Essential elements of a partnership
Discuss about the Business Partnership for Formation of Business.
1. In Australia, a partnership can be defined is a kind of relationship amid people who carry on a business in common and with the sole intention to gain from such relationship. It is a legally binding agreement which is formed amid two or more persons who mutually participate to carry on business to earn profits but is not equivalent to an entity (Green v Beesley (1835)). The necessary elements that are required for the formation of a partnership are: (Sydney 2016)
Two or more persons – No single person can form a partnership and the minimum requirement is two or more persons who can together mutually form a partnership amid themselves.
Carrying on Business – initially carrying on business signifies some form of continuity in order to establish partnership (Smith v Anderson (1880) & Re Griffin; Ex parte Board of Trade (1890)). But, there are cases wherein a single venture was considered as an act of partnership (Playfair Development Corporation Pty Ltd v Ryan (1969) & United Dominions Corporation Ltd v Brian Pty Ltd and others (1985)). It is the scope which defines whether a single venture can be categorised as a partnership or not (Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974)).
In Common – in common signifies that the business must be carried out by, or on behalf of, all the partners (Lang v James Morrison & Co Ltd (1912)). It is not the all the partners are involved in the business but the act of one will bind all the other partners of the firm.
Earn profit – the main motive of forming a partnership should be earning profits and sharing losses (Wise v Perpetual Trustee Co Ltd (1903).
Now, when all the above elements are present then a valid partnership is formed amid the partners. However, it is now important to understand the relationship of partners towards each other and towards the outsiders creditors) of the firm.
Basically, in any partnership there are mutual rights and obligation which are imposed upon the partners. The law of agency governs the basic rules of partnership. Every partner is the agent of the firm and other partners and vice versa. Thus, any action of one partner which establishes a relationship with an outsider will bind all other partners of the firm towards such outsider.
Mutual rights and obligations of Partners
It is well recognised that the partnership is one of the segments of the law of agency and there is a two way fiduciary duty that exists, that is, every partner is in a fiduciary duty towards each other and towards the firm and vice versa (Phillips-Higgins v Harper (1954)). Every partner is the agent of another while carrying out the partnership business (Re Agriculturist Insurance Co (1870)).
There are various instances wherein a partner is bound to an outsider even for the acts which are undertaken by some other partner as the law of agency is fully applicable in such situations and an act of one partner will defiantly bound the other partners towards such outsiders. The acts are:
When the partner (s) of the firm has given an authority to another person (regardless whether such other person is the partner of the firm or not) to undertaken transactions on behalf of the firm with a creditor or an outsider. In such situations, if such authorised person is acting within his authority (whether actual or apparent), then, the basic rule of agency will apply and such person will bound the firm and all the other partners towards such an outsider for the transaction that is undertaken by him.
In this situation, the partners are held accountable towards the creditors which are undertaken by a person who not necessarily be a partner of the firm and thus bound all the other partners of the firm by his actions. But, in this situation it is necessary that the actions should be undertaken which is within the scope of the authority which is enshrined upon such person by the partners of the firm.
But, there are situation wherein even when there is no real or apparent authority which is imposed upon a person, still, he is capable to bind all the other partners of the firm towards a creditor. This situation is submitted herein below.
When a partner has acted outside his scope of authority however, such a transaction if entered by such partner is within the scope of the partnership business (Polkinghorne v Holland (1934) and is carried out in its usual manner (Mercantile Credit Co Ltd v Garrod (1962) & Goldberg v Jenkins (1889)) and the outsider who is dealing with such unauthorised partner has reason to believe that such a partner is authorised to undertaken the transaction (Watteau v Fenwick (1893)), then, in such situation, any transaction by such unauthorised partner will bind all the partners towards the outsider.
The binding actions of partners towards outsiders
Thus, in such situation, even when the partner is acting outside his scope of authority still the actions undertaken by him will bind the firm provided all the essentials are fulfilled.
When the partners of the firm has given an authority to one of the partner to deal with an outsider in behalf of the firm. Then any action which is undertaken by such a partner will bind all the other partners of the firm. The partners will be bound even when the transaction which is undertaken by the partner is not within the scope of partnership or whether the outsider is not aware that the agent is the partner in the firm. Since all the partners has authorised another partner, thus, they must abide by every action of such authorised partner.
However, the partners of the firm or the firm may try to limit their liability by establishing some of the following:
That the creditor is aware that the partner is not authorized to undertake the transaction;
That the person to whom authority is conferred is not acting within his scope of authority.
Thus, it is a settled law that a partner has the capacity to bind all the other partners and the firm provided his actions are undertaken within one of the above scenarios.
Whether the Marlin Fishing Pty Ltd (Company 1) will be bound by the contract entered by Michael with Commercial Vessels Pty Ltd (Company 2)?
Law
The issue can be resolved by analyzing whether the actions of Michael which are outside the scope of the constitution of the company are bound upon the company or not? this issue is clarified by first understating some of the major provisions of the Corporation Act 2001.
In Australia, every company is either governs by its constitution or replaceable rules or both[1]. Section 125 (2) of the Act 2001 submits that when a company has a Constitution, then, it lays down the objects of the company. However, it is also submitted that just because an act is outside or exceeds the scope of the company object, then, this will not be the ground to consider such an act as invalid and the act will still be valid and binding upon the company. Likewise, as per section 125 (1), if any act is contrary to any express provisions or restriction mentioned in the Constitution, then such an act will not be considered as invalid in law just because it violates the provisions or restrictions of the Constitution.
Limitation of Partner liability
Now, the general rule is that whenever any agent of the company undertakes any act on behalf of the company within his authority then such actions are binding upon the company (Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd (1964)). But, it is important to understand the status of those contracts which are undertaken by an agent with an outsider which is outside his scope of authority. Normally, the company tries to avoid such kinds of contract and consider them voidable on the basis of lack of authority and thus causes great hardship to an outsider who is entering into a contract with an agent on a belief that such an agent has requisite authority to undertake the contract and all the companies internal management requirements are comply with. (Woodward et al 2001)
In order to protect the interest of outsiders, the Indoor Management Rule is applied which is laid down in Royal British Bank v Turquand (1856). As per the rule, whenever any outsider is entering into any contractual relationship with the company through its agent or directors, then, he can assume that all the internal requirements of the company are comply with provided he is acting in good faith and has no reasonable grounds to suspect any kind of irregularity. (Krawitz 2002)
Thus, an outsider is not imposed with any obligation to check and confirm whether the internal requirements of the company are comply with and he has the capacity to assume that every internal proceeding are met with before any agent or director of the company is dealing with him. There are various assumptions that can be made by an outsider, such as, the directors is appointed properly, that the board of directors meeting is comply adequate or all prior approvals are met before any contractual relationship is established amid the company and an outsider. (Krawitz 2002)
However, the Indoor Management Rule will not be applicable when the outsider has actual knowledge of the irregularities in the company or when the outsider is capable to make reasonable enquiry with the help of which he can attain the knowledge of the irregularities within the company (Northside Developments Pty Ltd v Registrar-General (1990)). (Halsbury 1998)
This rule of Indoor Management is rightly made part of the Corporation Act 2001 under section 128 and section 129 of the Act (Bank of New Zealand v Fiberi Pty Ltd (1994). As per section 128 (1), a person who is dealing with the company is empowered to make assumptions which are mentioned under section 129 of the Act (Gye v McIntyre (1991)). As per section 128 (3) if any officer of the company has forged a document, then, an outsider can assume that such an officer has the requisite authority to do so. The scope of section 128 (3) covers those documents which are signed of affixed by an officer who does not have the requisite authority. But, no assumption can be made if the outsider suspects or knows that the assumption so made is not correct (Tesco Supermarkets Ltd v Nattrass (1972). (Tomasic and Bottomley, 1995)
As per section 129, an outsider can assume that the provisions of the Constitution are complying with before any transactions are undertaken amid him and the company. As per sub section 3 of section129, an outsider can assume that the officer of the company is properly appointed and has all the powers to represent the company (Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975). Also, as per section 129 (5) and 129 (6), an outsider can assume that all the documents of the company are properly executed by the company unless and until ha has reasonable suspension on the same. (Meagher et al, 1992)
But, assumptions under section 129 (5) & 129 (6) must read along with section 127 (1) of the Act. a document without common seal can be executed if the same is signed by 2 director, of a director and a company secretary or a sole director of a proprietary company who is also the company secretary Pyramid Building Society v Scorpion Hotels Pty Ltd (1996)).
The law is now applied to the facts of the case
Now, the above raised law is applied to the facts,
As per the facts, Marlin Fishing Pty Ltd has four directors, that is, Michael and his three sons Dan, Terence and Pat. They are also the equal shareholders of the company.
As per the Constitution of the company, if any contract is to be established then it must first be approved at the meeting and a company seal must be affixed along with the signatures of two directors.
But, Michael entered into a contract with Commercial Vessels Pty Ltd (friend of Michael) without the compliance of the above procedure. His fried is aware of the irregularity.
It is submitted that since Michael made a contract with his friend and his fried is aware of the irregularity that existed in the company and is reasonable aware of the defect, thus, in such situation the Indoor Management Rule will not be applicable as there is presence of knowledge of irregularity.
Also, the Commercial Vessels Pty Ltd cannot raise the assumptions under section 129 because of the applicability of section 127 (1). It is submitted that the document which is executed by Michael is without common seal, in such scenario, as per section 127, the document must be signed by 2 directors or a director and Company Secretary or the sole director of the company. But, none of the requirements are raised are fulfilled by Michael and no objection I raised by Commercial Vessels Pty Ltd.
In such scenario, the irregularity is very obvious and thus Commercial Vessels Pty Ltd cannot sue the company of Michael.
Conclusion
Thus, the contract is not binding on the company and the friend of Michael cannot sue the company for the enforcement of the contract.
Reference List
Bank of New Zealand v Fiberi Pty Ltd (1994)
Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974).
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975).
Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd(1964).
Green v Beesley (1835).
Goldberg v Jenkins (1889).
Gye v McIntyre (1991).
Halsbury, 1998, Halsbury’s Laws of England, 4th ed vol.9.
Krawitz A, 2002, Protecting Outsiders to Corporate Contracts in Australia (online). Available at https://www.austlii.edu.au/au/journals/MurUEJL/2002/22.html. Accessed on 22nd August 2016.
Lang v James Morrison & Co Ltd (1912).
Mercantile Credit Co Ltd v Garrod (1962).
Meagher et al, 1992, Equity: Doctrines and Remedies, 3rd ed.
Northside Developments Pty Ltd v Registrar-General (1990).
Playfair Development Corporation Pty Ltd v Ryan (1969).
Phillips-Higgins v Harper (1954).
Polkinghorne v Holland (1934).
Pyramid Building Society v Scorpion Hotels Pty Ltd (1996).
Re Griffin; Ex parte Board of Trade (1890).
Re Agriculturist Insurance Co (1870).
Royal British Bank v Turquand (1856).
Smith v Anderson (1880).
Sydney, 2016, partnership (online). Available at: https://webcache.googleusercontent.com/search?q=cache:rKTyb6YyI70J:sydney.edu.au/lec/subjects/associations/notes/Summer%25202010-11/Topic%25203%2520-%2520Partnership.doc+&cd=1&hl=en&ct=clnk&gl=in. Accessed on 22nd August 2016.
Tesco Supermarkets Ltd v Nattrass (1972).
Tomasic and Bottomley, 1995, Corporations Law in Australia.
United Dominions Corporation Ltd v Brian Pty Ltd and others (1985).
Wise v Perpetual Trustee Co Ltd (1903).
Watteau v Fenwick (1893).
Woodward et al, 2001, Corporations Law – in principle, 5th ed, p.113
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