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Business Law Assignment: Critical Examination Of Partnership Act

Question

Task: A veterinary pharmaceutical company has employed a group of four pharmacology scientists for many years. Occasionally they get together and attend local football matches. At a recent game they were chatting about branching out and setting up their own company. They each have financial assets and skills that they would like to bring to the business. Let’s assume they consult you on Monday morning following the game.

What business structure would you recommend? What would be the advantages and disadvantages of each business structure in this context? 

The four of them envisage that by the end of its first financial year their business would have gross assets of at least $10m, employ 40 people full time and have a gross revenue of $20 million.

If this were the case by the end of the year, how would you classify their business?

One of the scientists rings you and leaves a message. In the message she states ‘can you explain to me what a legal person is?’ What will you tell her? 

If you recommended that the scientists create a company what would be the steps that they would need to take 

Question 2
Kyle and Jackie are hairdressers. They met during the TAFE Hairdressing course and as both lived in the inner southern suburbs of Adelaide they decided to work together. They had little money of their own and so they invited one of their customers, Lynn, a medical practitioner to join their business. Lynn provided $100,000 to the business. At the end of each week they divide up the ‘profit’ three ways.

When they first were in business they used their residential flat as the place to perform their hairdressing but as numbers of customers grew they went searching for a suitable shop. Kyle found an ideal commercial space on King William Road at Hyde Park and entered a lease. He signed the lease in his name.

About 4 months after they moved into the new premises Jackie applied some hair dye to Betty, one of their customers and Betty suffers serious burns to her scalp as a result of Jackie’s careless actions. Betty is treated at the hospital and is now having 6 monthly visits to a dermatologist and expects that these will continue for the next 5 years. Each of these visits are charged to Betty at $400 per visit.

Kyle is the lead singer in a 80s revival band and given that the band members try to re-create the style of the 80s Kyle uses the premises each Saturday afternoon to attend to all the other band members, blow-drying, cutting and colouring their hair. For this work, he is paid separately by each band member and does not disclose this to Jackie or Lynn. 

Answer ALL of the following questions:
Please advise Kyle, Jackie and Lynn on

  1. whether they are in a partnership and if so, who are the partners in the partnership - Use the Partnership Act and case law to support your argument 
  2. if the lease payments for the hairdressing premises fall behind by three months who is responsible to pay these- Use the Partnership Act and case law to support your argument
  3. whether Kyle is in breach of his partnership duties as a result of him carrying out his Saturday afternoon hairdressing of his band- Use the Partnership Act and case law to support your argument 
  4. if Betty wishes to commence a legal action against this business to recover the costs of her specialist visits and hospital fees, how can she discover who the individuals are behind this business -use any legislation or case law to support your argument

if Betty did find out the details of the business proprietors then who would she sue and who would be liable - Use the Partnership Act and case law to support your argument

Answer

Question 2
1. Formation of partnership
Issue
The issue examined in the Business Law Assignment is related to whether Kyle, Jackie, and Lynn are in partnership as per the Partnership Act.

Rules
According to Partnership Act 1891, section1 (1), Partnership is the connection which exists between persons mutually running a business to make a profit and also involves an incorporated limited partnership[1]. Based on this definition provided in the Business Law Assignment, it has been seen that there must be the presence of four elements, which are described as below –

  • Business consists of any trade, profession, and occupation, the same is stated in the legal case of Hope v Bathurst City Council (1980) 144 CLR1[2]. It should be a commercial enterprise and carry in a continuous manner.
  • The partnership business should be running continuously. Further, a single adventure based upon its scope may be considered as business, the decision is stated in the legal case of United Dominions Corp Ltd v Brian Pty Ltd (1985)[3].
  • The business may be carried by all partners or by one partner on behalf of other partners. However, partners can do things in a separate manner however for these they could be jointly obligatory. There should be mutual rights and obligation of partners. Along with this, the agency is not prerequisite for the formation of the partnership[4].
  • At last, it should be carried for generating profit.

Along with the above aspect, the partnership can be formed by express agreement and by implied agreement[5]. Moreover, it is also stated herein Business Law Assignment that according to section 24 Of the Partnership Act, each partner has right for management of partnership firm[6]. Along with this, admission of the new partner is possible in firm only by the consent of existing partner [Section 24(g)].[7] As per section 24(1) (a), the profit may be shared by partners in equal manner, if agreement does not contain any ratio[8]. Further, section 6 of the Partnership Act used in this segment of Business Law Assignment, contains whether any person involved in a partnership firm is considered as a partner[9]. The most common are described as below –

  • If there is a presence of joint ownership, then in such case he/she considered as a partner.
  • Partners should participate in gross return as per their pre-decided share in business.
  • Participation in the profit of the firm is the prima facie evidence of the existence of a partnership.
  • All partnership must equal liable for losses of the company also.
  • Person, who is eligible to exercise the rights of partners, is considered as a partner of a partnership firm.

Application in the present study
In the present case scenario of Business Law Assignment, it has been seen that Kyle, Jackie decided to work together with the contribution of money. Further, Lynn also entered into a partnership firm with consent of existing partner and contributed money. They all decided to share profits in equal ratio. All three partners are running a hairdressing business. Based on Partnership Act 1891, it has been asserted that the said business structure is considered a partnership. The reasons are explained within this Business Law Assignment as follows –

  • It is the business which is running by more than two persons, in the present case, it is running by three individual.
  • Hairdressing business includes in the term of trade and profession.
  • It is carried by partners continuously.
  • It is carried by all three partners.
  • The objective of this business is the generation of profit.

On the basis of the above aspect presented herein Business Law Assignment, it has been asserted that all four elements of the partnership are present in the current case scenario. Along with this, for the formation of partnership, it is not essential that there should be written documentation of all arrangement. Since, Kyle, Jackie, and Lynn agreed to share profits, therefore they are considered as partners.

Conclusion
By considering the above analysis provided within this Business Law Assignment, it has been concluded that Kyle, Jackie, and Lynn are partners and it is considered as a partnership firm.

2. Responsibility of partners in case of default in payment of lease rent
Issue
The issue related to who is liable for payment of outstanding lease payment for premises of hairdressing.

Rules
As per Section 5 of Partnership Act 1891 considered to design this Business Law Assignment, each partner is considered as an agent of the partnership firm and the other partners for the objective of the business of the partnership[10]. The activity of any partner that is related to normal activities of business running by the firm of which partner is considered as a member bind the partner as well as firm. Moreover, according to section 9 of the Partnership Act 1891, for any debt of partnership, all partners of the firm are jointly liable, the same judgment given in the legal case of Wang v Rong [2015] NSWSC 1419[11]. In other words, it can be said that if any person is considered as a partner, and at that time any debt is incurred by the firm, then each partner in a firm is liable in a joint manner with another partner[12]. However, in case of the death of any partner, liability is limited to the estate of a partner[13]. Further, as per section 5 of the cited Act, for the ascertainment of liability of other partners for debt and obligation is incurred by one partner, it should consider whether the business is running by the firm in a normal manner.

Application of rules in the present case scenario
In the present case scenario of Business Law Assignment, it has been seen that earlier, business is carried at a residential flat, however afterwards they found commercial space and started business there and entered into a lease agreement. The lease agreement is signed by Kyle. In this case, it does not matter that lease agreement by signed by Kyle himself. The reason behind the same is that this activity is related to the normal course of business, which binds other partners as well.

Conclusion
Based on the above provision on Business Law Assignment, it has been concluded that if the lease payments are falling behind by the three months for hairdressing premises, then in such case all partners are liable for payment by the application of section 5 and section 9 of the Partnership Act 1891.

3. Breach of partnership duty
Issue
The issue outlined in this section of Business Law Assignment is related to whether Kyle is in breach of partnership duties because on Saturday premises is attended by all members for hairdressing purpose, and he receives a fee from members separately but did not disclose to his partners.

Rules
Partners are required to comply with fiduciary duties, which are as follows -

  • The relationship among partners is based law of agency.
  • It is based on an assumption of trust and mutual confidence among partners. Each partner of the firm owns duty towards other partners of good faith and fairness[14].
  • It is the duty of a partner to act in good faith and activities should assist in providing benefit to the partnership firm. In the legal case of Helmore v Smith [1887], it was held that the relationship between partners in fiduciary nature[15].
  • It is the duty of partner not to make a secret profit from their position, except where is permission is given to partner is the express manner[16].
  • The partner should not engage in such type of activity which assists in rising of self-conflict interest.

Partnership Act 1981 also explains some statutory duties of partners, such as –

  • As per section 28 of the cited Act, it is the duty of a partner to make full disclosure to other partners related to all matters of business of the partnership[17].
  • It is the duty of a partner to account for any profits or any advantage gained from any activities related to business. In the
  • According to section 29 of the cited Act, it is the duty of partner to the account of any personal profit derived from any transaction related to partnership, or any use of the property of the partnership, without consent of other partners[18].
  • Section 30 of the said Act, stated that partner cannot compete with the partnership firm without the consent of partners[19].

Application of rules in the present study
In the present case scenario of Business Law Assignment, Kyle uses the business premises for hairdressing of band members and he is paid fee separately, however, did not disclose it to other members. It has been seen that by using the property of the partnership, Kyle was derived profit. It is the duty of Kyle to account for the fee received by band members. Along with this, the duty of full disclosure of other partners is also breached by Kyle.

Conclusion
By considering above study developed within the Business Law Assignment, it has been concluded that Kyle is in breach of fiduciary as well as statutory partnership duties because he did not make full disclosure of all matter related to partnership business (Section 28) and also did not account for personal profit generated by him in terms of a fee (section29).

4. Legal Action by Betty
Issue
The issue identifies in the context of Business Law Assignment is whether Betty can take legal action against the business.

Rules
Australian Consumer Law provides a guarantee for the rights of consumers[20]. With this aspect, if a person purchases products or services, then in such case it consists that there is an automatic guarantee of the goods or services that they would work[21]. Along with this, the consumer has also right to ask compensation for losses or injury they suffer because of the fault in goods and services. Along with this, if a person fails to take reasonable steps related to duty of care which leads towards damages or injury to other people, then in such case a person is held liable. The same rule applied in the legal case of Donoghue v Stevenson [1932][22]. Further, in such case of Business Law Assignment vicarious liability also take place, when a person is held liable because of the negligence action of other people. It is basically based on the negligence on the part of workers running out their duties[23]. In several cases, employers are held liable for the negligence action of employees. In relation to this, in a partnership firm, every partner carries their activities on behalf of partners or behalf of the partnership firm. Therefore, a partnership firm can be considered to be vicariously liable for the negligence act committed by its partners[24]. The reason behind the same is that partnership firm is not considered as separate legal entity from its partner[25].

Application in the present case scenario
In the given case scenario of Business Law Assignment, Jackie carries activities of the business on behalf of the firm. Since, in this case, because of negligence behaviour of Jackie, Betty suffers from significant injury. On the basis of Consumer Protection Law, it is implied to guarantee that services provided by Jackie would not assist towards any injury. Along with this, according to Tort Law of Australia, in case of negligence, a person can sue another person for damages takes place because of careless action. Moreover, as per vicarious liability, a partnership firm is considered as liable for the negligent act committed by Jackie.

Conclusion
On the basis of the above aspect provided within the Business Law Assignment, it has been concluded that Betty can commence the legal action against the partnership firm in order to recover the damages.

5. Legal Action against a partner
Issue
The legal issue related to whether Betty can sue business proprietor.

Rules
According to section 12 of the Partnership Act 1891, it is stated herein Business Law Assignment that every partner of the partnership firm is liable in a joint manner with other partners, and also severally, for everything which the firm held liable[26]. Section 10 of the cited Act, contained that for the wrongful and negligence act of partner if the third party suffered from a loss, then in such case all partners of the firm is held liable[27]. However, if another partner proves that, if there is no fault or they are not engaged in such type of activity, then in such case they would not be liable. In the legal case of Zhang v Popovic [2016] NSWSC 407 explored in the Business Law Assignment, it has been held that it is the duty of the plaintiff to prove evidence related to breach of causation[28]. In the legal case of Goldberg v Jenkins (1889), it was held that activities of partner cannot bind other partners, because he was involved in unreasonable activities[29].

Application in the present case scenario
In the present case scenario of Business Law Assignment, because of the negligent behavior of Jackie, Betty suffers from significant injury. Since, in this case, the firm is held liable as per the vicarious liability provision. Along with this, by application of section 12 of the Partnership Act 1891, each partner of the firm is joint or severally liable for any act which the firm held liable.

Conclusion
On the basis of the above provision on Business Law Assignment, it has been concluded that Betty can sue all three partners of the firm. However, if Kyle and Lynn prove that they are not involved in such type of activities, then in such case liability imposed on them may waive.

BIbliography
Books and Journals
Bodie, Matthew T. ‘Employment as fiduciary relationship.’ (2016) Geo. LJ 105 (2016) 816

Dols, Jean Dowling, Mary M. Hoke, and David Allen. ‘Building a Practice-Focused Academic-Practice Partnership.’(2019) 49 JONA: The Journal of Nursing Administration Business Law Assignment 377-383.

Eckstein, Asaf, and Gideon Parchomovsky. ‘Toward a Horizontal Fiduciary Duty in Corporate Law.’ (2018) 104 Cornell L. Rev. 803.

Ghahramani, Salar. ‘Business Ethics, Contractarianism, and (Optional?) Fiduciary Duties in Corporate Law.’ (2018) 39.1 Business Law Review 20-24.

Hurt, Christine. ‘Extra Large Partnerships.’ (2020) Firm Governance: The Anatomy of Fiduciary Obligations in Business (Arthur Laby & Jacob H. Russell eds., Cambridge Univ. Press forthcoming 2020) 20-01.

Hurt, Christine. ‘Startup Partnerships.’ (2019) BYU Law Research Paper 19-14

Islam, Carl. ‘Breach of fiduciary duty claims and the quiet fiduciary thesis’ ( 2019) 25.2 Trusts & Trustees 237-265.

Munro, Blair. ‘Limited Liability Partnerships and Fiduciary Duties.’ (2017): 417-423.

Online
Miles and Dowler, 2015. ‘Legal aspects of business’. (Online 24 March 2020) <https://legal.thomsonreuters.com.au/product/AU/files/720506676/chapter_summary_21e___ch_5.pdf >

The Australian Consumer Law, (Online 24 March 2020) <https://consumerlaw.gov.au/australian-consumer-law/legislation>

Partnership Act 1891, (SA) Business Law Assignment (Online 24 March 2020) <http://classic.austlii.edu.au/au/legis/sa/consol_act/pa1891154/>

Case laws
Donoghue v Stevenson [1932] AC 562

Goldberg v Jenkins [1889] 15 VLR 36

Helmore v Smith [1887] 35 Ch D 436

Hope v Bathurst City Council [1980] 144 CLR1

Salomon v A Salomon & Co Ltd [1896] UKHL 1,

United Dominions Corp Ltd v Brian Pty Ltd [1985] 157 CLR 1

Wang v Rong [2015] NSWSC 1419

[1] Partnership Act (SA) 1891Section 1

[2] Hope v Bathurst City Council [1980] 144 CLR1

[3] United Dominions Corp Ltd v Brian Pty Ltd [1985] 157 CLR 1

[4], Matthew T Bodie. ‘Employment as fiduciary relationship.’ (2016) 105 Geo. LJ 819.

[5] Jean Dowling Dols, Hoke Mary M, and Allen David. ‘Building a Practice-Focused Academic-Practice Partnership.’ (2019) JONA: The Journal of Nursing Administration 377-383.

[6] Partnership Act (SA) 1891 Section 24

[7] Partnership Act (SA) 1891 Section 24(g)

[8] Partnership Act (SA) 1891 Section 24(1)(a)

[9] Partnership Act (SA) 1891Section 6

[10] Partnership Act (SA) 1891Section 5

[11] Wang v Rong [2015] NSWSC 1419

[12] Partnership Act (SA) 1891Section 9

[13] Asaf Eckstein, and Parchomovsky Gideon. ‘Toward a Horizontal Fiduciary Duty in Corporate Law.’ ( 2018) 104 Cornell L. Rev. 803.

[14] Carl Islam. ‘Breach of fiduciary duty claims and the quiet fiduciary thesis.’ (2019) 25.2 Trusts & Trustees 237-265.

[15] Helmore v Smith [1887] 35 Ch D 436

[16] Salar Ghahramani. ‘Business Ethics, Contractarianism, and (Optional?) Fiduciary Duties in Corporate Law.’(2018) 39.1 Business Law Review 20-24.

[17] Partnership Act (SA) 1891Section 28

[18] Partnership Act (SA) 1891Section 29

[19] Partnership Act (SA) 1891Section 30

[20] Competition and Consumer Act 2010 schedule 2

[21] Christine Hurt. ‘Startup Partnerships.’ (2019) BYU Law Research Paper 19-14 .

[22] Donoghue v Stevenson [1932] AC 562

[23] Christine Hurt. ‘Extra Large Partnerships.’ (2020) Firm Governance: The Anatomy of Fiduciary Obligations in Business (Arthur Laby & Jacob H. Russell eds., Cambridge Univ. Press forthcoming 2020)20-01.

[24] Blair Munro. "Limited Liability Partnerships and Fiduciary Duties." (2017): 417-423.

[25] Salomon v A Salomon & Co Ltd [1896] UKHL 1,

[26] Partnership Act (SA) 1891Section 12

[27] Partnership Act (SA) 1891Section 10

[28] Zhang v Popovic [2016] NSWSC 407

[29] Goldberg v Jenkins [1889] 15 VLR 36

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