Definition and elements of a partnership in Australia
What is the business structure in which the business is running and the statue of each party involved in the business?
Rule
Two or more parties can enter into an agreement to form a partnership which is a common business structure in Australia. It is governed by the Partnership Act (Vic) 1958. Section 5 of PA describes partnership as an agreement to carry out business in common between two or more parties whose objective is to earn a profit. There are three key elements which form a partnership between two or more parties. Primarily, parties should enter into an agreement to carry out a business and based on such agreement, their responsibilities and obligations are divided as well. However, in Smith v Anderson case, the court held that performing of an event which would not be performed in the future could not form a partnership between parties.
The business of a partnership must be carried out by the parties in common, and they must have equal responsibilities. Partners are not required to be active in the partnership as long as other partners are managing its operations on their behalf. Partners must have a view of profits, and they must manage the partnership to earn a profit. However, as per the judgement of Cox v Hickman, parties cannot be considered as partners based on the fact that they share its profits; the presence of other elements is necessary as well.
Application
A business for financial advice has been established by Julio, Carolyn and Trisha and each of them is playing different part in the business. The objective of the business is to earn profits by providing financial advice to parties. Julio, Carolyn and Trisha manage the operations of the business, and they are mutually obligated for its operations. Thus, they have entered into a partnership, and they are partners in the business. Sarah only shares profits in the business but did not play any role in its operations. Other partners are not operating the business on behalf of Sarah as well, thus, she is a creditor of the partnership.
Conclusion
Case 2
Issue
Whether Julio and other partners are liable to pay damages for the loss suffered by X?
Rule
A claim for damages can be raised by a party if they suffered loss due to a false statement of another party and they can file a suit for misrepresentation. There are three types of misrepresentation: innocent, fraudulent and negligent. Certain factors are necessary to form a suit for misrepresentation. In Bisset v Wilkinson case, the court held that the defendant must have a duty to avoid making any false statement which could cause an injury to another party and such duty is breached due to failure of maintenance of a standard of care which would have taken by a reasonable person. The court provided in the case that a statement which is just an opinion or estimate is not valid to form a suit for misrepresentation.
Liabilities of partners in a partnership
However, if the party which is giving the opinion or estimate is in the position to know the facts, then a suit for misrepresentation can be formed. Moreover, the aggrieved party must take action by relying on the false statement or else a suit for misrepresentation cannot be formed. The damages suffered by the aggrieved party must occurred directly due to the misrepresentation and must not be too remote. While giving advice to clients, professionals owed a duty of care to ensure that such advice is correct and it would not cause any harm to the party. In Rogers v Whitaker case, it was held by the court that failure of maintenance of a standard of care which is expected by a reasonable person with that professional status resulted in making him liable for misrepresentation.
If the professional is operating a business under a partnership structure, then other partner will be held liable for the actions of the partner. Section 9 and 13 of PA held partners liable under joint liability. If the actions of the partner are within the scope of the business and it was not a usual act, then other partners are jointly and severally liable along with the partner. In Polkinghorne v Holland & Whittington case, the court held other partners liable for the misrepresentation of a partner because the actions were not unusual and partner was acting within the scope of business.
Application
The advice was given by Julio to X regarding tax implications of purchase of a property turn out to be wrong because Julio did not know about the latest ruling of Australian Taxation Office (ATO). Due to the change in tax regulations, X suffered a loss, and he had to pay $15,000 extra as a tax on the property. The loss occurred due to the mistake of Julio who owed a duty to ensure that his advice is right and it did not cause injury to another party. A false statement was made by Julio because he breached his duty based on which X can hold him liable as per negligent misrepresentation. The actions of Julio were not unusual, and he was acting within the scope of the business while giving advice to X. Thus, X can hold other partners, including Carolyn and Trisha liable for the loss suffered by him due to negligent misrepresentation of Julio.
Conclusion
To conclude, X can hold Julio along with other partners liable for the loss suffered by him because a duty of care was breached by Julio while he was acting within the scope of the business.
Misrepresentation and liability of partners
Case 3
Issue
Whether Julio and other partners are liable to pay damages for the loss suffered by Y?
Rule
A suit for negligent misrepresentation can be filed if a party made a statement of fact which is untrue and another party relied on such statement which resulted in causing damages to him. It is necessary that a duty of care is owed by the party who is making the untrue statement to maintain a standard of care. While evaluating whether a person is liable under negligent misrepresentation, the court analyse a number of factors which are given in the case of Wyong SC v Shirt which include practicability, gravity, justifiability and probability. The Wrongs Act 1958 has codified these elements based on which the court can hold a person liable for negligent misrepresentation. Section 59 of the act provides provisions regarding negligent misrepresentation of a professional while giving advice to a client.
A standard of care should be maintained by the professional which any reasonable person would with such expertise. Based on this principle, a judgement was given by the court in the case of Rogers v Whitaker. In this case, the court held a doctor liable for misrepresentation because he failed to provide appropriate information regarding the side effects of the treatment which any reasonable person would while acting in a similar position. In case the professional is providing its services from a partnership, then other partner can be held liable for the actions of the professional.
Section 9 and 13 of PA held partners jointly liable for the action of a single partner. Certain elements are required to be fulfilled to hold other partners liable for the action of one partner. The actions of the partner must be within the scope of the business and it must not be an unusual act. However, a professional cannot be held liable for the loss suffered by a third party who relied on the advice. As given in the judgement of Esanda Finance Corporation v Peat Marwick Hungerfords case, the court held that a party cannot be held liable for the loss suffered by a third party who relied on the false statement of the party without his/her knowledge.
Application
X shared the advice which he received from Julio to Y without telling Julio. As Julio did not know about the latest ruling of ATO, X and Y both had to pay extra $15,000 in tax. X is a client; therefore, Julio had a duty of care to protect the interest of X and did not give him any false advice which might cause loss to him. Due to a breach of a standard of care, Julio and other partners are liable to pay off the loss suffered by X. However, Y is not a client of Julio, and he did not owe a duty of care to protect the interest of Y. Furthermore, Y relied on the advice of Julio without his knowledge based on which Julio and other partners cannot be held liable by Y for the loss suffered by him.
Options for managing business risks
Conclusion
To conclude, Y is a third party, and Julio did not owe a duty of care to him based on which Y cannot hold Julio and other partners liable for his loss.
Case 4
Issue
What options are available for Julio, Carolyn and Trisha in order to improve the management of their business risks?
Rule
In order to change the process of managing the business, partners can mutually agree to different terms which assist them in improving the management of their business risks. Partners can add or delete terms from their partnership deed to change their responsibilities in the business based on which they can manage their business responsibilities. Furthermore, partners can change the structure of their business by forming a company. A corporation has a separate legal personality from its owners as given in the judgement of Salomon v Salomon & Co Ltd. The liability of the owners are limited based on which they cannot be held personally liable for the debts of the company. There are many advantages of incorporating a company which assist the members in managing their business risks.
A corporation has separate personality from its owners and it has its own rights and obligations. It can enter into a contract with third parties and purchase and sold assets. It can also file legal suits against third parties and other parties can file suit against it as well. As per the Corporations Act 2001 (Cth), it is divided into two categories which include a public and proprietary company. A public company can list its shares on the stock exchange and there is no limit on the number of shareholders. On the other hand, the members of proprietary company are limited and its shares cannot be listed on the stock exchange. These factors assist the owners in improve their business risks by managing their liabilities.
Application
Following are different options available for Julio, Carolyn and Trisha based on which they can improve the management of their business risk.
- They can make changes in their business procedure while giving written advice to their clients. They can add a disclaimer to their clients while giving them legal advice which provides that the partners will not be held liable in case the client suffered any loss due to such advice.
- They can form a partnership deed in which they can categorise responsibilities of each partner based on which other partners would not be held liable for the action of a particular partner.
- They can also form a proprietary company based on which the liability of each partner will be limited. In this structure, the company will have separate personality, and the clients will not be able to hold partners personally liable for the debts of the company.
The best option, in this case, is that Julio, Carolyn and Trisha should form a proprietary company based on which they will able to improve the management of risks in the business. The liability of parties will be limited, and the clients will sue the company rather than partners in case of a breach.
Conclusion
To conclude, in order to improve the management of business risks, Julio, Carolyn and Trisha should incorporate a proprietary company which would reduce their business risks.
To conclude, a partnership has formed to run the business and Julio, Carolyn and Trisha are partners in such business. Sarah is a creditor because she did not involve in the operations of the business.
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