Determining Partnership Existence
All four grandchildren of Edna Barcoo (Kate, William, Harry and George) inherit $250,000 each and decide to go into business, the business being running a horse stud by the name of “Tall Oaks”. This has not been registered as a business. They all contributed to the venture by investing their inheritance completely and William additionally brought in two race horses. The responsibilities are split among the siblings and William sanctions all purchase transactions (by agreement). Major decisions are discusses and voted on. William is not paid a salary. Profits were to be shared in the following ratio – William 50%, Harry 25%, Kate 12.5% and George 12.5%.
To determine if Kate, William, Harry and George are partners.
In order to determine if a partnership exists between the parties a four-step process needs to be employed, these are (Pearlie, 2015):
- Determination of the intent of the parties.
- Determination of the presence of all elements of a partnership [as per Section 5 (1) of the act].
- Determination of compliance with the rules prescribed under Section 6 of the act.
- Determination of application of case law.
In Bryant Bros v. Thiele [1923] SASR 393 it was held that in order to determine the intention of the parties to enter into a partnership the circumstances (the conduct of the parties) surrounding the transactions must be considered (Llewellyn, 2016).
Section 5 of the act defines partnership and poses four requisites which must be established these are (Fooks, & Gilmore, 2014):
- A busniness- Hope v Bathurst City Council[1980] HCA 16 laid down that activities undertaken by a commercial entity which are aimed at earning a profit and are of a continuous process would be considered a business (Norbury, 2015).
- “Being carried on”- has been described as a continuous process of transactions and not single transactions. However, single transactions can also be interpreted as business being carried on some cases.
- “In common”- Has been described to go beyond just common intentions to the establishment of a relationship between the parties whereby the carry on transactions of behalf of each other and as an entity as a whole.
- “With a view of profit”- Has been judicially defined to mean that the intention of the parties in entering into such transactions is earning a profit.
In the given set of circumstances we see that the parties entered into business transactions with the aim of earning a profit (as is evident from the profit sharing ratio). Kate, William, Harry and George continually engage in transactions and have formed their organization based on the aim of sharing profits thus from the conduct of the parties it can be inferred that they intended on entering into a partnership. Thus following Bryant Bros v. Thiele and Hope v Bathurst City Council it would successfully constitute a partnership.
The nature of the transactions entered into was continuous and that it would be deemed as a business being “carried on”. There is a relationship between them whereby transactions are undertaken by William on behalf of the other partners which has been agreed upon by them (as stated in the facts) and thus the third requisite under Section 5 of the act is fulfilled.
As stated above the profit sharing ratio obviates the intention to earn profits through the transactions and thus the fourth requisite has also been met.
Thus a partnership exists between Kate, William, Harry and George due to their compliance with the requisites of Section 5 and 6 of the Partnership Act, 1958 (Vic).
Partnership Liabilities in a Scenario
Kate arranged for a party at the stud and procured a dress worth $7000 without prior discussion with the other partners. The issue here is such a transaction would be a liable debt for the partnership.
Section 9 of the Partnership Act, 1958 (Vic) lays down circumstances in which the acts of a partner would bind the firm. This necessitates that the act should be done by virtue of actual authority or apparent authority (Freudenberg, 2013). Actual authority is when a partner is tasked with undertaking such transaction through agreement of all the partners and apparent authority is when such an authority can be inferred from the transaction (Noone, 2014). In case a partner is acting devoid of such authority the person the transaction is being entered into with must also be aware of the absence of authority or must have reason to believe that the transaction was made in the absence of such authority (Hynes, 2014).
The court can infer apparent authority if the transaction has the following requisites:
- If the transaction is of the same nature as the ones normally entered into by the firm.
- If the transaction is of a similar nature as compared to firms that carry on similar business activities.
With regard to the awareness of the third party Goldberg v Jenkins [1889] 15 VLR 36 laid down that if the transaction is such that considering the business of the firm a reasonable person could infer that it was not a transaction of the business (or that something was wrong) then it would not be binding on the firm (Hepburn, 2013).
It has been stated in the statement of facts that the transactions of the business were sanctioned by William who had to adhere to $25000 limit. This was agreed upon by the other partners thus giving William actual authority. Thus Kate did not have actual authority.
The transaction entered into related to the purchase of a dress and thus would not fall within the ambit of apparent authority and thus would not be binding on the firm as per Section 9 of the Partnership Act, 1958 (Vic).
The person selling the dress would also reasonably understand that buying a dress would not be a transaction that would be undertaken by a horse stud business and thus following Goldberg v Jenkins this would not constitute apparent authority.
Kate did not have the authority to act on behalf of the company as defined by Section 9 of the act and thus the firm would not be liable to pay for the price of the dress.
The partners wish to buy a race horse that amounts to $170,000 but the partnership firm does not have the amount at the moment. The same is taken from Harry as a loan with 15% interest. The issue here is to identify if this would be partnership property.
Partner’s Rights under the Partnership Act
Section 24 (1) of the act defines partnership property and includes any property, rights or interests that have been procured with the purpose of employing it for business transactions (Gan, Cashore & Stone, 2013). Section 25 states that where the property is bought with the firm’s money, and there is no intention to the contrary, then it would constitute partnership property (Williams, 2013).
In the given set of circumstances the race horse was purchased with Harry’s money (which would be returned as a loan) and not the partnership firm’s funds. Thus it would not constitute partnership property.
The race horse would not be considered as partnership property as per the definition in Section 24 (1). Thus the firm would not acquire all rights and interests in the property.
George wishes to leave the partnership. The issue here is determining the rights available to him in light of this and the remedies available to him to recover his share of investment.
Section 30 of the Partnership Act, 1958 (Vic) gives partners the right to retire from the partnership at will (Li, Xue & Wu, 2013). Under such circumstances the partnership will have to be dissolved. In such a case the dissolution process undertaken will follow the provisions of Section 36 of the act which defines and regulates dissolution of a partnership firm through expiration or notice (notice in case of retirement).
Section 47 of the Partnership Act, 1958 (Vic) lays down that a retiring or deceased partners share (investment) becomes a debt to the firm which maybe recovered (Perelli-Harris, 2015).
George, as a partner of the firm, has the right to retire from the partnership at will as per the provisions of Section 30 of the act. Thus, his share of investments would automatically become a debt to the firm which maybe legally recovered by him or his representative (following Section 47 of the act). This would be after the partnership is dissolved under the provisions of Section 36 of the act due to the fact that the dissolution is invoked through notice of a retiring partner.
Conclusion
George has the right retire at will from the partnership with Kate, William and Harry by giving them a notice of retirement as per the provisions of Section 30 (2) of the act. His best recourse in order to get back his investment would be to recover the money as a debt following the provisions of Section 47 of the act.
Reference list
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Gan, J., Cashore, B., & Stone, M. W. (2013). Impacts of the Lacey Act Amendment and the Voluntary Partnership Agreements on illegal logging: implications for global forest governance. Journal of Natural Resources Policy Research, 5(4), 209-226.
Hepburn, S. (2013). Australian Principles of Property Law. Routledge-Cavendish.
Hynes, J. D. (2014). Agency, partnership, and the LLC: the law of unincorporated business enterprises: selected statutes and form agreements. LexisNexis.
Li, J., Xue, Y., & Wu, W. (2013). Partnership dissolution and proprietary information. Social Choice and Welfare, 40(2), 495-527.
Llewellyn, K. N. (2016). The common law tradition: Deciding appeals (Vol. 16). Quid Pro Books.
Noone, M. A. (2014). Legal aid crisis: Lessons from Victoria’s response. Alternative Law Journal, 39(1), 40-44.
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Pearlie, K. O. H. (2015). 3. AGENCY AND PARTNERSHIP LAW.
Perelli-Harris, B. (2015). Partnership formation and dissolution in Western societies.
Williams, B. R. (2013). Trans-Pacific Partnership (TPP) countries: comparative trade and economic analysis.
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