Elements necessary to establish a partnership
1. The issue is related to the type of business structure in which the business is running and the status of each party in the business.
2. The issue is whether X can hold Julio and other partners liable for the loss suffered by him.
3. The issue is whether Y can hold Julio and other partners liable for the loss suffered by him.
4. The main issue is related to the best option available for Julio, Carolyn and Trisha to manage their business risks.
The issue is related to the type of business structure in which the business is running and the status of each party in the business.
There are different business structures from which parties can choose in order to run their business. In case two or more individuals decided to run a business, then they can form a partnership. It is referred to a relationship which binds two or more parties into an agreement based on which they divide certain rights and obligations in order to carry out the operation of the business in common, and the purpose of starting the business is to generate profits. The provisions regarding formation, rights and obligations of a partnership are given under the Partnership Act (Vic) 1958. This act also defines partnership under section 5 which provides that there are three key elements which are necessary to establish a partnership business structure. The first key element is that the partners must carry out the business of the partnership based on which they have a number of rights and obligations in the business. However, a business which will not be repeated in the future by the partners cannot be constituted as a partnership as given in the case of Mann v D’Arcy. A similar judgment was given by the court in the leading case of Smith v Anderson. In this case, the court provided that a relationship between parties which is formed for a purpose to perform a specific task cannot be considered as a carrying out of business. The carrying out of the business must be conducted together by the partners, and they should manage their operations of the business in common with other partners or on their behalf.
In Re Ruddock case, this principle was implemented by the court which provided that in case parties are running the operations of the business then a partnership can be formed between them. In this case, in order to pay off her debts, Mrs Bear acquired shares in a business of Ruddock, and she was sharing the profits of the business. While selecting a new partner, Ruddock is required to ask for the consent of Mrs Bear based on which the court held that a partnership had been formed between the parties. Finally, the objective of formation of a partnership must be to generate profits in the business. In the case of Checker Taxicab Co Ltd v Stone, the court provided that in order to carry out business in common, it is necessary that the parties are engaged in the same business. However, section 6 provides that mutuality in the partnership is a key element and only sharing of profits did not form a partnership between parties. A similar judgment was given in the case of Plummer v Thomas case. In this case, the profits were equally distributed among parties however there was no provision in the agreement to share the loss based on which a partnership was not formed between the parties.
Provisions of Partnership Act (Vic) 1958
As discussed above, there are certain elements which form a partnership between parties. Firstly, the parties must carry out the business of the partnership based on which they have certain rights and obligations. Julio, Carolyn and Trisha decided to establish a business in which they provide financial advice to different clients which fulfilled the first element of the partnership (Mann v D’Arcy). Another element of a partnership is that the business must be operated by the partners in common and they must together operate the functions of the business. The business is operated by Julio, Carolyn and Trisha and they have different roles to play in the business, and they are equally obligated towards the business based on which the second element is fulfilled as well (Re Ruddock). Finally, the objective of the business must be to generate profits and Julio, Carolyn and Trisha are equally sharing the profits based on which a partnership has formed between them, and their status in the business is of partners. Sarah did not have any role in the partnership, and no other partners are running the business on her behalf. She has given a loan to the partnership based on which she is the creditor of the business because only sharing of profits did not form a partnership (Plummer v Thomas).
Conclusion:
In conclusion, a partnership has been formed between Julio, Carolyn and Trisha because all the elements of a partnership are fulfilled in this scenario. Julio, Carolyn and Trisha are equal partners in the business. Sarah did not run the business operations of the partnership in common with other partners, and they did not run the operation on her behalf, therefore, she is a creditor who has given a loan to the partnership.
The issue is whether X can hold Julio and other partners liable for the loss suffered by him.
In case a person made any false statement regarding a fact to another party in order to induce such party to enter into a contract, and such party enter into the contract by relying on such statement which resulted in causing loss to the party, then a suit for misrepresentation can be filed. There are three types of misrepresentation which include fraudulent, negligent and innocent misrepresentation. In case a contract is formed based on misrepresentation, then it is considered as voidable. The party making the false statement of a fact can be held liable by the court to provide damages to the aggrieved party. The court analyses the case based on certain element to consider whether a suit for misrepresentation can be formed. Firstly, the court evaluates whether a false statement is made by a party or not because a false opinion or estimation cannot be considered as misrepresentation as provided in the case of Hedley Byrne v Heller.
Provisions of Australian Consumer Law
However, this rule did not apply to a person who is in the position to know the true facts as given in the case of Smith v Land and House Property Corp. In this case, a landlord was held liable by the court for misrepresentation when he made a false statement about his tenant because he was in the position to know the facts. The Australian Consumer Law provides a number of provisions which are necessary to comply by parties while operating their business in order to avoid causing injury to another party. Similarly, professionals are required to comply by the provisions of the Australian Consumer Law as well to ensure that they maintain a standard of care which is significant in the particular situation to avoid causing damages to their client. Section 9 of ACL provides that goods should not be defected or else the business can be held liable. Parties have contractual liabilities to ensure that they did make any false statements to another party which might result in causing loss to them. While giving professional advice, parties have to ensure such advice is correct to avoid any occurrence of loss suffered by the party who relied on such statement.
Furthermore, the damages suffered by the party must be caused directly as a consequence of the misrepresentation and the damages must be foreseeable. While giving advice in case of a partnership, the aggrieved party can hold other partners liable for the actions of a partner as well. Section 9 and 13 of the Partnership Act provides that other partners can be held liable by the actions of a particular partner in case the actions are not unusual and they come within the definition of business as usual. In order to file a suit for joint liability of partners, it is necessary that the partner must act within the scope of his/her authority and within the limits of the business. Walker v European Electronics Pty Ltd is a helpful case in this matter. In this case, other partners of a charter accountant firm were held liable for the action of a particular partner because his actions were not usual and he was acting within the scope of his authority.
Julio is the tax adviser of X, and he gave him the advice to purchase a property which would have provided him a tax advantage. However, Julio did not know that Australian Taxation Office (ATO) has introduced new regulations which resulted in increasing the tax on the property and Julio had to pay an extra $15,000 in tax. A duty of care is owed by Julio to X because he is acting as his tax adviser and he has to maintain a standard of care which any professional would do while acting in the particular situation. As per the Australian Consumer Law, Julio is required to maintain a standard of care in order to ensure that his clients are protected from any losses which could occur due to his advice. The advice given by Julio was not an opinion or estimation because he is a tax specialist and he is expected to know such facts (Smith v Land and House Property Corp). Thus, X has the right to file a suit for negligent misrepresentation against Julio because due to his mistake he suffered a loss of $15,000 in tax. Furthermore, the actions of Julio were business as usual, and he was acting within the scope of his authority. Based on these elements, X can hold Julio along with other partners liable for the loss suffered by him.
Legal consequences of misrepresentation
Conclusion:
In conclusion, a duty of care is owed by Julio to X as he was acting as his tax adviser. Such duty was breached by him, thus, X can hold him liable for the loss suffered by him. The actions of Julio were not unusual, and he acted within his authority, thus, other partners are liable towards X as well.
The issue is whether Y can hold Julio and other partners liable for the loss suffered by him.
A party can file a suit for negligent misrepresentation, in case a loss is suffered by him because he relied on a false statement made by a party who owed a duty of care to not make any untrue statement. It is necessary that the party making the statement must owe a duty of care to ensure that he/she did not make any false statement which might cause a loss to another party. While giving any professional advice to a client, it is necessary that the party must ensure that such advice is correct and the party who is relying on such advice will not suffer any loss. A standard of care is mandatory to be taken by parties which any appropriate person who while acting in a similar status. Wrongs Act 1958 provides a number of factors which are evaluated by the in order to determine whether a suit for negligent misrepresentation can be constituted or not. The factors include probability, justifiability, gravity and practicability. Furthermore, section 59 of the act provides provisions based on which a professional can be held liable for giving false advice to another party. In case the professional is a partner, then other partners can also be held jointly and severally liable for his actions.
In Mercantile Credit Co Ltd v Garrod case, the provisions are given by the court based on which other partners can be held liable for the action of a specific partner. The act of the partner must be business as usual, and it should not be outside the scope of the partnership business. Section 9 of PA provides that business as usual means that the actions of the partner are the usual way in which he discharges his duties. While operating in a partnership, other professionals can be held liable for negligent misrepresentation of a partner as per section 9 of PA. In Esanda Finance Corporation v Peat Marwick Hungerfords case, Esanda relied on the audit of PMH while given a loan to companies which are associated with Excel. Later, a suit was filed by the company against the auditor for negligent misrepresentation. The court held a suit for negligent misrepresentation cannot be formed because no duty of care is owed by PMH to Esanda and the company was a third party who relied on the audited accounts without the knowledge of auditor, thus, a suit for negligent misrepresentation cannot be formed.
Liability of partners for actions of other partners
As discussed above, a duty of care is a key element which is required to be present in order to file a suit for negligent misrepresentation. X was a client of the partnership, and Julio was acting as his tax adviser based on which Julio owed a duty of care to him. The actions of Julio were not outside the scope of his authority, and it was business as usual based on which other partners can be held liable as well. On the other hand, no duty of care is owed by Julio to Y because he was not acting as his tax adviser. Y is not the client of Julio, and he is a third party who relied on his advice. Thus, Julio cannot be held liable and other partners cannot be held liable as well as per the judgment of Esanda Finance Corporation v Peat Marwick Hungerfords.
Conclusion:
In conclusion, no duty of care is owed by Julio to Y because he was not acting as his tax adviser. Y is a third party who acted on the advice of Julio without his knowledge, thus, Julio cannot be held liable for the loss suffered by him. Similarly, other partners also cannot be held liable for the loss suffered by Y because no duty of care exists.
The main issue is related to the best option available for Julio, Carolyn and Trisha to manage their business risks.
There are a number of business structure in which a person can start his/her business. Although, there are advantages and disadvantages of every type of business structure, so it is advisable that one should select the same for his/her business accordingly. Proprietorship concern, Partnership concern/firm, trusts and corporations are some of the general types of business structures. The corporation is the most beneficial options available to those individuals who want to do business with another people due to any of the reasons. In private companies, generally, two or more people start their business together but not similar to Partnership, in this structure, the liability of entrepreneurs remains separate from their business entities. It was held in the case of Salomon v A Salomon and Co Ltd that a corporation has separate legal entities from it is directors and members. So, there are a number of benefits available to individuals in the incorporation of a private corporation.
In addition to separate legal entity feature, corporations also have other benefits such as proper capital structure and division the same into members in a proper ratio. In case of a corporation, powers and responsibilities of people are defined in a well, and better manner in comparison to partnership concern and they are not responsible for any of the conduct of corporation as well as of another people. But it is also necessary to mention that in case of corporations, legal requirements get extended. Every corporation in Australia has to comply with the provisions of Corporations Act, 2001 (Cth). There some duties which are defined for the directors of a corporation and one need to comply with them being the director an officer of the corporation. Penalties and punishment are also high and strict in case of a corporation. So, these are the highlights of a corporation business structure.
In the given case, Julio, Carolyn and Trisha, currently are in operation of a Partnership concern. But the same are facing issues related to bifurcation and division of responsibility among three of them. Julio has advised to the client, and due to this, the confusion has brought into light that who will suffer from the same or who will compensate to the client for the conduct of Julio. In this context, it may say that all three partners need to change their business structure and manage the same in a more proper manner. As earlier discussed that in case of corporation duties and responsibilities are more defined in comparison to partnership firm, it is advisable for them to form a corporation. In corporation structure, separate legal entity rule is also applicable, and for that reason, people involved in the business in the capacity of directors and members cannot held personally liable. Further, they will also be not liable for the actions of others as there is a defined way to declare responsibilities of every person when it comes to a corporation. So, in this context, it is to advise that Julio, Carolyn and Trisha should convert or transfer their current business to a corporation.
Conclusion:
In conclusion, it may state that as in the provided case, there was confusion about roles and responsibilities of a partner; they should continue their business as corporation form. By doing the same, they will have their separate liability from the corporation and other partners as well. They all will be responsible for their own act and actions. Further, they can also add some more persons who are interested in joining them in their business as director or member according to the requirement.
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