who haspurported to act as an agent but who actually had no authority to so act has hadtheir actions adopted or approved by the person who was originally said to be theprincipal. This situation was described by Tindal CJ in 1ilson v #umman (1-!# :>an M @ $!: at $-$6 1!- 95 3 at $ as follows/

That an act done by a person not assuming to act for himself but for such

other person without any precedent authority whatsoever becomes the act of the principal if subse;uently ratified by him is the 7nown and well establishedprinciple of law.

5atification can be express or implied and where applicable the principal will beliable for the actions which have been ratified. In a partnership context this meansthat where a person*s actions have been ratified by co<partners the co<partners willbe liable for those actions.

The 2artnership Act contains other sections which regulate a partner*s dealings withoutsiders. These sections include/

Partners &o$n% &" a!ts %one on &eha#f of firm

ection : of the 2artnership Act provides/

An act or instrument relating to the business of the firm and done or executed in the firm<name or in any other manner showing an intention tobind the firm by any person thereto authorised whether a partner or not isbinding on the firm and all the partners/ provided that this section shall notaffect any general rule of law relating to the execution of deeds or negotiable

© 26 May 2011 Page $:



instruments.

This section effectively means that acts done with the intention of binding the firmwill bind the firm. owever partners will not be bound where any act was done or document signed even if related to the business and done for its benefit if it is done

by a person in his or her own right and not on behalf of the firm. The ;uestion willalways be/ did the person act privately or for the firmR This provision iscomplimented by the following two sections.

Partners $sing the !re%it of the firm for pri'ate p$rposes

ection of the 2artnership Act provides/

4here one partner pledges the credit of the firm for a purpose apparently notconnected with the firm*s ordinary course of business the firm is not bound

unless he is in fact specially authorised by the other partners6 but this sectiondoes not affect any personal liability incurred by an individual partner.

This means that partners using credit of the firm for private purposes will not bindthe partnership unless they are specifically authorised by the other partners. Thelimits of being )specially authorised* are unclear however there is some authority tosuggest that if an outsider had reasonable grounds to suppose that there wasauthority (0endal v 1ood (1'# +5 : 9x $-! per %lac7burn J# or a representationor some form of ac;uiescence (London Chartered Ban% of Australia v 0err (1# -+5 (+# !!'# existed this would be enough to satisfy the section.

Noti!e of an agreement that a firm wi## not &e &o$n% &" the a!t of a partner

ection of the 2artnership Act provides/

If it has been agreed between the partners that any restrictions shall beplaced upon the power of any one or more of them to bind the firm no actdone in contravention of the agreement is binding on the firm with respect topersons having notice of the agreement.

Therefore partners who have restrictions placed upon their powers to bind the firmwill not bind it when they exceed these restrictions if the other party to the

transaction 7nows of the restrictions. This applies where the partner*s power hasbeen restricted or terminated. In such cases notice of the restriction or terminationmust be given to the outsider. ee Bo2man v Bacon (13# 1 +5 (&4# 1$.

Lia&i#it" in !ontra!t( tort an% !rime

De&ts an% o&#igations

ection 3 of the 2artnership Act provides/

© 26 May 2011 Page $



9very partner in a firm is liable 0ointly with the other partners for all debts andobligations of the firm incurred while he is a partner6 and after his death hisestate is also severally liable in a due course of administration for such debtsand obligations so far as they remain unsatisfied but sub0ect to the prior payment of his separate debts.

Joint liability means that although liability is incurred by two or more persons thereis only one right of action against them. o once 0udgment is entered against apartner or partners further legal action cannot be brought against the other partnerswho could have been 0ointly liable had they been included in the action.

Lia&i#it" of the firm for wrongs

ection 1' of the 2artnership Act provides/

4here by any wrongful act or omission of any partner acting in the ordinary

course of the business of the firm or with the authority of the partner=s co<partners loss or in0ury is caused to any person not being a partner of thefirm or any penalty is incurred the firm is liable therefore to the same extentas the partner so acting or omitting to act.

Further section 1$ of the 2artnership Act sets out that the liability for wrongs is 0ointand several. In this regard the Act provides/

9very partner is liable 0ointly with the partner=s co<partners and also severallyfor everything for which the firm while the partner is a partner thereinbecomes liable under either of the last two preceding sections.

Thus liability for both civil wrongs and crime is covered by these sections. In order for liability to be established it must be shown that the wrongful act or omission of the partner/

occurred in the ordinary course of the business of the firm or was authorised by the co<partners.

In relation to the meaning of the ordinary course of business of the firm seeol%inghorne v 3olland (13!-# "1 C+5 1-!. Importantly in 1al%er and others v !uropean !lectronics ty Ltd (133'<1331# $! &4+5 1 @leeson CJ stated at 1'/

...the essential tas7 remains one of identifying the nature and scope of thebusiness of the firm and relating the wrongful act to the business soidentified....The nature and scope of the business of a firm will fall to bedetermined by reference to the agreement between the partners.

>ahoney JA in agreeing with @leeson CJ added at 11/

In considering whether the act of a person is done in the ordinary course of the business of a firm of which he is a member it is of course necessary todetermine what the business of the firm is. ometimes the business of the

© 26 May 2011 Page $



firm is defined or described in the partnership agreement. In such a case thecourt must decide as a ;uestion of fact whether the act in ;uestion can beand was done in the course of carrying it on. This may be decided byreference to specific evidence that an act of the 7ind in ;uestion is apt to beor was done in carrying on such a business. Br in some cases the court

may be in a position to ta7e notice of the fact that a business of the 7ind in;uestion is apt to be carried on by doing acts of the relevant 7ind.

In other cases where the business is not defined or described in thepartnership agreement it is necessary to decide on the facts of the casewhat the business is and what acts are apt to be done in carrying it on.

In -ational Commercial Ban%ing Corporation of Australia Ltd v Batty (13:# :' A+J5!3 the respondent was a partner with a person named ,avis in an accountancypractice in Natoomba. ,avis was also a director of a company called %ushby 2ty+td and he deposited two che;ues belonging to the company (%ushby# in the

accountancy*s practice trust account. ,avis later withdrew the proceeds from theseche;ues and misappropriated the whole amount. The appellant ban7 was heldliable to the third party in conversion for collecting the proceeds for ,avis and onappeal the appellant argued that s 1' of the &ew outh 4ales 2artnership Actmade the respondent liable. ,avis in the meantime had died.

The igh Court by ma0ority held that the deposit of the che;ues in the partnershipaccount was not a transaction in the ordinary course of the firm*s business and wasnot within the actual or apparent authority of ,avis. This meant that the respondentwas not liable for ,avis*s wrongful act.

In finding that ,avis by depositing the che;ues was not acting in the ordinary course of the business of the firm support was found in the fact that the che;ueswere made out to the company not the firm and that the che;ues were substantiallylarger than any others which had been paid into the trust account/ (at !1 per @ibbs J and !31 per %rennan J#. Further unli7e other che;ues paid into theaccount these were payable to a third party were not deposited through the usualtrust account deposit boo7 and were not deposited by the secretary who normallycarried out the ban7ing. ,eane J suggested at !3 that an examination of theactual practices of the particular firm was re;uired.

According to %rennan J each partner is an agent only in and for the business of the

firm. Acts beyond that business will not bind the firm. is onour stated at !/

If a partner*s act is not in fact )for the purpose of the business of thepartnership* the firm is bound by his act only if it is )an act for carrying on inthe usual way business of the 7ind carried on by the firm* and the absence of authority is un7nown to the person with whom he is dealing. Acts done in theusual way of carrying on a partnership business are usually done for thepurpose of the business and unless the person with whom the partner isdealing 7nows that the act is not done for that purpose he may assume that itis.

© 26 May 2011 Page $3





clients of the firm and dealt with 5. 5 prepared their wills and discussed thepossibility of ma7ing investments on their behalf. 5 told >r and >rs that the firmhad clients engaged in the building trade who wanted to borrow money on secondmortgage from time to time and he offered to invest their money in this way. Inreturn >r and >rs would receive interest. 5 assured them that their investment

would be ;uite safe.

>r and >rs sued > and 5 on the basis that the money received by 5 wasmisapplied. There is no ;uestion that at the time the money was received by 5 hecarried on practice as a solicitor in partnership with >. owever > neither too7 partin nor had any 7nowledge of these dealings. Bn appeal to the igh Court the courtwas as7ed to consider the matter in the light of the 2artnership Act and the materialissue was whether 5 was acting within the scope of his apparent authority as apartner in the firm in his dealings with the respondent and her husband.

Their onours said at 1":/

%ut even if no mention was made of )second mortgages* there can be nodoubt that the moneys were placed in 5ichardson*s D5*sE hands for thepurpose of ma7ing specific investments from time to time upon securitiesprepared by him and such a finding would be sufficient to bring the casewithin sec 11 Dof the &ew outh 4ales 2artnership ActE.

Therefore > was liable for the money.

ubsection (b# relates to cases whereby money or property is received by the firm inthe course of its business and this money or property is misapplied by one of the

partners. In Rhodes v Moules D13"E 1 Ch $!: 5ew was a solicitor in partnershipwith >essrs ughes and >asterman. >r 5hodes was a client of the firm and thefirm had acted for him on previous occasions. >r 5hodes wanted to borrow somemoney on a property and as7ed 5ew as his solicitor to assist him to effect themortgage. ome clients of the firm the >oules were willing to lend the money. Assecurity for the mortgage >r 5hodes gave 5ew some share certificates and thesewere misappropriated by 5ew.

Bne of the ;uestions facing the court was whether the other two partners were liablefor 5ew*s actions. The court held that the partners were 0ointly and severally liablefor the value of the shares under both subsection (a# and (b#. According to +indley

+J at $-3/

The only conclusion at which I can arrive is that the plaintiff*s certificatescame into 5ew*s hands when acting within the scope of his apparentauthority. The case is thus brought within the first half of s 11 of the2artnership Act 13'. %ut it is also I thin7 brought within the second half.

The 0udge said that )the inference that the plaintiff*s certificates were received by thefirm in the course of its business* was 0ustified.

In contrast in -ational Commercial Ban%ing Corporation of Australia Ltd v Batty

© 26 May 2011 Page !1



(13:# :' A+J5 !3 mentioned at D!.$1E the igh Court found that the firm was notliable for the wrongful actions of the partner because they were not within the scopeof the partner*s apparent authority and because the firm had not received the moneyin the ordinary course of the firm*s business. Thus both subsections (a# and (b#were not satisfied.

In!oming an% o$tgoing partners

ection 1 of the 2artnership Act provides/

(1# A person who is admitted as a partner into an existing firm does notthereby become liable to the creditors of the firm for anything donebefore he became a partner.

($# A partner who retires from a firm does not thereby cease to be liable

for partnership debt and obligation incurred before his retirement.

(!# A retiring partner may be discharged from any existing liabilities by anagreement to that effect between himself and the members of the firmas newly constituted and the creditors and this agreement may beeither expressed or inferred as a fact from the course of dealingbetween the creditors and the firm as newly constituted.

%asically a partner will be only liable for debts and obligations incurred while he or she is a partner. 5etiring partners will be liable for debts and obligations incurredwhile they were partners sub0ect to being discharged by the new partners and

creditors. owever consent of the incoming partners or of creditors to the debts willoften be drawn as an inference from the parties conduct. ee !" parte eel (1'$#: es :'$6 !1 95 1$1:.

pecial provisions dealing with )continuing guarantees* given by partners are alsodealt with in the Act S section 1.

4hen a partner retires from a firm he or she should place an advertisement in the@aette a ydney newspaper and a local newspaper published in the area wherethe firm carries on business so as to give notice to outsiders. Failure to do so couldgive rights to outsiders on the basis that the person still appears to be a partner6

that is on the basis that he or she is an apparent partner.

Lia&i#it" of non)partners ) &" *ho#%ing o$t+ or estoppe#

ection 1- of the 2artnership Act provides/

(1# 9very one who by words spo7en or written or by conduct representshimself or who 7nowingly suffers himself to be represented as apartner in a particular firm is liable as a partner to any one who has onthe faith of any such representation given credit to the firm whether

© 26 May 2011 Page !$



the representation has or has not been made or communicated to theperson so giving credit by or with the 7nowledge of the apparentpartner ma7ing the representation or suffering it to be made.

($# 2rovided that where after a partner=s death the partnership business is

continued in the old firm<name the continued use of that name or of the deceased partner=s name as part thereof shall not of itself ma7e hisexecutors or administrators= estate or effects liable for any partnershipdebts contracted after his death.

This section ma7es it clear that it is the person who is represented as a partner or who represents himself or herself as a partner that is liable to outsiders who have onthe faith of the representation given credit to the firm. uch a person might bedescribed as a )partner by estoppel*. 9stoppel means that if any person expresslyor by conduct represents to another that a certain situation exists and the other person acts to his or her own detriment then the person who made the

representation will not be allowed to deny the truth of what he or she said.

In Re Buchanan & Co (1:# - ?C5 $'$ it was held that the section placesliability upon the person who represents themselves or allows themselves to berepresented as a partner U not upon the actual partners.

Thus to incur liability under this section three tests need to be fulfilled/

A representation must be made that the person is a partner. This can be doneby the person themselves or by any of the partners generally. It will be a;uestion of fact whether a representation has been made. Further the

representation need not have been made directly to the person who actsupon it. In Martyn v Gray (1:!# 1-! 95 :: it was said by 4illiams J at:-/

If the defendant informs A% that he is a partner in a commercialestablishment and A% informs the plaintiff and the plaintiff believingthe defendant to be a member of the firm supplies goods to them thedefendant is liable for the price.

Credit must be provided by a third party who believes the representation tobe true/ see Martyn v Gray (1:!# 1-! 95 ::. Credit would include the

receiving of property or the incurring of an obligation.

The third party must rely upon the representation/ see #o2er Cabinet Co Ltd v 'ngram D13-3E $ N% !3.

A%missions an% representations &" partners

ection 1" of the 2artnership Act provides/

An admission or representation made by a partner concerning the partnership

© 26 May 2011 Page !!



affairs and in the ordinary course of business is evidence against the firm.

The firm will be responsible in the circumstances contemplated by the section for statements of a partner when they are made by the partner who is acting within their actual or apparent authority.

Re#ationship of partners to ea!h other

The fi%$!iar" re#ationship &etween partners

2artners stand in a fiduciary relationship with each other. According to ,ixon J inBirtchnell v !>uity #rustees@ !"ecutors and Agency Co Ltd (13$3# -$ C+5 !- at-'<-'/

The relation between partners is of course fiduciary. Indeed it had been

said that a stronger case of fiduciary relationship cannot be conceived thanthat which exists between partners. )Their mutual confidence is the life<bloodof the concern. It is because they trust one another that they are partners inthe first instance6 it is because they continue to trust one another that thebusiness goes on* (per %acon C in 3elmore v Smith (1:# !" Ch , -!: at---. The relation is based in some degree upon a mutual confidence thatthe partners will engage in some particular 7ind of activity or transaction for the 0oint advantage only. In some degree it arises from the very fact that theyare associated for such a common end and are agents for one another in itsaccomplishment ... The sub0ect matter over which the fiduciary obligationsextend is determined by the character of the venture or underta7ing for which

the partnership exists and this is to be ascertained not merely from theexpress agreement of the parties whether embodied in written instruments or not but also from the course of dealing actually pursued by the firm. Bncethe sub0ect matter of the mutual confidence is so determined it ought not tobe difficult to apply the clear and inflexible doctrines which determine theaccountability of fiduciaries for gains obtained in dealings with third parties.

The law presumes that a partnership is based upon the mutual trust of the partnersand that these partners and on the confidence of each partner in the integrity of every other partner. It has been said that the utmost good faith is fundamental tothis relationship. ee Cameron v Murdoch (13:# :! A+5 "" at ".

The fiduciary obligations between partners may be varied by an agreement involvingfull disclosure between the parties. see -oranda Australia Ltd v Lachlan Resources-L (13# 1- &4+5 16 Chan v acharia (13-# 1"- C+5 1. The common lawand e;uitable obligations of partners are incorporated into the partnershiplegislation by implication. This is so as long as they are not inconsistent with the2artnership Act (sec -:#.

The sub0ect matter over which the fiduciary obligations extend is determined by thecharacter of the venture or underta7ing for which the partnership exists which isascertained both from the express agreement of the parties and from the course of

© 26 May 2011 Page !-



dealing actually pursued by the firm. see Birtchnell v !>uity #rustees@ !"ecutorsand Agency Co Ltd (13$3# -$ C+5 !- at -'< per ,ixon J.

Fiduciary obligations regulate the relationship between partners during the businesslife of the partnership as well as during its dissolution. see !veringham v

!veringham (1311# 1$ 5 (&4# "6 $ 4& (&4# 1$6 Chan v acharia (13-#1"- C+5 1.

Fiduciary obligations only cease upon the final settlement of accounts on winding upof the partnership.

The fiduciary relationship between partners does not necessarily commence withthe partnership business or a prior agreement and may exist between prospectivepartners who have embar7ed upon business together before the precise terms of any partnership agreement have been settled (see .nited (ominions Corp Ltd v Brian ty Ltd (13"# 1" C+5 1# or who have entered into partnership negotiations

and embar7ed upon conduct with a view to forming a partnership/ see $raser !dmiston ty Ltd v AG# *6ld+ ty Ltd D13E $ ?d 5 1.

The fiduciary duties which partners owe to each other include/

to act in good faith and honesty/ see Cameron v Murdoch (13:# :! A+5 ""at "6

to provide full accounts of all information and assets in a partner=s possessionor control which are material to the partnership business6

to avoid any conflicts of interest6 to avoid ma7ing a personal profit from partnership opportunities and

information6 to account for benefits obtained from partnership business.

The %$t" to ren%er a!!o$nts

A partner must provide true accounts and full information regarding all thingsaffecting the partnership to all other partners or their legal representatives (sec $#. A partner=s right to true accounts and full information continues until an end is put toit by a release by settled accounts or by the lapse of such time as may induce thecourt to refuse to interfere. see 1ilson v Carmichael (13'-# $ C+5 13' at 13".

4here accounts are improperly destroyed by a partner it is presumed that thatpartner had an improper purpose. see Gray v 3aig (1""# $' %eav $136 "$ 95.

A partner must disclose partnership opportunities to all other partners or their legalrepresentatives while the partnership is a going concern see Birtchnell v !>uity #nustees@ !"ecutors and Agency Co Ltd (13$3# -$ C+5 !-6 Chan v acharia(13-# 1"- C+5 1# and must disclose any special 7nowledge about the conditionof the partnership when dissolution is contemplated especially where the partner with special 7nowledge proposes to buy out another=s interest.

© 26 May 2011 Page !"



Right to inspect boo%s and documents

2artnership boo7s must be 7ept at the place of business of the partnership or theprincipal place if there is more than one and every partner may when he or shethin7s fit have access to inspect and copy any of them unless there is an express

or implied agreement to the contrary (sec $-(3##.

A partner may appoint an agent to inspect the boo7s on his or her behalf sub0ect toreasonable limitations. see Bevan v 1ebb D13'1E $ Ch "3. If the appointed agenthas personal business interests which are adverse to or conflict with those of thepartnership business such an appointment may be ob0ected to by the other partners. see (ads2ell v Jacobs (1# !- Ch , $.

4rder for production of boo%s

The boo7s of a partnership that are in daily use may be ordered to be produced atthe place of business of the partnership if there is a partnership action pending.owever where a party cannot be trusted with custody of the boo7s production of the boo7s in court may be ordered. ee Mertens v 3aigh (1:'# ' 95 :1:.

2artnership boo7s and documents may be produced to and inspected by adefendant partner prior to serving his or her defence if the items are in the hands of the plaintiff partner and are necessary for the defendant partner to prepare his or her defence. see ic%ering v Rigby (11$# 1 es --6 !- 95 -''.

Pri'ate profit of partners

9very partner must account to the firm for any benefit derived from/

any transaction concerning the partnership6 or any use by him or her of the partnership property name or business

connection (sec $3(1##6 or any transaction underta7en after the partnership has been dissolved by the

death of a partner and before its affairs have been completely wound up (sec$3($#.

This will be so were the benefit was obtained by the partner without the consent of the other partners.

A partner=s obligations to the partnership do not cease until the partnership is woundup so that any new agreement entered into by a partner prior to winding up even if after dissolution will be a partnership asset. In Chan v acharia (13-# 1"- C+51 the appellant and respondent were medical practitioners. In eptember 13they entered into a written memorandum of agreement under which ,r Vachariaagreed to sell and ,r Chan agreed to purchase one half of ,r Vacharia*s )right titlegoodwill and interest* in a medical practice which ,r Vacharia was then carrying onin Adelaide together with the )plant e;uipment and chattels and other assets of the

© 26 May 2011 Page !:



medical practice (excluding boo7 debts#*.

Knder the agreement the two doctors agreed to carry on medical practice as e;ualpartners for a period of one year (and thereafter until determined by notice or death#upon the terms set out in the agreement. The agreement provided inter alia that

upon determination of the partnership an account was to be ta7en of assets debtsand liabilities the assets (other than goodwill# were to be sold and after payment of liabilities and expenses and unpaid profits due to partners any balance was to bedivided e;ually between the partners.

The business was conducted at premises which had considerable advantages for such a medical practice and over which a three<year lease with an option to renewfor another two years was held. The option had to be exercised not later than threemonths before its termination by the )tenant* by which term the doctors werereferred to in the lease. The lease and any renewed lease was assignable with theconsent of the lessor which was not to be unreasonably or capriciously withheld.

,uring the third year of the lease the partnership was determined by notice given bythe appellant and a receiver for the purpose of winding up was appointed by courtorder. The respondent wished to exercise the option of renewal of the lease but theappellant did not 0oin with him in doing so and the option was not exercised. %eforeexpiry of the time for its exercise the appellant then sought a renewal for two yearsnot for the partnership but for himself. ubse;uently arrangements were madebetween the appellant and the owner of the premises for a lease for two years onpayment of a premium.

An issue for determination was whether the interest ac;uired by the appellant in anew lease was an asset of the former partnership and was held by him as a

constructive trustee. The igh Court (@ibbs CJ %rennan ,eane and ,awson JJ#(>urphy J dissenting# held that there was a fiduciary relationship between thepartners with respect to partnership property which arose from the partnership andcontinued after its dissolution for the purpose of the realisation application anddistribution of the partnership assets. In these circumstances the appellant hadobtained a new lease in disregard of that fiduciary relationship and was thereforebound to account to the partnership as a constructive trustee for any benefit hereceived from the new lease.

According to ,eane and ,awson JJ the partners were under a dual obligation inrespect of the original lease and this obligation continued after the partnership*s

dissolution. This arose from the fact that they held the lease as trustees for thepartnership and from their fiduciary obligations as partners. Therefore the obligationof the appellant to account arose from both aspects of their obligation.

Also their onours added that where a partner without the consent of his or her co<partner obtains a renewal in his or her own name of a lease of partnershippremises there is a rebuttable presumption of fact that the renewed lease wasobtained by use of his or her fiduciary position and that he or she holds it as aconstructive trustee for the partnership.

A partner and after the partner=s death his or her executor is liable to account to the

© 26 May 2011 Page !





D$ties of partners whi!h are set o$t in the Partnership A!t

ections 13<!1 of the 2artnership Act sets out variable rules which regulatepartners. %riefly these rules include the following/

1 5ights and duties of partners which are contained in their agreement witheach other which are defined by the Act may be varied by the consent of allthe partners (sec 13#/ see ublic #rustee v Schult5 (13:-# 111 C+5 -$.

$ artnership property /

(a# All property and rights and interests in property originally brought intothe partnership stoc7 or ac;uired on account of the firm or for thepurposes and in the course of the partnership business are 7nown as)partnership property* and must be used exclusively for the purposes of

the partnership. (sec $'#

It is the acts and intention of the partners that determine whether property owned by a partner is in fact partnership property/ see4,Brien v 0omesaroff (13$# 1"' C+5 !1' (dealing with the ownershipof copyright in precedent unit trust deeds which had been drafted by asolicitor# and 3arvey v 3arvey (13'# 1$' C+5 "$3 (dealing with theownership of a farm#.

(b# If purchased with money belonging to the firm then it is deemed tohave been bought on the account of the firm (sec $1#.

(c# If it is land that is held by the partnership it becomes personalproperty (sec $$#.

(d# A writ of execution levied against partnership property can only beissued if 0udgment has been obtained against the firm (sec $!#.

(e# The 2artnership Act also provides that every partner is entitled to havethe property of the partnership applied in the payment of the debts andliabilities of the firm and to have any surplus assets after the paymentapplied in the payment of what is owing to the partners (sec !3#.

! 4ith regards to matters of management where there is no special agreement(sec $-#/

(a# all partners are entitled to share e;ually in capital and profits andcontribute e;ually towards losses6

(b# the firm is to indemnify partners with respect to payments made in theordinary and proper conduct of the business of the firm6

(c# every partner may ta7e part in management6

© 26 May 2011 Page !3



(d# no partner is entitled to remuneration6

(e# no person can be introduced as a partner without the consent of allexisting partners6

(f# any difference arising as to ordinary matters connected with thepartnership business may be decided by a ma0ority of the partners6and

(g# the partnership boo7s are to be 7ept at the place of business of thepartnership.

- &o ma0ority of partners can expel any partner unless power to do so has beenconferred by express agreement (sec $"#. In such cases the power to expelmust be exercised in good faith.

" 4here no fixed term has been agreed upon for the duration of thepartnership (where that is it is a partnership at will# any partner maydetermine the partnership at any time on giving notice (sec $:#. In Moss v !lphic% D131'E 1 N% -: it was held that every partnership was one at willunless there is an agreement to the contrary. &ote that where a partnershipfor a fixed term is continued then it is presumed that the continuation is in theold terms (sec $#.

: 2artners are bound to render true accounts and full information of all thingsaffecting the partnership to any partner or their legal representative (sec $#.

. 2artners must account to the firm for any benefit they derive without theconsent of the other partners from any transaction concerning the partnershipor for any use of partnership property name or business connection (sec $3#.

. Finally the 2artnership Act states that if a partner without the consent of their other partners carries on any business of the same nature as and competingwith the firm he or she must account for and pay over to the firm all profitsmade by him or her in that business (sec !'#.

Documents

Topic 3 - Partnership