Formation of a Partnership Business Structure
The issue, in this case, is related to the business structure which is formed between Julio, Carolyn, Trisha and Sarah and the status of each member of the business.
Rule
There are different business structure based on their characteristics which can be selected by the parties based on their advantages and disadvantages. A large number of people form a partnership because of its advantages. It is relatively easy to form a partnership business structure, and costs relating to set up and maintenance of the operations are low as well. The provisions regarding operations of a partnership business are given under the Partnership Act 1958 (Vic).
The definition is given under section 5 of the act which provides that it is referred to a relationship between two or more parties who decided to enter into a business which they operate commonly with an objective to generate profit. As per the definition, there are three key elements which form a partnership including ‘carrying on a business’, ‘in common’ and ‘objective to generate profit’. Partners in business have unlimited liability because the business did not have a separate legal personality of its own. Therefore, in case the business is unable to repay its debts, then the partners can be held personally liable by the court.
The first element is that the partners must carry on the business of the partnership and as given in the judgment of Smith v Anderson case, an isolated event which will occur only once cannot be constituted as a carried out of business. The business of the partnership must be running ‘in common’ by the partners. In the judgment of Saywell v Pope case, the court held that in case that if there are an intention and agreement between partners regarding the creation of a partnership, there is lack of participation in the business, then a partnership cannot be formed between parties. The partners must operate the business in common with an objective to generate profits for the business and them.
A good example was given in M Young Legal Associates Ltd v Zahid (A Firm) case in which it was held that if a person did not receive a share in the profit, then he/she cannot be considered as the partner of such business. However, in the judgement of Britton v The Commissioners of Customers & Excise case, it was held by the court that only sharing of profits did not construct a partnership between parties and fulfilment of other requirements are necessary as well.
Key Elements of a Partnership
Application
Julio, Carolyn and Trisha started their business by writing down some terms on the business in a paper. They did not get involved in any legal compliance. Each of the party plays a different role in the business, for example, Julio is a tax expert, Carolyn is an accounting expert and Trisha provides advice regarding investments. All three of them are running the business in common, and their objective is to generate profits for the business. Therefore, a partnership has been formed between the parties and Julio, Carolyn and Trisha are equal partners in the business. In case of Sarah, gave a loan of $40,000 for which she is receiving a share of two per cent from the profits. She is not interested in the business, and she did not get involved in its operations. Sarah is only sharing the profits of the partnership and as provided in the judgment of Britton v The Commissioners of Customers & Excise case, only sharing of profits did not construct a partnership between parties. Therefore, she is not a partner in the business, and she is only a creditor of the business.
Conclusion
Thus, a partnership business structure is formed between parties and Julio, Carolyn and Trisha status in the business as partners. Sarah did not run the operations of the business commonly with other partners, and she only gets a share of the profits. Based on which she is a creditor of the business.
Question 2
Issue
In this case, the key issue is whether X can hold Julio and other partiers jointly liable for the loss suffered by him due to the wrong advice was given by Julio.
Rule
The law required that people should maintain a standard of the case while giving advice to another party in order to ensure that they did not suffer any loss. In case a false statement is made by a party, then a suit for misrepresentation can be formed. In this case, the party making the false statement can be held liable for breaching the standard of care which resulted in causing loss to another party. A suit for misrepresentation can only be filed against a party in case a false statement is made by him rather than a statement of opinion or estimate. Misrepresentation is divided into three categories which include innocent, negligent and fraudulent.
A good example was given in Bisset v Wilkinson case. In this case, the claimant decided to purchase farmland, and he asked the seller to tell him about the capacity of the land to hold sheep. The seller did not know about the actual capacity of the land, and he estimated that it might be able to hold 2,000 sheep. The land was not able to hold 2,000, and the claimant files a suit of misrepresentation against the seller.
Concept of Joint Liability for Negligent Misrepresentation
The court held that it was not a false statement rather it was just an opinion based on which the party cannot be held liable for misrepresentation. Although a statement of opinion or estimate cannot be constituted as a false statement unless the party is in the position to know the facts. In Smith v Land and House Property Corp case, a landlord described his tenant as “most desirable” based on which the claimant entered into a deal with him. After some time, the tenant becomes bankruptcy, and the claimant filed suit against the old landlord. He defended his case by stating that the statement was just an opinion and it was not a statement of fact.
However, the court held that he was in the position to know the truth based on which he held liable for misrepresentation. The person who owes a duty of care must ensure that a standard of care is maintained by him in order to avoid injury to others. In case he/she failed to maintain such standard and an injury is suffered by another party, then a suit for misrepresentation can be filed by the innocent party.
The Partnership Act provides provisions regarding the joint liability of partners under section 9 and 13. It provides that partners can be held jointly liable by the court for the action of one partner if such action is carried out during the business, the partner was acting within his/her scope, and it was business as usual. Polkinghorne v Holland & Whittington is a helpful case in this matter. In this case, a partner conducted a fraud with a client by giving his advice regarding making an investment in government bonds and investing in a company which is run by an acquaintance. Other two partners did not know about the actions of the partner.
The client filed a suit against the partners by hold other partners liable as well. Other partners argued that they did not know about the actions of the first partner, and he was a legal expert, therefore, this advice did not come under the scope of his job, and it was not business as usual. The court held that all the partners are jointly liable because although they did not know about the actions of the partner, but, it comes under the definition of business as usual because a legal advisor is required to make enquiries regarding the client before given him advice.
Examples from Case Law
Application
Julio is tax expert, and mistakenly he gave false advice to X due to which he had to pay extra $15,000 in taxes. Julio did not know about the latest ruling of Australian Taxation Office (ATO) due to which X suffered loss. Since Julio was the tax advisor of X, he owed him a duty of care to ensure that the advice given by him is in his interest. As a tax advisor, Julio was in a position to know the facts regarding the advice he was given to X based on which a suit for misrepresentation can be formed as given in Smith v Land and House Property Corp case. Julio breached such duty by failing to learn about the latest ruling of ATO.
Therefore, a suit can be filed against Julio for failure to maintain a standard of care which any reasonable person would have in such situation due to which he is liable for negligent misrepresentation. Furthermore, while giving tax advice to X, Julio was acting within the scope of the business, and it was business as usual. As per the judgement of Polkinghorne v Holland & Whittington case, partners are jointly liable in case the false statement given by a partner comes under the definition of business as usual. Based on which X can hold other partners liable for the misrepresentation made by Julio while giving tax advice to him.
Question 3
Issue
In this case, the key issue is whether Y can hold Julio and other partiers jointly liable for the loss suffered by him due to the wrong advice was given by Julio to X.
Rule
Partners have unlimited liability, and they can be held accountable for the actions of other partners which are within the scope and comes under the definition of business as usual. In case a party mistakenly made a false representation to another party due to which the party suffered a loss, a suit for negligent misrepresentation can be filed. Therefore, a duty of care is required to be maintained by parties, and as given in the judgement of Shaddock v Parramatta City Council case, the duty also extends to any advice which is given by a party regarding a “serious circumstances” which include information about road widening project. In case a party mistakenly failed to ensure that a standard of care is maintained which any reasonable person would in such situation, then a suit for negligent misrepresentation can be filed. Furthermore, in case of a partnership business structures, partners can be held jointly liable in a case of negligent misrepresentation against one partner.
In case of National Commercial Banking Corporation of Australia Ltd v Batty, the court held that other partners could not be held jointly liable for the actions of a partner in case such actions are outside the scope of his/her authority, and they are performed by the partner in a wrong manner. In this case, the partner obtained money for the firm which was not a usual way of doing business, based on which the court held that the partnership firm could not be held liable for the actions a particular partner.
In the case of Esanda Finance Corporation v Peat Marwick Hungerfords, the court provided provisions regarding the duty of care owed by a person to the third party. In this case, PMH was acting as the auditor of Excel; Esanda gave a loan to different companies which are associated with Excel, and a guarantee was given by Excel. A claim was made by Esanda that the decision to give loan to the firms associated with Excel was in part due to its reliance on the audited accounts of Excel. Later Esanda sued PMH by claimed that the auditor owed a duty of care to the company.
The court held that PMH owes no duty of care to Esanda and PMH cannot be held liable due to the reliance made by Esanda on its judgement without its knowledge. The Wrongs Act 1958 provides provisions regarding professional advisers. Section 59 of the act provides that a standard of care should be maintained by a professional while giving advice to another party as any other professional adviser would maintain in the particular situation. However, a professional cannot be held liable for the damages suffered by a third party who relied on his/her judgement without the knowledge of the professional because a duty of care did not owe by the professional.
Application
X is a client of Julio, and due to the wrong advice of Julio, he suffered a loss of $15,000 for which Julio and other partners are jointly liable. X also told Y regarding the advice of Julio due to which Y suffered a loss of $15,000. However, Y cannot file a suit of negligent misrepresentation against Julio and other partners because they did not owe a duty of care. The actions taken by Julio while giving false advice to X were within the scope of the business due to which he and other partners are liable. However, Y was not the client of Julio, and he did not owe a duty of care towards him. Julio and other partners cannot be held liable because they did not owe a duty of care to a third party who relied on their statement without their knowledge as provided in the case of Esanda Finance Corporation v Peat Marwick Hungerfords.
Conclusion
Thus, Julio and other partners cannot be liable by Y for the loss suffered by him because they did not owe a duty of care and Y relied on Julio’s advice without his knowledge.
Question 4
Issue
In this case, the issue is associated with the options available to Julio, Carolyn and Trisha regarding the reduction of their business risks.
Rule
While operating a partnership business, parties can make changes in its terms and conditions by mutually deciding to benefit themselves or for the benefit of the business. Other than a partnership, there are other business structures as well from which parties can choose. A sole trader is another business structure which is operated by a single person, and he/she is responsible for all its operations. It is relatively easy to form a sole trading business, and the owner has to comply with low legal requirements. However, the membership of a sole trading business is limited to one person, and the liability of owner is unlimited. Furthermore, parties can form a trust in order to operate their business.
In this business structure, a trustee holds a property and collects all its benefits for the interest of its beneficiaries. The rights and liabilities of a trustee are clearly defined under a trust deed; however, its formation is relatively complex. Parties can also form a company which is categorised into two parts: public and proprietary. In Salomon v Salomon & Co Ltd case, the court held that a company has separate legal personality from its owners, and they cannot be held liable for its actions.
Application
Julio, Carolyn and Trisha have different options in case they wanted to manage their business risks better. The first option is that they can change the procedure of giving written advice to their clients by adding a disclaimer that the expert and the partnership would not be held liable in case the client suffers any loss by acting based on such advice. The second option is that the partners can form a legal partnership agreement in which they can clearly mention the role of each partner and what their duties. They can also mention that other partners will not be held liable if a partner failed to fulfil his/her responsibility.
The third option is that partners can change their business structure in order to form a proprietary company. After formation of a proprietary company, the liability of the partners will be limited to their shares in the company, and they would not be held personally liable for the actions of other members. Furthermore, the responsibilities and roles of each member would be clearly given in case of a proprietary company based on which they can easily manage their risks. In this case, the third option is most suitable for Julio, Carolyn and Trisha because their liability will be limited, and they cannot be held liable for the actions of other members.
Conclusion
Thus, Julio, Carolyn and Trisha should incorporate a proprietary company which would assist them in managing their business risks better, and their liability will be limited.
Thus, X can hold Julio and other partners jointly liable for the loss suffered by him due to the false advice was given by Julio.
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