Definition of Partnership

Part a

Any relationship exists between the persons for the purpose of carrying on a business with a common view to earn profit is known as partnership. This form of business structure involves agreement between two or more parties for the purpose of entering into a relationship which is legally binding on parties and this relationship is contractual in nature[1].

Section 5 of Partnership Act 1958 states that partnership is considered as a relation between two or more persons for the purpose of carrying on a business with a view of earning profit, and it also includes limited partnership as per the meaning stated in part 5[2].

In case Green v Beesley (1835) 2 Bing N C 108 at 112[3], Tindal CJ stated that for the purpose of understanding the definition of partnership I have considered mutual participation, even though participants does not create any legal entity when they create a partnership.

There is one more case Smith v Anderson (1880) 15 Ch D 247 at 273[4], in this James LJ stated that ordinary partnership is that partnership which includes some definite individual for binding them together under a contract to carry on a joint object either for pleasure or for limited time period, and it is necessary that these persons compulsory entering into a contract with each other.

It must be noted that despite of these definitions there is limitation on number of persons entering into partnership. Both case law and statute law contributes in partnership agreement, and for this purpose relevant provisions are stated under Partnership Act 1958 (Victoria). However, partnership is also considered as special type of agency because partners acting as agents for each other while conducting partnership. This can be understand through case law Lang v James Morrison & Co Ltd (1911) 13 CLR 1 at 11[5].

Following are some necessary elements of partnership, and if any of the elements is missing then relationship is not considered as partnership:

• Carrying on a business,
• in common, and
• For the purpose of earning profit.

Section 6 of the partnership Act 1958 states the rules for determining whether partnership exists or not:

• It must be noted that sharing of gross returns does not create the relationship of partnership, if persons sharing such returns does not have joint or common interest in any property from which such returns are originated.
• The receipt of share of profit by person is considered prima facie evidence of deciding the status of person as partner in business, but it must be noted that if such receipt or profit sharing is contingent in nature or varying as per the profit of the business does not create the relationship of partners between the persons in the business[6].

In the present case, Mary, Fred and Chris want to start a café in Melbourne, and for this purpose they create a simple agreement in which they state some rules related to serviette. They are contributing equal money in the business and also sharing equal profit, and three of them are ready to actively participate in the management. In this form of business all the traits of partnership are present such as carrying on a business with a common view to earn profit.

Elements of Partnership

In this case Mary, Fred and Chris conducting partnership because they are carrying on a business with a common view to earn profit is known as partnership. Therefore, they are conducting partnership for the purpose of running their café.

Part b

Tort of negligence is considered a legal action taken by plaintiff if defendant own duty of care towards plaintiff, and defendant breach such duty of care which results in damages to plaintiff. Generally, tort of negligence includes three elements and it is necessary that all three elements must be present for establishing defendant liability. Three elements are duty of care, breach of such duty, and damage cause to the plaintiff.

Usually, negligence is considered as act of carelessness but not all carelessness act result in liability, only those results in liability which satisfy three elements stated above.

Section 43 of Wrongs Act 1958 states the definitions of different key terms[7]:

• Negligence means when any person fails to take reasonable care.
• Damages stand for monetary compensation in any form.
• Harm means, any kind of harm which includes injury or death, damage to property, and economic loss.
• Injury means personal or body injury.

Section 44 of the Wrongs Act 1958 states that this part of the Act applied to any claim for damages filed under tort of negligence[8].

Section 48 of the Wrongs Act 1958 states that person is liable for negligence if:

• Risk included in the case was foreseeable,
• Risk was significant in nature
• Any reasonable person in the person’s position takes those precautions in similar situation[9].

Section further stated that, for the purpose of determining whether reasonable person would have taken precautions or not against any risk of harm, Court consider following questions:

• Probability of occurrence of harm if care was not taken by person.
• Seriousness of the harm.
• Burden on person for taking precautions for avoiding risk of harm.
• Social utility of activity which cause risk of harm.

Section 50 of the wrongs Act 1958 states that if defendant owns duty of care towards the plaintiff then he must give warning or other information related to risk of harm to plaintiff or any other related matter, and this step of defendant satisfying the duty of care to take reasonable steps[10].

Section 51 of the wrongs Act 1958 states that for the purpose of determining whether negligence caused particular harm or not court consider following elements[11]:

• Whether or not negligence is the necessary condition for the damage or injury that means factual causation.
• Court also considers scope of liability, which means whether it is right to extend the liability of negligent person to the harm caused.

In other words, for the purpose of establishing liability in common law it is necessary for plaintiff to proves that defendant own duty of care towards him or the deceased person in case of death. From last many years, law stated the requirement that people should conduct their affairs up to a standard for ensuring the protection and safety of other people, and standard of care is checked by considering the actions of reasonable person in similar situation. After considering all the facts or situations, Court determines the actions of reasonable person in similar situations.

This can be understand through case law Donoghue v Stevenson 1932 AC 562[12], in this case Mrs. Donoghue purchased sealed and opaque bottle of ginger beer because of which it is not possible to check the contents of bottle. Later when she poured another glass of beer she found decomposed snail in the beer because of which she suffered from gastroenteritis and nervous shock. For this she file claim for negligence against the manufacturer of ginger beer that was Mr. Stevenson.

Tort of Negligence

This case was heard by House of Lords in London, which is the highest Court of Britain, and the main issue in this case was whether Mrs. Donoghue can take file claim for negligence against the manufacturer. In this case Court stated that manufacturer of the product owns duty of care towards the ultimate customer, because it is the customer who ultimately consume the product.

There is one more case that is Stella Liebeck v. McDonald’s Restaurants (1994),[13] in this case almost 12 persons as jury give their decision. Jury after applied the principles of comparative negligence stated that in this case 80% liability of negligence was imposed on McDonald’s and 20% of Lieback. However, warning was stated on coffee cup but it was not that much large or sufficient. In this case, jury awarded US$200,000 in the form of compensatory damages, which was then reduced by 20% to $160,000. In addition, they awarded her $2.7 million in punitive damages to Lieback.

In this case decision made by jury was appropriate because defendant is negligent on his part on the basis of following reasons:

• Defendant owned duty of care towards the plaintiff, which means duty to take reasonable precautions.
• Defendant breach duty of care owned towards plaintiff.
• Injury caused to the plaintiff because of such breach of duty by defendant.
• Plaintiff suffered damages.

Jury also stated that defendant fails to provide adequate warning and other information to the plaintiff, which means that defendant have served extremely hot coffee at 180-190 degrees, and failed to warn the plaintiff about the danger of extremely hot coffee.

Jury further warded the punitive damages to the plaintiff because defendant knows about the risk related to serious burn from such hot coffee, did not take any reasonable steps to rectify such problem, and also failed to warn the plaintiff related to the foreseeable risk. Therefore, it is clear that defendant acted willfully, maliciously, and recklessly[14].

In the present case, Mary, Fred and Chris purchase number of products for their café which also includes new Italian coffee machine which costs almost thousands of dollars, but this coffee machine was not worth for money. This coffee machine produced such hot coffee that one customer of the café cause personal injury by burning her lips, while she only want to enjoy her coffee. Coffee was served by Chris and he did not check the temperature regulator on the coffee machine before serving the coffee. Generally, regulator was set to a medium heat temperature but thermometer was broken because of which water in the machine was boiling hot.  

Hot coffee served by Chris caused second degree burn to the customer which was very painful, and because of this customer was not able to work for a week.

Key Terms under Wrongs Act 1958

In this case, customer can sue the café for breach of their duty under tort of negligence because Defendant owned duty of care towards the plaintiff, defendant breach duty of care owned towards plaintiff, and plaintiff suffered damages. Defendant also failed to provide adequate warning and other information to the plaintiff, which means that defendant have served extremely hot coffee, and failed to warn the plaintiff about the danger of extremely hot coffee. Therefore, café is liable for the damages suffered by customer.

Part a

At the time of starting and growing the business, person can consider the company structure for their relevant business. Company is considered as separate legal entity in the eyes of law which means company possess same rights and obligations as any natural person possess such as company can incur debt, sue and be sued. It must be noted that owners of the company has option to limit their personal liability and they are not liable for the debts of the company. Following are some key aspects of company:

• Company is considered as separate legal entity, and has limited liability as compared to other structures.
• This form of business structure is complex in nature, and involves higher cost for set and running the business.
• In this form of structure, it is necessary for owners to comply with regulations stated under stated under Corporation Act 2001.
• In this operations of the business are controlled by the directors of the company and owned by shareholders of company[15].

There are two types of company proprietary limited companies and public companies. In case of public company, shares can be issued to general public for raising the funds, and this company may or may not be listed on Australian Stock Exchange. In both the cases, some of ownership is hold by the public without any restrictions placed on proprietary companies regard to offering shares.

However, two most important characteristics of company are limited liability and separate legal entity. The company is considered as a separate legal entity which is separate from its shareholders, and liability of the shareholders for company’s debt is limited only up to their contribution to the company’s capital.

This can understand through case law Salomon v Salomon & Co [1897] AC 22 [16](Salomon), in this case House of Lords stated that doctrine of legal entity was two edge sword. In genera way this decision of considering the corporations as separate legal entity was good, and this case shows all necessary attributes of the company for the purpose of becoming the powerhouse of capitalism. On the other hand, this decision was also considered bad decision because this decision extends the benefits of incorporation to small private enterprises[17].

In this case House of Lords affirmed the legal principle of separate legal entity which states that after Incorporation Company is considered as separate legal entity which is separate from its shareholders[18]. In case Peate v Federal Commissioner of Taxation, high Court stated that company represents a new legal entity in the eyes of law.  

Liability under Tort of Negligence

In the present case, Mary, Fred and Chris want to manage and limit their liability in much better way as compared to previous form of business structure, and for this purpose they adopt new business structure in which they issue shares for arranging the funds for business operations.

In this case, they operate company as their business structure because it is only the company which is considered as separate legal entity, and has limited liability as compared to other structures.

For the purpose of limiting the liability of owners company is the best form of structure, an only in company owners can issue shares for arranging the funds for operations of business.

Part b

Corporation law develops doctrine of Indoor Management to ensure the protection of outsiders, and legislature through section 128 and 129 of Corporation Act 2001 adopted more business convenience business approach. This policy related to business convenience that efficiency of business transactions ensures the financial interest of creditors, members, and outsiders.

As per the corporate law, if any outsider entered into a contract with any person who purported to act on behalf of the company but in actual such person does not have any relevant authority, then such contract is considered as voidable contract at the option of the company. This principle was considered as harsh for the outsiders and creditors of the company who acted with the company in good faith, and if they do not have any way to check whether person satisfies all necessary internal approvals and requirements before entering into contract. For the purpose of solving this problem legislature introduced rule of indoor management which was identified in Royal British Bank v Turquand[19] case[20].

This rule stated that if board of directors of the company wants to give actual authority to the agent, then it is necessary to fulfill some procedural conditions. These conditions must be applied strictly and include some basic requirements:

• Directors of the company must be appointed properly
• Proper board meeting must be convened by directors
• Required quorum must be presented in the meeting for deciding anything.
• Proper information must be given to the board members.

Under this doctrine it is clear that if outsider of the company is acted in good faith then he is not liable to check whether all the necessary internal actions are taken and all necessary internal steps are fulfilled. This doctrine covers all those matters which are related to the internal management of the company, and not public. Application of IMR requires that acts must be related to internal management.

Section 128 of the Corporation Act 2001 states that an outsider can make assumptions stated   under section 129 that while dealing with the company, and company cannot stated in proceedings that assumptions made by person are incorrect[21].

Company Structure and Characteristics

Section 129 of the Corporation Act 2001 states that outsider can assume that any person who is appoint by company as officer or agent of the company has been duly appointed by the company, and has authority to exercise his powers and perform duties on behalf of the company[22].

In the present case, Chris, Marry, and Fred is appointed as directors of the company, and after get blame through customer Chris is little upset and wants to do something good, and he finds that neighboring shop is available for sale at $120,000, and for this Chris decided to take loan for $150,000 for the purpose of buying shop and also arranging some money for renovation. Constitution of the company states that directors of the company have power to manage the operations of the company, and any contract related to goods and services which also includes loan exceeding $100,000 must be signed by the director of the company and another person authorized by the board for that purpose, but Chris did not discuss this with any director of the company and signed the contract.

In this case, business is bound by the contract because outsider has no obligation to check under the IMR, whether person satisfies all necessary internal approvals and requirements before entering into contract. Therefore, Contract signed by Chris is binding on company.

Part c

Generally, directors of the company are liable towards the shareholders of the company, but in actual they are also liable towards the creditors and other members of the company as well. Corporation Act 2001 imposed number of duties on directors of the company which are stated below:

• Care and diligence- this duty states that it is necessary that directors must exercise his powers and discharge his duties with due care and diligence, and similar duty is imposed by common law as well on directors. In recent cases, Court also focus on this duty of directors while giving their decisions especially in cases which require approval of financial transactions such as James Hardie Case. Court extend the scope of this duty and stated that it is determine that duty is breached if directors of the company enter into any risky transaction without taking any reasonable steps and prospect of producing a benefit. Court also stated that directors breach their duties if they fail to inform the board about any matter in which board approval is required.
• Good faith- under this duty, it is necessary that directors of the company act in good faith while taking any decisions, and also in the best interest of the company and for proper purpose for avoiding the conflict of interest and manage the conflicts if any arise. This duty is considered as duty of fidelity and trust and fall under the fiduciary duties of directors imposed by common law and Corporation Act 2001.
• Improper use of position- common law and act also imposed duty on directors not to use their position in improper manner for the purpose of gaining advantage for themselves or for some other person[23].

Section 180 of the Corporation Act 2001 states that it is necessary that directors and other officers of the Corporation must exercise their power and discharge their duties with due care and diligence that any reasonable person would exercise in those situations if they holds the position of director officer in the company, and occupied the office as director or officer or had the same responsibilities in the company as director or officer. This subsection is considered as civil penalty provision under section 1317E[24][25].

Section 181 of the Corporation Act 2001 states that, it is necessary director or officer of the corporation must exercise their powers and discharge their duties for a proper purpose, in good faith, and in the best interest of the company[26].

Section 182 of the Act states that directors not to use their position in improper manner for the purpose of gaining advantage for themselves or for some other person which cause any detriment to the company[27].

In the present case, Chris breach duties under section 180 of the Act by not informing the directors about the information which require their approval.

References:

ASIC, ‘Directors – What are my duties as a director’, < https://asic.gov.au/regulatory-resources/insolvency/insolvency-for-directors/directors-what-are-my-duties-as-a-director/#1>, Accessed on 26^th May 2017.

Austlii, ‘A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine’, < https://www.austlii.edu.au/au/journals/MurUEJL/2000/32.html>, Accessed on 24^th May 2017.

Austlii, ‘Protecting Outsiders to Corporate Contracts in Australia’, < https://www.austlii.edu.au/au/journals/MurUEJL/2002/22.html>, Accessed on 24^th May 2017.

Business, ‘Company’, < https://www.business.gov.au/Info/Plan-and-Start/Start-your-business/Business-structure/Business-structures-and-types/Company>, Accessed on 24^th May 2017.

Business, ‘Partnership’, < https://www.business.gov.au/info/plan-and-start/start-your-business/business-structure/business-structures-and-types/partnership>, Accessed on 26^th May 2017.

Corporation Act 2001- Sect 128.

Corporation Act 2001- Sect 129.

Corporation Act 2001- Sect 1317E.

Corporation Act 2001- Sect 180.

Corporation Act 2001- Sect 181.

Corporation Act 2001- Sect 182.

Donoghue v Stevenson 1932 AC 562.

Green v Beesley (1835) 2 Bing N C 108 at 112.

Ian M. ramsay, ‘Piercing the Corporate Veil in Australia’, (2001) 19 Company and Securities Law Journal 250-271.

Kevin G. cain, ‘The McDonald’s  Coffee Lawsuit’, < https://www.jtexconsumerlaw.com/V11N1/Coffee.pdf>, Accessed on 26^th May 2017.

Lang v James Morrison & Co Ltd (1911) 13 CLR 1 at 11.

Partnership Act 1958- Sect 5.

Partnership Act 1958- Sect 6

Royal British Bank v Turquand.

Salomon v Salomon & Co [1897] AC 22.

Smith v Anderson (1880) 15 Ch D 247 at 273.

Stella Liebeck v. McDonald’s Restaurants (1994).

Wrongs Act 1958- Sect 43

Wrongs Act 1958- Sect 44.

Wrongs Act 1958- Sect 48.

Wrongs Act 1958- Sect 50.

Wrongs Act 1958- Sect 51.