T1, 2021 business law lecture week 7 - partnership and agency law

1. 2105 AFE – Introduction to Business Law
Lecture 7: Partnership Law
1

2. 2
The Law of Partnership
Objectives
 Define the term “partnership”
 Explain the difference between a joint venture
and a partnership
 Explain the advantages and disadvantages of
a partnership
 Explain the tests used to decide if a
partnership exists
 Relationship of partners to third parties
 Liability of partners in Contract
 Liability of partners in Tort

3. 3
Introduction to partnership
Characteristics of Partnerships
-Participation in management and decision making
-Partnerships are simple and cheap to set up and
dismantle
-Partnerships have no separate legal existence
-Continuity problems. Every time a partner leaves or a
new partner joins the business, the old partnership
terminates and a new partnership must be established

4. The Law of Partnership
 Definition: A partnership is
defined as ‘the relationship
which subsists between
persons carrying on business
in common with a view to
profit’
 Partnership Law is regulated by
both statute and common law
principles. The statute is:
The Partnership Act 1891
(Qld).

5. Partnerships
 Partnerships are unique in that
each partner is both a
principal and an agent for their
other partners. As such there
are a number of mutual duties
that partners owe to each other.
 A partnership may be an oral or
written agreement.

6. The Advantages of
Partnerships
 Simple structure
 Sharing of profits and losses
 Sharing in skills, economies and overall
efficiency
 Relatively cheap to set up*
 No public disclosure of financial information
* If trading under another name – must register a
business name.

7. The Disadvantages of
Partnerships
 Partners are liable for the debts of the other
partner(s)
 Partnerships do not enjoy a separate legal
entity
 Partners are liable for the actions of the other
partner(s)*
* (Provided they are acting within the scope of the
partnerships business).

8. Relationships That Can Look Like
Partnerships
 Associations of people which possess some of the
features of partnership, but are not partnerships, includes:
 Co-Ownership
 Co-ownership does not necessarily involve carrying on a
business with a view to profit.
 Joint Venture
 A one-off commercial activity for profit, although a
single undertaking can amount to a partnership where
the parties are engaged in a commercial activity with a
view to profit – next slide
(United Dominions Corp Ltd v. Brian Pty Ltd (1985);
Canny Gabriel Castle Advertising Pty Ltd v. Volume
Sales (Finance) Pty Ltd (1974)).

9. 9
Joint Venture
 Definition: A joint venture is a contract
between two or more individuals or business
entities in which they agree to enter into a one
off type of commercial activity, usually one
major project, for the individual gain of each
party.
 Joint ventures are common in the mining, oil
and gas industries and are often co-operations
between a local and foreign company.
E.g Building a road to enable both parties to access mineral
resources

10. Partnership - Statutory Rules:
As to when a partnership exists
 Section 5 PA focuses upon features of the relationship
between the parties in order to ascertain whether there is
a partnership. If these features indicate that parties are
carrying on business in common with a view to profit
then a partnership relationship will be found to exist.
 However, these features may not always be easy to
identify. As a partnership relationship is a contractual
one, the actual agreement between the parties must be
examined in order to infer whether a partnership
relationship has been created.
10

11. Establishing a partnership
To create a valid partnership:
(i) There must be an agreement between partners
(ii) Partners must carry on a business
(iii) Partners must act in common
(iv) Partners must carry on a business with a view to
a profit
*Section 5 Partnership Act (Qld.) see
11

12. ‘Carrying on a Business’
 There must be a degree of repetition in the parties’
conduct. An isolated act or transaction will not be
carrying on a business unless there is either a
contrary intention or the parties intend that the act,
transaction or venture, will be repeated.
 Smith v Anderson (1880): No repetition of acts so no
association created for the purpose of carrying on a
business.
 Ballantyne v Raphael (1889): An isolated transaction or a
single venture will not be treated as a partnership

13. 13
Carrying on a Business
Smith v Anderson (1880)
 Facts: A trust was set up to invest in submarine
telegraph companies. Subscribers invested in the
trust. P sued to have the trust wound up arguing
that it was an illegal partnership as it had more than
20 members. The act of investment was a one off
transaction and was not classified as a
partnership.
 Held: The subscribers were not carrying on a
business and accordingly, there was no
partnership to dissolve. The act of investing was not
carrying on a business. In fact, the trustees of the
trust were carrying on the business.

14. 14
Khan v Miah (2000)
 Facts: The parties agreed to form a partnership to
operate a restaurant. They made various arrangements
to start the restaurant such as obtaining premises,
purchasing furniture and setting up a bank account.
Before the restaurant opened, the parties’ relationship
broke down. One party carried on the business and the
other sought a share of the business capital and profits. `
 Held: The parties had become partners because the
preliminary activities were part and parcel of what the
parties had jointly agreed to do.

15. 15
Partners must act “In Common”
 Plaintiff has onus of proving that:-
The partnership business must be operated by, or on behalf of, all the
partners.
1. Each party acts as an agent for the other. Agency means that each
partner acts on behalf of the principal (which is the partnership) and
has the power to bind the other partners to his or her actions (e.g.
entering a contract).
2. The parties share rights and obligations so that each participant
benefits from and is liable for partnership obligations.
Kang-Kem v Paine (2004)
 Facts: P and D in a de facto relationship. P and D operated two
restaurants – P managed the restaurants and D was an investor in
them.
 Held: P and D were not operating their restaurants in partnership,
but had separate interests.

16. ‘In Common’
 The business must be ‘carried on’ by, or on behalf of, all
partners.
 Not all partners need to be involved in the day to day running of
the business. i.e. all the partners need not take an active role.
Keith Spicer v Mansell [1970]:
 Facts: X and Y purchased premises to open a restaurant. Y
purchased furniture for the restaurant from a 3rd party. The
furniture was not paid for. The 3rd party sued against the
partnership.
 Held: There was no partnership as acts ‘carried on’ in
contemplation of a partnership of a business does not
constitute a partnership

17. ‘With a View to a Profit’
 Did the parties intend to make a profit when they
formed the partnership?
 Even where an enterprise operates at a loss, the vast
majority of parties would have intended a profit upon
forming the partnership.
 United Dominions Corp Ltd. V Brian Pty Ltd (1995)
 The Partnership Act treats any receipt of a share of
profits from a venture as being prima facie evidence of
the existence of a partnership.

18. 18
Statutory Rules: Section 6PA
Section 6 PA: Adds to the basic definition of
partnership three specific rules as to whether a
partnership exists:
s6 (1)(a) - co-ownership of property,
s6 (1)(b) - revenue sharing, and
s6 (1)(c) - profit and loss sharing. See:

19. 19
Co-Ownership of Property
Section 6(1)(a) PA:
The joint ownership of property does not itself
create a partnership irrespective of whether the
owners do or do not share in any profits made by
the use of the property or whether the property is
held as joint tenants or tenants in common.
For example: Joint owners of the land.

20. 20
**Vote Break** Revenue Sharing
 s6 (1)(b) PA: The sharing of gross returns does not of
itself create a partnership, whether the persons sharing
such returns have an interest in any property which is
utilised to obtain the returns.
Definition: ‘Gross Returns’
It means the revenue gained from a venture before any
expenses are deducted. A profit is a return after all
expenses are deducted (net returns).

21. Revenue Sharing
Cribb v Korn (1911)
Facts: C agreed to allow Rano to farm 2 paddocks on his
property. C supplied the property and tools, Rano supplied the
labour with gross revenue divided. Rano hired K to help him and
K was injured. K sued both Cribb and Rano alleging that they
were partners and therefore both his employers.
Held: Cribb and Rano were not partners as they had separate
businesses. Rano provided the labour, Cribb provided the tools
and property – they were not carrying on a business together
despite receiving ½ share in gross revenue.
21

22. 22
Sharing Profits
 s6 (1)(c) - profit and loss sharing. The receipt by a person
of a share of the profits of a business is prima facie
evidence that the person is a partner in the business, but
simply receiving such a share does not mean the person is a
partner
 The importance of this rule is that receiving a share of
profits may be prima facie evidence (i.e. a strong indication)
that a partnership exists. Whether or not the relationship
does exist must depend on the real intention of the parties
and the contract between them.

23. 23
Relationship of Partners to Outsiders
Common Law Position
 An outsider has two possible grounds to recover
from the partnership – where the partner has actual
authority or apparent authority.
 Actual authority: the authority of a partner to do
acts clearly stated and agreed to by the other
partners (whether written or oral).
 Apparent authority: the authority that the partner
appears to have to third parties (e.g. buying and
selling goods, receiving payments, issuing
cheques and taking out insurance policies).

24. 24
continued
Therefore, the general rule is:-
 If an action is within the partner’s actual or
apparent authority, the firm is liable for the
partner’s actions.
 If an action falls outside the partner’s actual or
apparent authority, the partner is personally
liable and the firm is not bound by the partner’s
actions.

25. 25
Statutory Rules: Section 8PA
 s8 PA - Power of partner to bind the firm
s8PA - recognises that each partner is an agent of the firm and
therefore bound to a partner’s actions within their actual
authority.
Further, there are four requirements to establish apparent authority:-
1. The transaction involved must be within the scope of the
partnership business (“business of the kind”);
2. The transaction must be effected in the usual way;
3. The outsider did not know or should not have known that the
partner had no actual authority;
4. The outsider must have known, or at least must have
believed, that the person with whom he or she was dealing
was a partner.

26. 26
continued
Polkinghorne v Holland (1934)
Facts: Father, son (Harold) and Whitington were partners in a
law firm. The son advised the plaintiff to sell stock and invest
proceeds in two companies formed by the son which were
mere shells – they did not conduct any business. The
investments failed, the son disappeared and the Plaintiff sued
the remaining partners (i.e. the father and Whitington).
Held: The remaining partners were liable for the investments
made in the two companies. Although law firms do not
commonly provide investment advice, it was within the usual
scope/course of business carried on by the firm. The Court
looked at the firm’s actual activities and found that investment
advice although not the core business was nevertheless within
the scope/course of the firm’s business.

27. 27
Mercantile Credit Co Ltd v Garrod
Facts: G and P operated a garage in partnership. P ran the business
and G was a ‘sleeping’ partner. The partnership agreement specified
that buying and selling motor vehicles was not to be part of the firm’s
activities. In breach of the express prohibition and without actual
authority from G, P fraudulently sold a motor vehicle to MC.
Held: Even though what P had done was without G’s actual authority,
it was an act falling within the scope of the firm’s business.
P therefore had the necessary authority and G was liable under
the rules of apparent / ostensible authority.

28. 28
Statutory Rules: s10PA
s10PA - Partner using credit of firm for private
purposes
 If one partner pledges the credit of a firm for a purpose
apparently not connected with the firm’s ordinary course of
business, the firm is not bound, unless the partner is in fact
specially authorised by the other partners.
 Meaning: If one partner uses the credit of the firm for private
purposes and the creditor was or should have been aware that
the transaction was not connected with the ordinary course of
the firm’s business, the firm is not liable for the debt.
 Section 10: Goldberg v Jenkins - a partner using the credit of
the firm for private purposes binds the firm provided it is within
the scope of the business


29. 29
Statutory Rules: s12PA
s12 Liability of partners (in contract)
Every partner in a firm is liable jointly with the other
partners for all debts and obligations of the firm incurred
while a partner.
Two key components of section 12:-
 “Debts and obligations of the firm”: Does not apply
to a personal debt or obligation, even if it is for the
benefit of the firm.
 Joint Liability: Joint liability means that the partners
(or firm) can only be sued in one legal action. If some
of the partners are sued and found liable, the other
partners cannot be sued later.

30. 30
continued
Kendall v Hamilton (1879)
Facts: K lent money to a partnership. K was not aware at the
time of providing the finance that H was a partner. K sued the
two partners he initially dealt with (comprising of Wilson & Co)
when the partnership got into financial difficulties. K obtained
judgment and obtained a percentage of the money lent in their
bankruptcy. K later found out about H’s involvement in the
partnership venture and attempted to sue him.
Held: K’s action failed because partners are jointly liable for
partnership debts.
 To avoid the problem in Kendall v Hamilton, the Partnership Act
provides that an outsider is able to sue in the firm name. This
automatically includes all partners as parties to the action.

31.  S13 PA Liability of the firm for wrongs (torts)
(1) If, by any wrongful act or omission of any
partner in a firm, other than an incorporated
limited partnership, acting in the ordinary
course of the business of the firm, or with the
authority of his or her co partners, loss or injury
is caused to any person not being a partner in
the firm, or any penalty is incurred, the firm is
liable for the loss, injury or penalty to the
same extent as the partner so acting or omitting
to act. – next slide
Statutory Rules: s13PA (Tort)

32. Statutory Rules: s13PA
 Four components of s13:-
1. A wrongful act or omission;
2. Committed by a partner;
3. The partner was acting either in the ordinary
course of the firm’s business or with the
actual or apparent authority of his or her co-
partners (dealt with in s8); and
4. The person suffered loss or injury.
32

33. 33
Statutory Rules: s14PA
s14 PA - Misapplication of money or property
received for or in custody of the firm
The firm is liable for the misapplication of money or property in one
of two ways:-
(a) If a partner is acting within the scope of the partner’s apparent
authority, receives money or property of a third person and
misapplies it (s14(1)(a));
(b) A firm in the course of its business receives money or property
of a third person, and the money or property so received is
misapplied by 1 or more of the partners while it is in the custody
of the firm (section 14(1)(b)).
 Liability for misapplication of money or property is joint and
several (section 15).
See: Walker v European Electrics Pty Ltd – partners liable for money
misappropriated by a partner

34. 34
continued
S15 - Liability for wrongs joint and several
 Several liability is separate liability - Each party has
a separate or several liability.
 Joint liability means that all the parties have a joint
obligation to repay irrespective of any personal
arrangements between them.
 Liability can be joint and several.
Statutory Rules: s15PA

35. 35
continued
Proceedings Commissioner v Ali Hatem [1999]
Facts: One partner in a garage partnership, who was in charge of the
firm’s staffing, was held to have been guilty of the sexual harassment
of an employee of the firm. The first acts of sexual harassment occurred
when the partner was interviewing one of the complainants for a job.
When making “sexually loaded remarks”, the partner was dealing with
staff members in a work environment.
Held: The partner’s acts of sexual harassment, which was a statutory
tort, occurred in the ordinary course of business. Therefore, the firm (i.e.
all his co-partners) was liable for this tort.
 Partner may not have actual or apparent authority to bind the
firm but still might be acting in the ordinary course of the firm’s
business, thereby making the firm liable under s13 PA.

36. Statutory Rules: s17PA – Holding Out
s17 PA Persons liable by 'holding out'
(1) Everyone who by words spoken or written or by conduct
represents himself or herself, or who knowingly suffers himself or
herself to be represented, as a partner in a particular firm that is a
firm is liable as a partner to anyone who has on the faith of the
representation given credit to the firm, whether the representation
has or has not been made or communicated to the person so
giving credit by or with the knowledge of the apparent partner
making the representation or suffering it to be made.
See: Tooth v Laws – next slide
36

37. Tooth v Laws (1988)
 Facts: L sold his hotel to a TP but allowed
his name as licensee to be displayed over the front
door of the hotel. The new owner continued to purchase the alcohol on
alcohol on credit, as L had done, from Tooth. Tooth was not aware
of the change in ownership. After several months of failing to pay
their bills, Tooth sued Laws for the alcohol.
 Held: Laws was liable to pay for the alcohol because by allowing
his name to remain over the front door of the hotel as licensee, he
was representing to the public that he was still the owner. Thus, it
was possible to infer that the new purchasers were his agent.
37

38. 38
Statutory Rules: s20PA
s20 - Liability of Incoming and Outgoing Partners
 A partner is only liable for partnership liabilities incurred
while a member of the firm (s20). This means that:-
 The partner is not liable for what happened before
becoming a partner or what happened after retiring from
the firm (subject to s39); and
 Outgoing partners will continue to be liable for debts
and obligations incurred whilst a partner (subject to
obtaining a release or indemnity).
 Retired partners will be liable for all debts and
obligations incurred while a partner.

39. Liability On Change of Partners
 Retiring partners
 Remain liable for debts incurred before retirement unless the
creditors and other partners agree otherwise;
 May be liable for debts incurred by the partnership after
retirement if they have not taken steps to notify former and new
customers of their retirement.
See: Birtchnell v Equity Trustees
 Incoming partners
 Generally only liable for future debts unless they agree to
assume liability for past debts.

40. 2105 AFE – Introduction to Business Law
Lecture 7: Partnership Law II
1

41. Relationship between Partners; Dissolution of a Partnership
OBJECTIVES
• Analyse the relationship of partners to each other
• Discuss the dissolution of partnership
41

42. Relationship of Partners to Each Other
 Partners in a partnership are in fiduciary
relationship with each other.
 Such a relationship requires the utmost good faith.
 The fiduciary duties of the partners arise under
statute and under common law.
42

43. Exclusivity of Partnership Property- sections 23&24
Section 23 of the PA states that:
“Assets that have become partnership property will
belong to the partners collectively rather than to
each partner individually”.
Section 24 of the PA states that:
“Property bought with money belonging to the firm
is deemed to have been bought on the account of
the firm”.
Example:
Kelly v Kelly (1990) – next slide
43

44. Kelly v Kelly (1990)
 Facts: The partnership operated an abalone business. The
male partner held an abalone permit. The permit was not
recognised in the partnership books. The permit was later
converted by govt legislation into an authority which enabled
the authority to be transferred to the female partner. Upon
dissolution of partnership, the female partner claimed that the
authority as partnership property because annual fees for the
authority had been paid by the partnership.
 Held: The parties had not intended the authority to be
partnership property as demonstrated by the accounts. The
payment of annual fees had given the partnership the right to
operate a personal asset, being the authority. Although the
annual fee was paid by the partnership to purchase the
authority. The mere payment of the annual renewal fees had
not changed that position.
44

45. Sharing of Profits and Losses: section 27(1)(a)
 Section 27 (1)(a) of the PA states that: subject
to written agreement
“The partners are entitled to share equally in capital and
profits and each must contribute equally to make up the
firm’s losses”.
Kilpatrick v Mackay (1878)
 Facts: Mackay purchased a hotel for 1400 pounds and
Kilpatrick paid 200 pounds towards the purchased price. The
hotel was sold at a profit and there was a dispute about how
the profit would be distributed.
 Held: Without an agreement, the presumption was that the
parties intended to share profits and losses equally. Under
the rules of dissolution, the parties’ capital contributions were
repaid (1200 Mackay, 200 Kilpatrick) and the remaining profit
45

46. Fiduciary Duties of Partners
 Partner owes fiduciary duties to the other partners at common
law and under PA.
(1) Duty to Render Accounts - section 31
Partners must render (i.e. provide) true accounts
and full information of all matters affecting the
partnership.
Law v Law [1905]
Facts: There was a silent and active partner in a manufacturing business.
The silent partner agreed for the active partner to buy him out. After
dissolution of the partnership, the silent partner discovered that
the active partner had not disclosed all partnership assets, meaning
that the silent partner’s interests in the assets had been undervalued.
Held: The active partner was liable for failing to properly disclose all
partnership assets. The active partner agreed to pay the silent
46

47. continued
(2) Account of Profits- Section 32
Partners must account to the firm for any benefit they
obtain without the consent of the other partners from:
 Any transaction concerning the partnership
 Any use of partnership property, name or business connections.
Birtchnell v Equity Trustees (1929)
 Facts: The plaintiffs discovered that their deceased partner in a
real estate business had been running a profitable land
development business on the side with one of the partnership’s
clients. The plaintiffs sued for an account of the deceased
partner’s share of the profits in the business.
 Held: The plaintiffs were entitled to an account of profits. The
deceased partner had made the profits by using a business
connection of the partnership – one of its clients, in breach of
his fiduciary duty to the partnership. The transactions of the land
development business also concerned the partnership because
the partnership was involved in the same business as the land
development enterprise, being the sub-division and sale of land.
47

48. continued
(3) Competing with the Firm –Section
33
A partner must not carry on a business of the same
nature as and competing with the firm without the
consent of the other partners.The rule has two
aspects:-
1. The partner must not carry on a business of the same
nature as the firm (e.g. Aas v Benham, Birtchnell v
Equity Trustees ); and
2. That business must not compete with the firm.
48

49. **Vote Break **Assignment of Partnership Interest-
Section 34
 Partners can assign (or in other words transfer) all
or part of their individual shares and interests to
others. Such assignments do not require the prior
consent of their fellow partners. However,
(1) the assignee does not become a partner.
(2) The assignee cannot interfere in the management
of the partnership.
(3) The assignee is entitled to receive the share of the
profits to which the assignor is entitled. – but not
the losses
49

50. Dissolution of Partnership
What is dissolution?
The means by which the partnership is terminated
A partnership may be dissolved by:
 the partnership; or
 Court order.
50

51. Dissolution by Partners
 Dissolution by Partners can occur:
(a) by agreement –section 35
(b) expiry of a fixed term partnership –section 35
(c) notice of dissolution –section 35
(d) bankruptcy or death of a partner –section 36
(e) if the partnership becomes unlawful –section
37
51

52. Dissolution by the Court- section 38
The court may dissolve the partnership on any of the following
grounds:
(a) where a partner has been declared to be of unsound mind; s
38(a)
(b) A partner is suffering from any permanent incapacity- s 38(b)
(c) A partner is guilty of conduct which, in the opinion of the court,
is calculated to prejudicially affect the business - s38(c)
(d) A partner has engaged in wilful or persistent breach (whether an
implied or express term) of the partnership agreement or conduct
in relation to the partnership business which makes continuation
of the partnership impractical- s38(d)
(e) The business can only be carried on at a loss - s38(e); and
(f) Just and equitable to do so- s38(f).
52

53. How is the partnership property distributed on dissolution?
There are two preliminary steps taken before this question can
be answered (unless there is a partnership agreement to the
contrary):
(a) Identify and collect all partnership property, such as
debts owed to the firm, and distinguish partnership
property from personal property.
(B) Partnership property that can be sold will be sold
53

54. Section 47 of the PA sets out the steps for distributing property
upon dissolution (unless there is any agreement to the contrary).
- Partnership Flowchart/Framework
 If there is not enough partnership property to pay the debts, the
partnership has a loss.
 The loss is allocated to the partners in the same proportion as they share
profits (remember s27(1)(a)). As partners have unlimited liability, the
partners must meet any loss out of their personal assets.
 If a partner does not have the personal assets to meet his or her share of
the loss (i.e. the partner is insolvent), the remaining partner(s) must take
on the insolvent partner’s liability in the proportion of the remaining
partners’ share of profit/loss.
 The remaining partner(s) can then lodge a claim (as creditors) in the
insolvent partner’s bankruptcy for the additional liability.
 If the remaining partnership assets are sufficient, the remaining assets
will be paid in proportion to the loans advanced
 If the remaining partnership assets are sufficient, the remaining assets
will be paid in proportion to the capital advanced
54

55. For you to do
Question: How is the partnership property distributed on dissolution?
Facts:
A, B and C are in a partnership. The capital
contributions of
the parties are as follows:
A - $6,000
B - $4,000
C - $1,000.
 The partnership property is $100,000
 The debts owing by the partnership are $130,000
55

56. The loss is $30,000 - All partners must contribute
equally to the Loss:
$30,000/3 -$10,000 each
A has personal assets of $90,000
B has personal assets of $50,000, and
C has personal assets of $5,000.
 C is insolvent because C cannot meet the entire $10,000 loss. He
has only $ 5,000.
 C’s deficit of $5,000 (10,000 loss – 5,000 personal assets) will be
shared equally between A and B ($2,500 each).
56

57. continued
Conclusion
 A will pay $12,500 ($10,000+2,500)
 B will pay $12,500, ($10,000+2,500), and
 C will pay $ 5,000.
Total $30,000
 A and B can lodge a claim of $2,500 each in C’s bankruptcy
proceedings as creditors.
57

58. Question 2
 A, B and C are in a partnership. The capital
contributions of the partners are as follows:
A - $6,000
B - $4,000
C - $1,000
The partnership property is $100,000
Debts owing by the partnership to creditors are $70,000
The Profit is $30,000.
B lent $7,000 as a loan to the partnership.
58

59. continued
ANSWER
 $100,000 less $77,000 leaves $23,000.
 The capital contributions of the parties are as follows:
A - $6,000
B - $4,000
C - $1,000
 $23,000 –$11,000 = The net profit is
$12,000
 This $12,000 must be shared equally
between partners. Each partner receives
$4,000.
59