Characteristics of Business Structures in Australia
The issue, in this case, is associated with the business structure in Julio, Carolyn, Trisha and Sarah are in and their status in the business.
Business structures have different characteristics which provide both advantages and disadvantages to parties. Based on these factors, parties are required to choose between different business structures. In Australia, the business structures which are selected by parties to operate their business include a sole trader, company, partnership and trust. A partnership is created if two or more parties decided to start a business and manage its operations by themselves jointly. The formation of a partnership is relatively easy, and partners are not required to comply with a number of legal requirements while performing their business operations. The Partnership Act (Vic) 1958 provides provisions regarding the governance of partnerships. Its definition is given under section 5 of the PA which provides that it is a relationship which is constructed between two or more individuals who decided to carry out business in common and their purpose is to generate profit. Based on its definition, there are three elements which are necessary to be present in order to form a partnership business. The first key element is that the partners must carry out a business in the partnership. The court provided in the case of Goudberg v Herniman Associates Pty Ltd that a partnership cannot be formed between parties if they did not carry out a business.
Further, the court provided that carry out a business means that the partners must have mutual rights and obligations in the business. The business of the partnership must be carried out by the partners in common which is another key element of a partnership. It means that the business of the partnership must be carried out by each partner on and behalf of others. There should a mutually in the rights and obligations, and not all members are required to be active in the management as long as other partners are running the business on their behalf. In Saywell v Pope, the court provided that the parties did not enter into a partnership structure because the business was not carried out by them in common. Finally, while operating the business, the purpose of the partners must be to generate profits. They should be a part of the business in order to earn profits, and each partner must receive a share of the profits of the business. In Cox v Hickman case, a judgement was given by the House of Lords that only sharing of profits did not create a partnership between two or more individuals and it is necessary that they fulfil other elements of the partnership as well.
Elements of a Partnership Business Structure
While starting their business, Julio, Carolyn and Trisha write the terms of their business in a simple format, and they decided to manage their operations of the business together. Each of them decided to perform different operations in the business, and they established the business in order to generate profits. Julio is performing the role of tax adviser in the company, Carolyn is the head of accounting and Trisha is managing the investment department. Moreover, each party has mutual obligations and rights in the business based on which they perform their duties. Julio, Carolyn and Trisha have fulfilled all the elements of a partnership; therefore, they have entered into a partnership business structure. Each of them has a status of partner in the business. In case of Sarah, she is not running the operations of the business neither other partners are running the business on her behalf. She had given a loan to the business for which she is receiving a share in the profit. Although she is sharing the profits of the partnership, however, she did not fulfil other two criteria which are necessary to form a partnership between parties. Therefore, Sarah is not a part of the partnership business, and she is not a partner in the business, and she is just a creditor of the partnership.
C: Conclusion
Therefore, Julio, Carolyn and Trisha have entered into a partnership, and each of them has a status of partner in the business because they have fulfilled the elements of a partnership. Sarah is just a creditor of the business because she did not carry out the business of the partnership in common with other partners.
The issue in the second question is associated with the wrong advice given by Julio to X due to which he suffered loss for which whether he can hold Julio and other partners liable.
In case a party made a false statement to another due to which such party suffered any loss, then a suit for negligence could be filed by the aggrieved party based on the principle of misrepresentation. If a party induce another person to enter into a contract by making a false statement regarding a fact, then a suit for misrepresentation can be filed. There is three type of misrepresentation which includes negligent, innocent and fraudulent. In order to file an actionable claim for misrepresentation, certain criteria are required to be fulfilled by the parties. In Esso Petroleum v Mardon case, the court provided that it is necessary that a party gives a false statement in order to file a suit for negligence. Although not every false statement is accountable for a suit for misrepresentation, the statement must be regarding a fact because a false estimation or opinion cannot be accountable for misrepresentation. However, an exception can be overruled by the court if the party making the statement is in a position to know the facts as given in Smith v Land & House Property Corp case.
Liability of Partners in a Partnership Business Structure
The person making the false statement must have a duty of care which he/she breached by making a false statement to another party. The party must show reliance on such statement and performed an act which resulted in causing loss to him. The loss must not be too remote or else a claim for misrepresentation cannot be formed. The person who owed a duty of care must ensure that a standard of the case is maintained by him to avoid a loss to another party which any reasonable person would in such situation. These principles apply to a person while giving professional advice to another party. The professional has to ensure that the advice given by him is not false and a standard of care should be maintained by him which any professional would in a particular situation. In Hedley Byrne & Co v Heller & Partners case, the court provided that a party can be held liable for negligent misrepresentation if it failed to maintain a standard of care to fulfil its duty. Section 29 of the Australian Consumer Law provides that while dealing with clients, businesses should not involve in any conduct which is false, misleading or deceptive.
Section 18 of ACL also provides that parties should not perform any act that is misleading or deceptive. These principles are required to be followed by professionals while giving advice to their clients in order to ensure that they did not suffer any loss due to acting on such advice. In case of a partnership, partners are mutually obligated towards each other, and they could be held jointly and severally liable by the court for actions of another party. Section 9 and 13 provides provisions based on which partners can be held jointly liable. Firstly, it is necessary that the partner must act within the scope of his authority and his actions should not be outside the scope of his authority. The actions of the partner should also be considered as business as usual, or else other partners cannot be held liable for the actions of a partner. In Polkinghorne v Holland & Whittington case, a partner was held liable by the court for conducting fraud to harm the interest of a client. The client filed a suited against other partners as well. It was held by the court that the actions of the partners come within the scope of his authority and it was business as usual based on which other partners were held jointly liable for the action of the first partner.
Negligent Misrepresentation and Liability of Partners
Julio, Carolyn and Trisha are mutually handing the operations of the business, and they are responsible for the actions of each other if they are within their scope and business as usual. Julio handles tax advice in the business, and he gave wrong advice to X due to mistake. Julio is responsible for ensuring that he knows about all the changes made by the Australian Taxation Office (ATO), however, he failed to do that due to which X had to pay extra $15,000 tax. Julio was acting within the scope of the business because he provided information regarding tax implications of an investment in a particular real estate property and it was business as usual. Julio owed a duty of care as per section 18 and 29 of ACL based on which he is required to ensure that he did not make any false or misleading statement which could cause harm to his clients. Thus, X can file a suit against Julio for negligent misrepresentation because he owed a duty of care which he breached by not maintaining an appropriate standard of care which any professional would in such situation due to which he is liable as given in Hedley Byrne & Co v Heller & Partners case. Julio was a tax specialist based on which he was in a position to know about the necessary changes in tax regulations based on which he is liable as given in Smith v Land & House Property Corp case. Furthermore, X has the right to hold Carolyn and Trisha held liable for the loss suffered by him as well because the action of Julio was within the scope and it was business as usual as given in Polkinghorne v Holland & Whittington case.
Conclusion
Therefore, a suit can be filed by X against Julio for negligent misrepresentation and other partners are liable as well because Julio was acting within the scope and it was business as usual
The issue is associated with the loss suffered by Y and whether he can hold Julio and other partners liable for such loss.
An aggrieved party can file a claim for damages under negligent misrepresentation if a false statement is made by a person relied on which the aggrieved party suffered a loss. Before filing a suit for negligent misrepresentation, it is necessary that the parties fulfil certain criteria. Firstly, the defendant must have a duty of care to ensure that the statements made by him are correct in order to avoid a loss to another party. The court evaluates a number of factors which were given in Wyong SC v Shirt case which include probability, gravity, practicability and justifiability. These factors are not codified in Wrongs Act 1958. The act provides provisions regarding professional advisers under section 59 which provides that a level of skill and care is required to be maintained by professional advisers which any appropriate person would in such situation to avoid occurring of loss to another party. A similar judgement was given by the court in the case of Rogers v Whitaker in which a doctor was held liable by the court under negligent misrepresentation due to not giving appropriate information to the patient regarding the side effects of the treatment due to which he suffered an injury.
Factors Determining Liability in a Partnership
The scope of a partner is a key element in order to establish a suit for negligent misrepresentation. In Mercantile Credit Co Ltd v Garrod, the court provided that as long as the acts of a partner come within the scope of business as usual, then other partners will be held jointly and severally liable for his actions. The business as usual means that the actions of the partner must be associated with the kind of business which is operating by the partners. In such case, the loss suffered by a third party who relied on the false statement of the partner and suffered loss has the right to file a suit for negligent misrepresentation and held other partners jointly or severally liable. However, in Esanda Finance Corporation case the court provided an exception. In this case, a party relied on the audited accounts of another company after which it filed a case against the auditor for negligent misrepresentation. The court held that the auditor has a duty of care towards its client and it did not have a duty towards any third party who relied on the audited documents.
The business is operated by Julio, Carolyn and Trisha and each of them has a mutual obligation. Julio is responsible for giving tax advice to the client, and the advice given by him to X comes under the definition of business as usual. Julio and other partners are liable to reimburse the loss suffered by X because a duty of care is owed by them and Julio breached a standard of care. On the other hand, Y is not a client of Julio, and he did not have any contractual relationship with Julio or other partners. X passed on the advice of Julio to Y, and he relied on which due to which he suffered loss. However, Y is a third party, and Julio did not owe a duty of care towards him, therefore, as per the judgement was given in Esanda Finance Corporation case, Julio and other partners cannot be held liable for the loss suffered by Y.
Conclusion
Therefore, a duty of care is not owed by Julio towards Y based on which he and other partners cannot be held liable for the loss of Y.
Julio, Carolyn and Trisha wanted to manage their business risks better, and the issue is what options they have to do so.
While operating a business structure, parties can make changes to such structure in order to change their liabilities and manage its operations most effectively. In case of a partnership, partners can make changes to its terms and conditions by mutually adding or deleting terms for their partnership deed. My mutually deciding certain terms, partners can make changes to the way they operate their business. They can also make changes in their responsibilities by amending their partnership deed. However, there are certain restrictions based on which partners cannot change the basic elements of a partnership. In order to make substantial changes, the parties are required to make changes into their business structure. Partners can dissolve their partnership and form a corporation which is divided into two parts including the public and proprietary company. A proprietary company can be maximum 50 shareholders whereas a public company has no such restrictions.
A public company can list its shares on a stock exchange from which people can easily purchase or sold their shares. One of the most important cases regarding corporations is Salomon v A Salomon & Co Ltd. In this case, the elements of separate legal personality and limited liability were established by the court. In this case, the court provided a company has a separate legal entity in the eyes of the law based on which it can hold property under its name. It has the ability to sue another party, and other parties can sue it as well. The provisions regarding companies are given under the Corporations Act 2001 (Cth). However, the formation of a company is relatively complex, and members are required to comply with a number of regulations.
Julio, Carolyn and Trisha have the different option from which they can choose to manage their business risks better. They are in business to give financial advice to parties, and in order to manage risks while giving advice, they can add a disclaimer in the advice. The disclaimer should read that the partner who is giving the advice or any other partners associated with the partnership will not be held liable for the loss suffered by the party due to acting on such advice. Another option which they have is to protect themselves from the actions of other members. They can form a partnership deed in which they can mention the responsibilities of each partner which would avoid confusion.
Furthermore, it will manage their risks better because they will be able to hold a specific partner accountable for his mistakes. Julio, Carolyn and Trisha can also change their business structure by forming a proprietary company because it will make their liability limited. Furthermore, the company would have its separate legal personality, and its clients will sue the company rather than its members. It would assist them in managing their business risks better. However, they would have to deal with a large number of legal regulations given under the Corporations Act and establishment of a company is relatively expensive. Thus, they should form a partnership deed in which responsibilities of each partner should be clearly mentioned. Based on such deed, partners would be able to hold a single partner accountable for his/her mistakes which would assist them in managing their business risks better.
Conclusion
Therefore, the best option for Julio, Carolyn and Trisha are that they should form a partnership deed in which they can clearly mention responsibilities of each partner. It would assist in reducing the liability of partners due to the mistake of a partner, and they would be able to manage their risks better.
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