Partnership as Business Structure
Discuss about the Structure Of Business Is Operating By The Parties.
The main issue is related to the structure in which the business is operating by the parties and the status of each party involved in the business.
People have different options to choose from while selecting their business structure in Australia. One of the most common business structures which are selected by parties when one or two parties are establishing a business includes a partnership. Its definition is given under section 5 of the Partnership Act (Vic) 1958. It is defined as an agreement to carry out the operations of business together between two or more parties whose objective is to earn a profit for the business. The definition of a partnership divides it into three categories which are considered as its essential elements. The first element is that the partners must ‘carry out the business’ of the partnership and they must be involved in the operations of the business. In Goudberg v Herniman Associates Pty Ltd case, it was held that preparing for starting a business does not come under the definition of carrying out business. The partners must have mutual obligations and rights while they are operating the business of the partnership.
The mutuality of rights and obligations did not mean that each partner must have equal duties towards the partnership or they are required to perform its operations. In the case of Momentum Productions Pty Ltd v Lewarne, the court provided although a partnership is managed by all partners together however it did not means that they are required to participate in its daily activities. As long as the partner has a right to say in the operations of the partnership and other partners are running the business on his behalf, then a partnership can be formed. Similarly, an agreement to perform a specific event for one time which would not be repeated in the future cannot be considered as a partnership as given in Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd. The partners must carry out the business together, and they must have mutual obligations towards the business.
A leading judgement was given in the case of Re Ruddock in which it was held that a partner is required to run the operations of the business in common in order to form a partnership. Partners are not required to remain active in the business; other partners can run the business on their behalf. The final element of a partnership is that it must be formed to earn profits and partners must share in the profits of the business. M Young Legal Associates Ltd v Zahid (A Firm) is a leading case in which the court provided a party can be considered as the partner of the business even if it is not sharing the profits in the business. However, in the case of Britton v The Commissioners of Customs and Excise, the court held that section 6 (3) of PA provides that only sharing of profits is not enough to form a partnership and parties are required to carry out the business in common with other partners.
Elements of Partnership
The business was started by Julio, Carolyn and Trisha by writing certain rules and each of them performs different activities in the business. Julio is the tax specialist in the business, Carolyn manages accounting department, and Trisha is an expert in investment advice. The operations of the business are managed by each party, and they are jointly liable for the actions of the business. The main objective of starting the business is to earn profits, thus, all the elements of a partnership are present in this case based on which the business is run under a partnership structure. The status of Julio, Carolyn and Trisha are of partners in the business. Sarah is interested in arts, and she did not get involved in the operations of the business. She shared the profits of the partnership because she has provided a loan to the company. Thus, Sarah is a creditor of the business rather than a partner because she only shares the profits of the business based on which she cannot be considered as a partner of the business (Britton v The Commissioners of Customs and Excise).
Conclusion
Therefore, a partnership has been formed to run the operations of the business in which Julio, Carolyn and Trisha are partners. Sarah is a creditor rather than a partner in the business because she did not get involved in its operations and she only shares profits of the business
The main issue is related to the liability of Julio and other partners towards the loss suffered by X and whether they can be held jointly liable.
A party can be held liable to pay damages for a loss suffered by another party who relied on the false statement made by the party; in this case, a suit for misrepresentation can be formed. While claiming damages for misrepresentation, it is necessary that the statement made by the party must be false and it should not be an opinion or estimation made by the party as provided by the court in Hedley Byrne v Heller case. There are three types of misrepresentation: fraudulent, negligent and innocent. The person who is making the false statement must owe a duty of care to avoid making any untrue statement which might cause damage to another party. Section 9 of the Australian Consumer Law provides that the safety of the products should be ensured while giving them to customers in order to avoid legal consequences. Similarly, while giving professional advice to clients, ACL provides that professional should maintain a standard of care to avoid causing harm to the party. In case of an opinion or estimate, a party cannot be held liable for misrepresentation; however, if the party is in the position to know the fact, then a suit for misrepresentation can be filed as provided in Smith v Land & House Property Corp case.
Liability of Partners in Partnership
The damages suffered by the party must be caused directly due to the false statement made by the party, and the damages must not be too remote. In case a false statement is made by a partner, then other partners can be held liable for damages as well. In a partnership firm, partners are jointly and severally liable for the actions of other partners as given in section 9 and 13 of PA. In order to hold other partners liable, it is necessary that the activities conducted by the partner must be business as usual and it should not be outside his scope of authority. In the case of Polkinghorne v Holland & Whittington, a partnership firm was established which incorporate different professionals who provide different legal advice to their clients. The legal adviser gave fraudulent advice to a client regarding investment based on which he suffered loss. He filed a suit against other partners to hold them liable for damages. The court held that the action of the partner was usual and related to the kind of business for which partnership was formed because a legal adviser is required to make an enquiry regarding the client before giving him advice. Thus, other partners were held jointly liable by the court for giving false advice to the client.
As discussed in the rule section, ACL provides that a duty of care should be maintained while providing goods or services to customers in order to avoid causing any loss. Similarly, a duty of care exists between Julio and X because he is his tax adviser. While giving advice regarding tax implication of purchasing a property, Julio did not analyse the latest changes made by the Australian Taxation Office (ATO). Due to lack of care, a loss of $15,000 was suffered by X. As a duty of care exists, and the loss occurs as a direct consequence of the tax advice, X can hold Julio liable for negligent misrepresentation as he breached his contractual liabilities. As discussed in the case of Polkinghorne v Holland & Whittington, other partners can be held jointly liable in case a misrepresentation is made by a partner. The act of Julio was business as usual, and he did not act outside the scope of his authority. Thus, X can hold other partners liable for the loss suffered by him as well.
Conclusion
Therefore, the loss suffered by X is caused due to a breach of the standard of care by Julio based on which he can be held liable for negligent misrepresentation, and X can also hold other partners liable for the damages.
Misrepresentation and Liability of Partners
The main issue is related to the liability of Julio and other partners towards the loss suffered by Y and whether they can be held jointly liable.
A suit for negligent misrepresentation requires that certain elements are required to be fulfilled by the parties. The party must owe a duty of care to ensure that no untrue statement is made by him which could cause harm to another party. The party must suffer an injury because he/she relied on the untrue statement. Wrongs Act 1958 provides provisions regarding a duty of care which is owed by a professional. Section 59 provide that there are certain elements which are necessary to be evaluated by the court in order to determine whether a suit for negligent misrepresentation can be formed or not which include justifiability, gravity, probability and practicability. Similarly, ACL provides that a standard of care should be maintained by professional or else a suit for negligent misrepresentation can be filed against them. In case professional advice is given by a partner, then other partners can be held liable for negligent misrepresentation as well. In the judgment of Construction Engineering v Hexyl Pty Ltd case, the court provided that section 9 of PA provides a number of factors based on which other partners of a partnership can be held liable for the action of a partner as long as such actions are business as usual and the partner did not exceed his authority.
In this case, the court held that business as usual means the actions of the partner must be associated with ‘kind of business’ which is operated by the partnership. However, the liability of partners is limited to the person to whom they owed a duty of care; they cannot be held liable for the loss suffered by a third party who relied on their advice. In this context, a good example was given in Esanda Finance Corporation v Peat Marwick Hungerfords case. In this case, PMH was the auditor of Excel Company, and its books of accounts are audited by them. Esanda was another company who decided to give loans to companies associated with Excel based on the guarantee issued by the company after relying on its audited accounts. Later, Esanda filed a suit for negligent misrepresentation against PMH. The court provided that PMH cannot be held liable towards Esanda because it is a third party and no duty of care is owed by PMH towards Esanda.
Conclusion
In this case, X is a client of Julio based on which a duty of care is owed by Julio towards X. A standard of care is not maintained by Julio due to which a loss of $15,000 is suffered by X. X also give the same advice of Julio to Y, and he also purchased the property. Just as X, Y suffered a loss of $15,000 as well. However, Y cannot file a suit against Julio because he was not his client and no duty of care is owed by him. Y is a third party who relied on the professional advice of Julio without his knowledge, and as per the judgment of Esanda Finance Corporation v Peat Marwick Hungerfords case, Julio cannot be held liable for the loss suffered by him. Furthermore, other partners cannot be held liable toward Y because he was not a client of the partnership and no duty of care is owed towards him.
Conclusion
Therefore, Y cannot hold Julio and other partners liable for the loss suffered by him because he is a third party who relied on the advice without the knowledge of Julio. He cannot hold them liable for the loss suffered by him because no duty of care exists between the parties.
The main issue is related to the best option available for Julio, Carolyn and Trisha to manage their business risks.
If partners want to change the procedure of operating the business, they can do that by mutually changing the procedure of the operations. By making changes in the procedure, partners are able to manage their business risks. Furthermore, in case any confusion arise regarding the responsibilities of partners in the business, then changes can be made to the partnership deed based on which responsibilities of the partners can be made clearer. Moreover, a person can start and continue his/her business in many of the ways. These ways are generally known as business structures. According to the nature, requirements and features, these business structures have their own positives and negatives. In the present economy and era, Proprietorship entities, partnership firms, Propriety and Public corporations, and trust are the basic business structures which people use in for their business activities. Corporations are generally one of the most beneficial types of business frame, as it has more positives and fewer negatives. This has some features of both partnership firms and proprietorship concern as well. The highlighted and most attractive feature of a corporation is it is “separate legal personality”.
It was held in one of the most popular cases named Salomon v A Salomon, and Co Ltd that corporation has their different identity from it is directors, officers and members. Until unless these people would not act outside of their granted authorities; the same will not be held personally liable. Further, in the case of a corporation, roles, duties and responsibilities are defined in more expressive manner. Corporations can fulfil their capital requirements while issuing share to the public if the nature of the corporation is public rather than proprietary. But this is a universal rule that everything has it is negative aspects also. Similarly, the same is with corporations. As corporations are more managed form of a business, it has to follow more rules and provisions. Every corporation in Australia needs to follow the procedures and provisions given under the Corporations Act 2001 (Cth). This Act works as a regulator for corporations and describes the duties and responsibilities of directors and members of the corporation. Further, this act also contains the provisions related to penalties and punishment in case of non-compliance. It may state that although this form of business has lot benefits yet the same brings more liabilities in comparison to other business structures. However, it provides a number of advantages to the parties based on which it is beneficial for partnerships to change their business structure in order to incorporate a company.
In this case, all three people are running their business in the form of partnership firm. They are facing some issues related to the division of liabilities. One of them has given wrong advice to the client, and others are getting confused regarding their liability in respect of Julio’s conduct, it may note that they are not facing any other issues, but the one that who is responsible for whose conduct. They can add a disclaimer while giving legal advice to clients in order to provide them they will not be held personally liable for their losses. They also have the option to form a partnership deed in which they can clearly mention their responsibilities. Based on such partnership deed, the partner will be able to hold each other accountable for their actions, and they will not hold personally liable for the actions of another partner.
As discussed in the Rule segment, the corporation is the more defined structure of a business. In case of a corporation, people are only responsible for their own conduct. In this case, they cannot be held personally liable for the conducts they are doing on behalf of the company under the umbrella of granted authority. Here, Julio, Carolyn and Trisha if convert their business to the corporation, can resolve this issue. They will have proper and defined powers and liability frame, so it is advisable for them to change their business structure from partnership firm to corporation in order to remove the confusion about responsibilities and work area.
Conclusion
In conclusion, there are a number of business risks faces by Julio, Carolyn and Trisha and in order to manage such risks they should change their business structure and form a public company. It will make their liabilities limited, and they will not be held liable for the mistakes of other partners. Furthermore, the clients will suit the company rather than the owners personally that would assist them in managing their business risks.
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